In Wednesday’s Budget, chancellor George Osborne made much of the global economic “storm clouds” that have gathered since he last presented his forecasts in November’s Autumn Statement. But while the Office for Budget Responsibility does talk about the risks to the global outlook having grown, it makes a point of saying in its latest economic forecast that “we have made only relatively small downward revisions to our forecasts for world gross domestic product and world trade growth”.
So if it’s not the deteriorating global picture, what has caused our growth prospects to look so much worse in just four months? In a word: productivity.
At the time of the Autumn Statement last year, the OBR had observed the short-lived burst of productivity growth in the first half of 2015, and made the tentative assessment that we were starting to see the return of our former economic self. Before the financial crisis and ensuing recession, we used to enjoy productivity growth of 2.3% a year. As a result, we had a higher rate of trend (or ‘potential’) economic growth, and could enjoy a higher level of wage growth without risking a rise in inflation, which both made our debts more affordable and gave us a continual improvement in living standards.
In the years following the recession, our productivity growth has gone missing. This hasn’t just been true for us; the chancellor is right to note that productivity growth has stalled across developed economies since 2008. But what he didn’t mention is that our post-recession productivity growth has been the second lowest in the G7 (above Italy), and that even before the crisis hit, we had for many years been less productive than our competitors.
The OBR has seen productivity once again stall in the second half of 2015 and concluded that the pickup seen at the start of last year was a false dawn. But it is worse than that: the longer the UK spends in the productivity doldrums, the more likely it becomes that we have been permanently scarred by the 2010 recession - that is, that our productivity growth will never return to its pre-crisis rate. That means permanently lower economic growth, lower real wage growth, and lower profits. This is what the OBR now believes has happened, and is why our growth forecast isn’t just lower this year and next, but across the entire forecast period.
Osborne responded to this news with some shuffling of the fiscal deck, and through his considerable efforts in this regard, he remains on track to meet his self-imposed rule to generate a surplus in 2019/20 (although the OBR now thinks there is a 45% chance he won’t). But his efforts leave us no closer to understanding – let alone solving – our productivity problem.
Part of the reason that the left has had so much trouble gaining traction in the economic debate in recent years is that the economy had appeared to be emerging from the post-crisis period relatively unscathed. That made it increasingly difficult to argue that austerity had been economically damaging: the chancellor could point to a raft of economic indicators – employment and growth in particular – and say that all was going well with the ‘long-term economic plan’.
Seven years into the post-recession period, and a different picture is slowly coming into focus. We appear to be on a permanently lower growth path, with implications for the amount of tax revenue we can raise, the profits we can generate, and the speed at which we can expect our living standards to improve. Seen in this context, moves to raise income tax thresholds start to look ineffectual as well as regressive.
The chancellor was right to note the storm clouds gathering. But they aren’t in Asia or Europe: they are on our own horizon.
