UK productivity growth to remain sluggish, says OBR

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More innovative companies would drive productivity higher, says Lord O'Donnell

Economic productivity in the UK will see only weak growth in the next five years, according to the government's economic watchdog, the Office for Budget Responsibility (OBR).

A review of its own past forecasting says productivity has grown by just 0.2% a year for the past five years, much less than expected.

This trend will improve only slightly, the OBR says.

This could dent the government's finances, the watchdog warns.

The OBR argued that continued low productivity would hinder the ability of the UK economy to generate increased tax revenues for the chancellor, though it will not be the only factor in play.

"Other things being equal a downward revision to prospective productivity growth would weaken the medium-term outlook for the public finances, while a lower sustainable rate of unemployment and more hours worked would strengthen it," the OBR said.

The Chancellor, Philip Hammond, will present his next Budget on 22 November.

Analysis: Kamal Ahmed, BBC economics editor

After today's announcement, the government's target to "balance the books" by the middle of the next decade looks increasingly difficult to hit.

A growth downgrade could mean that the government will either have to raise taxes or find further cuts if it is to hit that fiscal target.

Or Mr Hammond could simply extend the length of time the government gives itself to hit its own Holy Grail - eliminating the deficit.

Which some might say - after repeated misses - is now looking like "sometime never".

'Longstanding challenge'

The trade union organisation the TUC blamed the government for this "self-inflicted wound" of poor productivity.

"Years of cuts, low public investment, and rising job insecurity have taken a heavy toll," said the TUC's general secretary Frances O'Grady.

A Treasury spokesman rejected that analysis, and said the UK economy had grown strongly in recent years.

"Productivity has been a longstanding challenge for the UK economy, which is why we are focussed on boosting our performance to deliver higher living standards and build an economy that works for everyone," he said.

'Zombie firms'

The OBR blamed low investment by firms, and the impact of low interest rates, for the weak growth in productivity over the past few years.

Interest rate policy, it said, had kept alive some weak businesses which in more normal times would have folded.

This view was backed by the former cabinet secretary, Lord O'Donnell.

Speaking to the BBC, he said that the introduction of low interest rates after the 2008 financial crisis "meant a lot of very poor companies that would have gone bust with very low productivity have been kept alive - zombie companies".

"Our recovery has been quite employment-strong.

"Unfortunately it has been productivity light, so those extra people who are working aren't producing so much, so overall the pie isn't growing as fast as we'd like it to be," he added.

Paul Hollingsworth, at Capital Economics, said the OBR's forthcoming Budget forecasts would disappoint the chancellor.

"The OBR now thinks that the factors depressing productivity are more persistent and as a result, that there is much less scope for a pick-up in productivity over the coming years than previously assumed," he said.

"This will have a significant impact on the public finances and is likely to limit the extent to which the chancellor can ease the fiscal squeeze over the coming years if he still wants to meet his fiscal mandate."