UK productivity growth to remain sluggish, says OBR

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    Image caption More innovative companies would drive productivity higher, says Lord O’Donnell

    Economic productivity in the UK will grow only weakly in the next five years, according to the government’s economic watchdog, the Office for Budget Responsibility (OBR).

    A review of its own past forecasting says productivity has grown by just 0.2% a year for the past five years, much less than expected.

    This trend will improve only slightly, the OBR says.

    It blames low investment by firms, and the impact of low interest rates.

    That particular policy, it said, had kept alive some weak businesses which in more normal times would have folded.

    The OBR argued that continued low productivity was a problem because it would hinder the ability of the UK economy to generate increased tax revenues for the chancellor, though it will not be the only factor in play.

    “Other things being equal a downward revision to prospective productivity growth would weaken the medium-term outlook for the public finances, while a lower sustainable rate of unemployment and more hours worked would strengthen it,” the OBR said.

    The trade union organisation the TUC blamed the government for this “self-inflicted wound”.

    “Years of cuts, low public investment, and rising job insecurity have taken a heavy toll,” said the TUC’s general secretary Frances O’Grady.

    A Treasury spokesman rejected that analysis, and said the UK economy had grown strongly in recent years.

    “Productivity has been a longstanding challenge for the UK economy, which is why we are focussed on boosting our performance to deliver higher living standards and build an economy that works for everyone,” he said.

    ‘Zombie firms’

    Earlier, the former cabinet secretary Lord O’Donnell told the BBC that although low interest rates – designed to shore up the economy after the 2008 financial crisis – had kept “zombie” companies alive, thus boosting employment, this had also led to lower output per worker.

    “Interest rates were set to virtually zero which meant a lot of very poor companies that would have gone bust with very low productivity have been kept alive – zombie companies,” he said.

    “Our recovery has been quite employment-strong.

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    “Unfortunately it has been productivity light, so those extra people who are working aren’t producing so much, so overall the pie isn’t growing as fast as we’d like it to be,” he added.

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