Philip Hammond must borrow an extra £90bn over the next five years after the Treasury’s independent forecaster downgraded productivity growth.
The Office for Budget Responsibility (OBR) warned that the chancellor faced a long period of lower than expected wages growth that would dent tax receipts and push up borrowing. The cumulative effect over the life of the parliament would add £90.5bn to the UK’s debt pile and jeopardise Hammond’s target of balancing the government’s books by 2025, it said.
But some analysts said the OBR’s revision failed to go far enough and it continued to overestimate the capacity of British businesses to invest in new equipment and processes to drive up productivity.
They argued that the forecaster should have gone further and predicted that productivity growth – which measures the average output per hour worked – of almost zero over the last seven years would continue for another five years.
Joanna Davies, a UK economist at Fathom Consulting, said the OBR’s new forecast that productivity would increase at a rate of 1.1% until 2022 – almost half the 2.1% average seen in the 30 years before 2007 – still looked ambitious.
She said the prospects for GDP growth would suffer a severe knock-on effect from lower productivity and a rapidly ageing population.
“Over the last five years, productivity growth has averaged just 0.3%,” she said. “Combined with UN projections for working-age population growth, the UK’s trend rate of overall economic growth is probably somewhere in the range 0.5%-1% – around half the 1.5% assumed by the OBR.”
The OBR chair, Robert Chote, said GDP growth would not only be hit by lower productivity, but also a weaker than expected export sector that would fail to benefit significantly from the lower pound.
Meanwhile, low wage growth would dampen consumer spending while Brexit uncertainty would deter businesses from investing or opening new offices and factories.
Sir Charles Bean, one of the three OBR committee members who draw up the forecasts, said: “We think at some point productivity will improve. There are good grounds to believe that as the labour market tightens, businesses will need to invest.”
He said the OBR committee did not subscribe to the “techno-pessimistic” view that robots and other intelligent machines were about to deskill the labour force and force down wages. He said it was more likely that investments in new machinery would enhance productivity.
But the former deputy governor of the Bank of England admitted there was great uncertainty about how much businesses would invest to raise their workers’ productivity.
“There is not a lot of science in measuring the path of productivity and others could take a different view,” he said. “We haven’t seen such a long period of low productivity growth since the 19th century, so we are in uncharted territory.”
He added: “It’s not clear when the effects of government measures to enhance workers’ skills will take effect. Likewise infrastructure investments. Both of them can take a long time to take effect.”
Howard Archer, an economic adviser to the forecasting group EY Item Club, said the OBR’s new figures “may now be overcautious”.
He added: “It seems that the OBR may now be erring on the side of caution on UK productivity growth, having been repeatedly overoptimistic in recent years.”
Samuel Tombs, the chief UK economist at consultancy Pantheon Macroeconomics, said the chancellor had been saved from his borrowing spiralling further by a switch in the classification of housing associations, which took their debt off government books.
The Office for National Statistics recently said housing associations should be considered private bodies after the government passed an act of parliament relinquishing some control over their day-to-day running.
Tombs said: “The chancellor would have been boxed into a corner, had the government not loosened its control over housing associations last week, enabling them to be reclassified as private bodies. This statistical deception, alongside other accounting adjustments, reduced borrowing by £5bn a year, or £24bn over the five years from 2017-18.”
He said Hammond was only able to announce a series of measures – from boosting NHS funding to easing business rate rises – that cost £17bn over the next five years after housing associations were shifted off the government’s balance sheet.
Victoria Clarke, a UK economist at banking group Investec, said downward revisions to GDP growth were “a natural consequence of the more realistic view of productivity trends”, and came despite the expected buoyancy of the global economy.
She said: “On the back of this it looks doubtful, at best, that Hammond can achieve his broad objective of balancing the public finances as soon as possible in the ‘next’ parliament.”