MNI INTERVIEW: OBR's Productivity Outlook Realistic - Miles

The key figure behind the UK Office for Budget Responsibility's fiscal forecasts has pushed back hard in comments to MNI against suggestions that the fiscal watchdog will be forced to cut its productivity growth assumptions in the near future.

Some analysts have argued that the OBR may by as soon as the autumn have to slash the assumptions contained in its Spring Forecast that productivity growth will rebound from levels near zero to around one-and-a-quarter percent towards the end of its five-year forecast. But David Miles said recent poor productivity has been factored into the watchdog's arithmetic.

"If you are looking at what we are predicting for the level, not the rate of change ... at the end of the forecast horizon, it is a bit more than one percent lower than we thought back in October. To put that point another way, the higher GDP that the Office for National Statistics think that the UK has been producing in recent years is overwhelmingly because they think more people have been at work and not because of productivity which … has gone backwards," Miles said in an interview.

The Office for National Statistics revised up its estimate of GDP for the last couple of years but revised up employment even more, by half a million, pushing down on productivity. 

"The question we are trying to answer there is ‘what might the world look like five years into the future?’" Miles said.

50-YEAR TIMELINE

If the last 50 years, when productivity growth averaged 2% a year, are used as the baseline, rather than the feeble performance of recent times, the OBR’s assumption looks too pessimistic, Miles noted.

"Those who say we are ridiculously optimistic and we have to ‘get real,’ and very soon, I’m not sure what question they think we are answering. The question we are trying to answer is about what productivity growth will be in future, not what has productivity been in recent years. It is not sensible that  if we get another few months of weak productivity growth that we have ‘got to get real’ and suddenly slash our productivity forecast for the next five years and beyond,” he said.

The period used for predicting productivity trends matters hugely and uncertainty is high.

“The idea that we are absolutely on the edge of some sort of capitulation, that it is only going to take one bad productivity number for us to say ‘Okay, we give in’ and we are going to lower productivity from 1% to nothing – that is a bit misguided,” Miles said. (See MNI INTERVIEW: UK's OBR To Cut Productivity Only Slightly-Bean)

DEFENCE AND CAPITAL SPENDING 

A lower OBR outlook for productivity would make it much harder for the government to meet its fiscal rules, which are already likely to come under strain due higher debt interest and planned increases in defence spending, first to 2.5% of GDP and eventually to 3.0%.

While the Treasury's self-imposed balanced budget rule is for current spending to balance, many defence outlays on equipment count as capital spending and are exempt, but Miles does not see this providing much help. The government also has a target for a fall in the ratio of net public debt to GDP over five years and any spending financed by borrowing will show up in the debt target, he noted.

Another wrinkle in the fiscal rules is that rather than aiming for a precise budget balance in future, the Treasury is set to allow 0.5% of GDP of margin either side, though this did not impact the OBR's latest assessment as it has yet to kick in.

"Assessing whether the targets have been hit, which is currently over five years going out to fiscal years 2029-30, that is going to move toward us until it comes down to three years ... But for now that 0.5% doesn’t play a role," Miles said.