The UK is recording a rare surge in productivity growth, a think tank says

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The UK is enjoying a rare surge in productivity growth, according to newly available data showing that GDP was stronger than previously thought, while employment fell.

The analysis by the Decision Foundation, published on Tuesday evening, found that production per hour worked rose by 1.6 percent over the past year, in stark contrast to official data showing a decline of 0.5 percent.

But she warned that the new figures were unlikely to save Chancellor Rachel Reeves a punitive reduction productivity Growth forecasts released by the government’s official budget watchdog on November 26.

The think tank’s estimate is based on recently revised official estimates of GDP and salary figures employment Derived from tax records, rather than the official measure of working hours derived from the erroneous Labor Force Survey conducted by the Office for National Statistics.

It paints a picture of recent productivity growth that is much stronger than the post-pandemic average of 0.1 percent and the 0.5 percent average recorded in the decade following the global financial crisis. One limitation of the data is that HM Revenue and Customs records do not show the number of hours worked.

A sustained improvement in productivity would transform the UK’s economic fortunes, supporting strong growth in output and living standards, boosting tax revenues and making it easier to fund public services.

However, the Resolution Foundation said that despite the short-term recovery, Reeves still faces a cut in the Office for Budget Responsibility’s forecast for long-term productivity growth, which is likely to widen the fiscal hole she must plug in the budget.

The Office for Budget Responsibility’s forecasts currently assume that productivity growth will average 1 per cent per year over its five-year forecast period.

Greg Thwaites, research director at the Decision Foundation, said a potential 0.2 percentage point cut in the OBR’s productivity forecasts would cost £15bn a year, the equivalent of a 2p increase in the basic rate of income tax.

He added that despite the recent rise, “the UK’s long-standing productivity problems show that a reduction is justified.”

These numbers come as the Chancellor heads to Washington to attend the annual meetings of the International Monetary Fund and the World Bank. It has embarked on a drive for pro-growth measures ahead of the Budget, including regulatory relaxation, as part of its attempt to mitigate the impact of reduced productivity of the Office for Budget Responsibility.

Michael Saunders, of consultancy Oxford Economics, says the OBR should have lowered its productivity forecasts years ago, given repeated disappointments in the UK’s performance, rather than setting its forecasts “at the high end of the range”.

However, other economists see some reasons for optimism in the latest data.

The improvement partly reflects recent job cuts in the hospitality and retail sectors, the two sectors hardest hit by tax and minimum wage changes in April, said Andrew Wishart, an economist at Berenberg. “Cutting salaries for the lowest paid and least productive employees results in higher average output for those still working,” he said.

But he added that the UK “could be at the foot of a sustained rise in productivity”, given signs it was also improving in higher value-added sectors, such as IT and professional services.

Rob Wood, chief UK economist at consultancy Pantheon Macroeconomics, said that while the recent improvement could be just a “blip on the horizon”, it would make it difficult for the Office for Budget Responsibility to justify a significant cut in its forecasts on the productivity trend.

Wood said the watchdog “should avoid becoming pessimistic and imposing a more stringent policy than might be needed.”