This article is more than 2 years old

This article is more than 2 years old

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.

The Treasury said that once the positive effects of an increase in employment and better than expected borrowing over the last year are taken into account, the net borrowing rise would be £35bn, putting the chancellor in a position to reach his target of creating a surplus in the middle of the next decade.

Q&A What is productivity and why does it matter? Show Hide Productivity is an economic measure of the efficiency of a workforce. It typically measures the level of output per hour of work, or per worker. A more productive workforce signals stronger growth and healthier public finances. Productivity gains are vital to economic prosperity because it signals that more is being achieved by workers in less time. Gains are typically achieved through advances in technology and increased skill levels within a workforce. In the UK, productivity growth has stalled since the financial crisis, putting it behind international rivals. The UK ranks fifth out of G7 leading industrial nations, with Canada and Japan having weaker levels of productivity. Germany is the most productive nation per hour, while the US is top for output per worker. Weak productivity is problematic because it signals weaker economic growth, therefore eroding the public finances. Without an improvement in productivity, economies miss out on increases in wages and living standards, putting further pressure on the welfare system and depressing tax receipts. Some industries are more productive than others. In the UK, manufacturing firms are among the most efficient, whereas the services sector operate at below average productivity. Photograph: Bloomberg

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.

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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.

Q&A What is the Office for Budget Responsibility? Show Hide The Office for Budget Responsibility is the government’s independent forecaster, which gives its verdict on the outlook for growth and the public finances twice a year. The forecasts are published to coincide with the chancellor’s two big set pieces of the year – the autumn budget and the spring statement – and takes into account the impact of any tax and spending measures announced in those statements. The OBR also uses its public finances forecasts to judge the Treasury’s performance against the chancellor’s fiscal targets, stating whether or not it has a greater than 50% chance of hitting the targets under current policy. It was established in 2010 by the then chancellor George Osborne with the aim of improving the credibility of the government’s official forecasts for growth. The forecasts were previously produced by the Treasury itself and often criticised for being unrealistic. The OBR is led by three members of the budget responsibility committee, including chairman Robert Chote, a former director of the Institute for Fiscal Studies, with support from the OBR’s permanent staff of 27 civil servants.

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.”

•This article was amended on 23 November 2017 to add a response from the Treasury in the third paragraph

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