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The UK is enjoying a rare spurt of productivity growth, according to newly available data showing GDP has been stronger than previously thought, while employment has fallen.
Analysis by the Resolution Foundation, published on Tuesday evening, found output per hour worked had risen 1.6 per cent over the past year, in stark contrast with official data showing a 0.5 per cent decline.
But it warned the new figures were unlikely to spare chancellor Rachel Reeves a punishing downgrade to productivity growth forecasts by the government’s official watchdog in the Budget on November 26.
The think-tank’s estimate is based on recently revised official estimates of GDP and figures for payroll employment drawn from tax records, rather than the official measure of hours worked drawn from the Office for National Statistics’ faulty labour force survey.
It paints a picture of recent productivity growth far stronger than the post-pandemic average of 0.1 per cent and the average of 0.5 per cent recorded in the decade following the global financial crisis. One limitation of the data is that HM Revenue & Customs’ records do not show the number of hours worked.
A sustained improvement in productivity would transform the UK’s economic fortunes, underpinning strong growth in output and living standards, boosting tax revenues and making it easier to fund public services.
However, the Resolution Foundation said that despite the short-term pick-up, Reeves was still facing a downgrade in the Office for Budget Responsibility’s forecast for long-run productivity growth, which is likely to widen the fiscal hole she must fill in the Budget.
The OBR’s forecasts currently assume productivity growth will average 1 per cent a year over its five-year forecast period.
Greg Thwaites, research director at the Resolution Foundation, said a likely 0.2 percentage point markdown in the OBR’s productivity forecast would cost £15bn a year, equivalent to a 2p rise in the basic rate of income tax.
Despite the recent pick-up, “the UK’s long-standing productivity problems show that a markdown is justified”, he added.
The numbers come as the chancellor heads to Washington for annual meetings of the IMF and World Bank. She has embarked on a drive for pro-growth measures ahead of the Budget, including easing regulation, as she attempts to mitigate the impact of an OBR productivity downgrade.
Michael Saunders, at consultancy Oxford Economics, argues that the OBR should have downgraded its productivity forecast years ago, given repeated disappointments in the UK’s performance, rather than pitching its forecast “at the top end of the range”.
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Other economists see some grounds for optimism in the recent data, however.
Andrew Wishart, economist at Berenberg, said the improvement partly reflected recent job cuts in hospitality and retail, the sectors hardest hit by April’s tax and minimum wage changes. “Cutting the lowest-paid and least productive staff pushes up the average output of those still working,” he said.
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But he added that the UK “could well be in the foothills of a sustained upturn in productivity”, given signs it was also improving in sectors with higher value-added, such as IT and professional services.
Rob Wood, chief UK economist at the consultancy Pantheon Macroeconomics, said that while the recent improvement could prove to be “a flash in the pan”, it would make it harder for the OBR to justify a big downgrade to its trend productivity forecast.
The watchdog “should avoid becoming pessimistic, forcing tighter policy than might be needed”, Wood argued.