Productivity isn’t everything, observed the Nobel laureate Paul Krugman, but in the long run it is almost everything. For Britons, the worrying news is that the growth in productivity – the amount of stuff we produce every hour – has slowed to a snail’s pace. The Office for Budget Responsibility, after maintaining a sunny disposition in the face of ever darkening clouds of data, now accepts that we are unlikely to return to pre-crash levels of productivity growth. Below the OBR’s seemingly innocuous statement is the “everything” that Mr Krugman alludes to. Before the crash, we would have expected living standards to double every 40 years.

If we were to carry on in the current manner, it would take more than two centuries to do so. Unless something drastic happens we face not just losing a decade, but a future.



While it is true that all western economies have failed to recover the kind of growth they experienced before the crash, rich world economies are picking up speed, while the UK splutters along. Our rivals are also more prosperous than we are: France and the US had an average productivity in 2015 of €55 per hour worked - 25% higher than the UK. Britain is becoming the sick man of the rich world. Some of reasons for the malaise is historical: our educational system has woefully disregarded vocational training; after the last war we had less need for an industrial recovery and spent less on new equipment.

However, that meant the others played catch up – and now it is a case of Britain lagging behind our rivals. It takes a German worker four days to produce what an employee here makes in five. Too many British workers work longer hours for lower pay than their rich-world counterparts. The reason is that our economy seems to be particularly bad at allocating labour: in the last year the less productive service sector has gone on a hiring spree, while higher value manufacturing has shrunk. The market, which so many rightwingers think needs unchaining, is operating a sort of reverse creative destruction where the strong are weakened so that the weak can be strengthened. The result is that productivity, expected to be the main driver of economic growth and wellbeing, is as flat as a pancake. The brute facts of a troublesome reality are beginning to bite. Workers are supposed to see their wages march in lockstep with productivity gains. Today household income per person is just 5% higher than a decade ago. The decade before the crisis saw six times that earnings growth. While low interest rates have helped in the past, the spectre of inflation is growing. If the stagnation is more permanent than previously thought, the Treasury will lose out on tax receipts. Last year Philip Hammond thought he would have £26bn over the next five years to weather the storms of Brexit. It now looks as if the chancellor will get less than half that. Britain is an ageing society. Its economy suffers with high levels of debt and it faces a Brexit likely to exacerbate longstanding economic weaknesses. Given the political emphasis placed on controlling immigration, UK exports will face higher costs in the coming decade. The danger is that we will resort to depreciating the pound to retain competitiveness – and deliver an inflation shock to the UK’s poorest.

We need to avoid such low-wage, drudgery-filled dystopias. The Conservative party bears responsibility for a failed economic experiment which deflated demand through austerity and built an unequal economy on regulation-lite cheap labour. The question in economic terms now is whether capitalism is capable of generating enough gains from growth. Politically the issue is how such windfalls can be fairly distributed. Technological progress can raise productivity and boost wages. But as Britain is currently wired, this would see a rising concentration of wealth. A fairer, more productive economy needs designing. We must be architects of the future, not victims of it.

• This article was amended on 11 October 2017 because an earlier version said that before the crash, we would have expected the economy to double in size every 40 years. It meant to say before the crash, we would have expected living standards to double every 40 years.