Whisper it but – could Britain’s productivity problems be about to end?

The Resolution Foundation says the UK is underestimating its productivity. But the OBR’s pessimism could lead The Chancellor to kill off its revival in its early days, editor Edmund Greaves writes.

Productivity is well-documented as one of the British economy’s biggest problems. But could this be about to end? A bombshell new report from the Resolution Foundation thinks so. 

The Office for Budget Responsibility (OBR) has been persistently wrong about its productivity forecasts in the last decade. It has consistently overestimated the UK economy’s productivity.

This in turn means when Chancellors come to the dispatch box, they tend to have to bend their numbers in fantastical ways in order to make them fit. In essence, there is never quite as much tax income to the Treasury as they would like, because the OBR’s numbers don’t meet expectations.

Productivity is very important. Unlike measures such as GDP, which straightforwardly measure the size of the economy, productivity estimates how well we do the things we do. When productivity rises, this means we’re being more efficient with our time, therefore producing more for less and making more money. 

As mentioned, the UK’s productivity has been abysmal for a decade or more. This brings us to the latest Budget ‘blackhole’ – supposedly to the tune of around £30 billion. This new blackhole has, according to reports, been created because the OBR has finally given up its over-optimism on the measure and has revised it down, leaving a shortfall in the forecast tax take.

This brings me to the shock Resolution Foundation report, which hasn’t been widely covered (because we’re distracted in the media by stuff like the cash ISA). 

It says the official data suggests output per hour (productivity) had declined 0.5% in the past year. But extraordinarily, it believes the data is wrong. The Resolution Foundation’s report suggests in fact output per hour has been +1.6% in the past year. This would mark an extraordinary reversal in the UK’s productivity problems. 

Indeed, some economists have pointed out that productivity has appeared to outperform OBR forecasts since about 2023. The implications of this are not trifling. 

Discerning why this is happening is extremely tricky to do. Could it be AI? Could it be investment happening finally in the right places? Or could it be higher interest rates clearing out the economic dead wood? Any of the above, or all, might be in play.

We’re talking about incrementally different numbers here but the potential difference this makes to the Government’s fiscal rules runs into the 10s of billions of pounds. OBR forecasters have such a profound effect on everyone’s lives because the models they create are now the difference between sweeping policy changes (i.e. tax hikes) that will have a quantifiable effect on millions of lives.

In a best-case scenario, this productivity starts to feed through to the tax take and makes the picture look easier for the state (with a dose of probably lower rates in 2026). 

But the tragedy I hope does not come to pass is that Reeves plumps for tax measures that kill this productivity revival in its infancy, simply because the OBR has suddenly gone the wrong way on its forecasts. 

The wrong tax measures or inflationary policies could kill off this quiet revival at precisely the moment we need it most. 

This article first appeared on Mouthy Money’s sister publication Octo Members.