Britain’s Productivity Pain Costs Hammond $120 Billion

Updated on
  • Office for Budget Responsibility sees no improvement this year
  • Poor performance leads growth forecasts to be revised downward
U.K.'s Hammond Says Growth Outlook Has Deteriorated

The U.K.’s budget watchdog warned the economy faces years of poor productivity as it gave up assuming the post-financial crisis weakness will be temporary.

With Brexit looming over the outlook, the Office for Budget Responsibility said it sees zero improvement in output per hour this year and weaker growth in the coming years than previously forecast, with the average increase in the five years through 2021 slashed by half to 0.9 percent.

The OBR also quantified the cost of that to the exchequer. Over the period through March 2022, it means about 90 billion pounds ($120 billion) of extra borrowing. The effect is somewhat offset by an improvement to the outlook for employment and working hours.

“As the remarkable period of post-crisis weakness extends – and as various explanations pointing to a temporary slowdown become less compelling – it seems sensible to place more weight on recent trends as a guide to the next few years. But huge uncertainty remains around the diagnosis for recent weakness and the prognosis for the future.”

The growing focus on the U.K.’s weak productivity performance wasn’t just apparent in the numbers in the OBR’s fiscal document. The word appears 136 times in the report. That’s up from 35 in the previous document in March.

The OBR also cut its predictions for potential output in the next few years to about 1.5 percent from 1.9 percent. That’s in line with the latest predictions from the Bank of England. Poor productivity also has implications for monetary policy; the BOE raised interest rates this month, citing in part a concern the economy can’t grow as fast without raising inflationary pressures.

The OBR’s view sums up the issue:

“The persistence of weak productivity growth does not bode well for the U.K.’s growth potential in the years ahead.”

On the outlook for GDP growth, the OBR sees expansion of 1.5 percent this year and 1.4 percent in 2018, reductions compared with March.

Nevertheless, some economists say the growth estimates might be overly pessimistic. “There is scope for somewhat faster growth over the next five years as slack is used up,” said Andrew Goodwin, an economist at Oxford Economics. “We think that the OBR’s new growth forecasts may prove too gloomy.”

Brexit is playing a large part in the downgrades. In March 2016, before the EU referendum, the OBR predicted growth of 2.2 percent in 2017 and 2.1 percent in 2018.

The OBR estimated the U.K. will need to borrow an extra 53 billion pounds over five years. The projected deficit through March 2021 is now almost 120 billion pounds higher than forecast before the Brexit referendum.

All this means that Hammond remains on course to meet his fiscal rules, but with only 15 billion pounds to spare rather than the 26 billion pounds he thought he had in March. Those rules commit the chancellor to reducing structural borrowing to less than 2 percent of GDP by 2020-21.

— With assistance by Zoe Schneeweiss, and Jill Ward

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