Productivity is not everything, but in the long run it is almost everything. This truth, enunciated by the Nobel laureate Paul Krugman, has just bitten George Osborne, the UK chancellor. But the prospects for productivity are not important just to Mr Osborne. They are the most important uncertainty affecting the economic prospects of the British people. Is it reasonable to expect a return to buoyant pre-crisis productivity growth? Will productivity continue to stagnate? Or will it end up somewhere in between?
The negative impact on the budgetary position of the Office for Budget Responsibility’s mild revisions to productivity projections shows how much this matters. The reduction in the OBR’s forecast rate of growth in output per hour — a basic measure of productivity — is only by an average of 0.2 percentage points a year. Yet, notes the OBR, “cumulated over five years, that represents a material downward revision to the level of potential output by 2020”.
In its latest forecast, the OBR expects UK productivity levels to be 6.2 per cent lower in 2020 than it had hoped in June 2010 and 2.5 per cent lower than it had hoped in March 2014. But the biggest downgrades of all are relative to the pre-crisis optimism: the OBR’s latest forecast for potential output in 2020 is 15 per cent below the Treasury’s March 2008 forecast. Similar downgrades have occurred to the official US forecasts.