U.K. Chancellor of the Exchequer George Osborne can blame weak global growth as much as he likes, but one of the main reasons for the worse public borrowing outlook is a little closer to home: Britons' productivity.
Amid the plethora of forecast changes unveiled alongside Osborne's annual budget on Wednesday, the Office for Budget Responsibility said a cut to its estimates for the economy's growth potential was the ``most significant'' since its last projections in November. And because lower growth means fewer tax receipts, the speed at which the chancellor was hoping to close the government deficit took a big hit.
In fact, compared with the November forecast, the OBR added 36.4 billion pounds ($51.3 billion) to its government deficit projection over the next three years.
The gloomier outlook may also have other policy implications. Productivity helps determine wage growth and the speed at which the economy can grow without generating inflationary pressures, both crucial to the Bank of England's decision on when it will begin raising its key interest rate from a record low. The central bank has said one of the factors that may have contributed to the softening in pay increases in the past six months is weak productivity, a perennial problem in Britain since the financial crisis.
The OBR has been losing faith in its assumption that productivity growth would return to its pre-crisis trend after being serially disappointed. Fourth-quarter data almost entirely reversed a mid-2015 pickup.
``This was another false dawn,'' it said. ``With the period of weak productivity growth post-crisis continuing to lengthen, we have placed more weight on that as a guide to future prospects.''
The increased pessimism prompted the OBR to cut its gross domestic product growth forecasts by about 0.3 percentage points a year to an annual average of 2.1 percent over the rest of the decade.