UK economy nearly a third smaller thanks to ‘catastrophically bad’ productivity slowdown
The slowdown in productivity growth since the financial crisis has been “catastrophically bad” for the UK economy, according to a leading economist at the Office for Budget Responsibility (OBR).
Since the financial crisis, productivity growth in the UK has slowed significantly from its pre-2008 trend and has fallen behind international peers. Slower productivity growth has translated into much slower economic growth.
David Miles, a member of the Budget Responsibility Committee at the OBR, said: “15 years ago, people thought the level of GDP would be 30 per cent higher than it is today”.
“That’s absolutely transformational,” he added.
The slowdown in productivity growth, and therefore GDP, has put the government into a tight fiscal position, Miles said.
“Part of the reason why there are no easy choices for any government right now is that GDP is much lower than people thought,” he said.
“Perhaps the expectations of people for what government can do in terms of public services have not fallen in line with the reality of how much less well off we all are,” he continued.
Despite the UK’s sluggish performance, the OBR’s forecasts over the next couple of years are relatively optimistic, particularly when compared to the Bank of England.
The independent fiscal watchdog expects the UK to grow 0.8 per cent this year, accelerating to 1.9 per cent in 2025. The Bank of England, in contrast, thinks the UK will grow just 0.2 per cent this year and 0.6 per cent next year.
A large part of the OBR’s relative optimism derives from its more hopeful forecast for UK productivity growth. The OBR expects trend productivity growth to pick up to 0.9 per cent a year, whereas it currently is around 0.5 per cent.
“We’ve taken the view that the last 15 years have been so bad that, more likely than not, things will be a bit better over the next five to 10 years,” Miles said.
Historically, manufacturing has recorded higher levels of productivity growth than the services sector. But Miles pointed out that the latest technological developments, such as artificial intelligence, could be more easily applied to the services sector, which now makes up a dominant part of the UK economy.
However, Miles cautioned that the OBR’s assessment on productivity was “no more than an educated guess – and it may not even be terribly educated”.
The OBR estimates that improving annual productivity growth by 0.5 per cent could reduce borrowing by more than £40bn by 2028-29.