There is a moment when gamblers realise that betting on the same horse after a string of losses is hopeless.
That moment has arrived at the Office for Budget Responsibility (OBR) after officials at the government’s economic forecaster finally gave up betting that Britain’s labour productivity was about to race to the head of the international pack.
After seven years of predictions that it would bounce back from virtually zero to nearer the 2.1% average seen in the pre-crisis period, the OBR has thrown in the towel.
Few would consider the OBR as a home for speculators and cardsharps, ready to bet their futures, and the country’s, on a rebound over the next five years in the output of the average worker.
Yet the turnaround in thinking reveals a huge amount of wishful thinking. Officials now say that the productive capacity of the economy – as measured by the output of the average worker per hour worked – will be closer to the 0.2% seen this year than the 1.6% it predicted.
As for a reversion to the 2.1% growth seen before the 2008 crash, that is for the birds.
The impact is likely to be devastating for the chancellor, who must now make his calculations for spending based on much lower forecasts for tax income.
When most of the government’s revenue comes from the two giants of income tax and national insurance, and wages growth is linked to improving levels of productivity, it is not hard to join the dots and see that tax receipts will grow at a slower pace than previously expected.
Philip Hammond thought he could deploy about £26bn over the next five years to help him through a difficult Brexit transition with some left over for investment. It looks like about £18bn of that will fail to materialise.
The OBR explains the permanent damage to productivity is mainly the result of weak business investment.
Even after a 40% rise from the post-crisis low, business investment today is just 5% above its pre-crisis peak almost a decade ago. This contrasts with the decades that followed the 1980s and 1990s recessions, when investment was 63% and 30% higher than the pre-recession peaks respectively.
“If business investment remains weak then this factor should continue to reduce productivity growth relative to the pre-crisis period,” the OBR says in its report.
Unfortunately, business investment is a key factor in the improving fortunes of the country that the OBR has also overestimated. Like productivity, it was always supposed to bounce back, but didn’t. Shockingly, if the productivity growth seen in the pre-crisis era had continued, the level would be 21% higher today.
Should this mea culpa damage our view of the OBR and its ability to tell us the likely path of the economy? The answer must be yes, when there was plenty of evidence, both theoretical and from the real economy, that showed the financial crisis was the spark for an extraordinary recession, unlike those of the recent past. And for that reason, the recovery would be long and slow, and not the rapid return to form as the OBR said.
Austerity was always going to have a bigger impact on business and household sentiment about the health of the nation than the OBR was prepared to acknowledge.
With austerity a feature of the government’s financial planning until at least 2025, it is only right that those who gambled on a return to old ways were trounced by the realists.