Recent calculations from the Office for National Statistics (ONS) have revised the UK's productivity growth rate from 2010 to 2019, increasing it from 0.7% to an average of 1.3% per year. This adjustment brings the productivity rebound closer to the pre-crisis norm of nearly 2% annually, mainly due to the ONS's updated assessment that the workforce had been logged as working fewer hours than previously recorded. The ONS uses the average productivity from 1997 to 2007 as a baseline set at 100.
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Officials have also noted signs of improved productivity in recent years, with growing optimism surrounding the potential impact of artificial intelligence on future gains.
The Office for Budget Responsibility (OBR) had previously relied on the UK's sluggish productivity performance to cut economic forecasts last year, contributing to a challenging fiscal environment and increased tax rates proposed by Labour. In March, the OBR forecasted modest productivity growth of approximately 0.9% annually in the coming years.
The Resolution Foundation, a left-leaning think tank, pointed out that the recent data challenges the prevailing perception of the UK's economic stagnation, suggesting that the OBR might need to revise its productivity forecasts, though potentially not in time for the upcoming budget. They remarked, "The new data means the OBR productivity assumption is more pessimistic than the UK's post-financial crisis performance."
Historically, the OBR faced criticism for its projections of a productivity rebound in the 2010s, which ultimately did not materialize based on earlier figures. However, the ONS's recent revision makes past OBR projections appear more reasonable. David Miles, a senior OBR official, acknowledged this shift in perspective during a discussion in London.
The timing of these revisions is crucial, as they are likely too late for the OBR to incorporate them into the working assumptions for the budget set for October 28. Chancellor Jeremy Healey's financial flexibility is already limited due to rising borrowing costs following the US-Iran conflict, which Bloomberg Economics estimates has reduced his fiscal headroom to about £12 billion.
Under existing fiscal guidelines, day-to-day spending must balance with revenue by 2029-30. The OBR's latest evaluation relative to these guidelines was made public in early March. A reduced fiscal cushion increases the likelihood of additional tax measures or less preparedness for unexpected fiscal challenges.
While the potential for a more favorable productivity outlook next year could provide Chancellor Healey with additional fiscal space, the current financial situation remains constrained, with the UK lagging behind several major economies. Economist Simon Pittaway advised caution, stating, "We shouldn't get carried away."