Given the persistently disappointing performance of productivity, it is entirely understandable that the Office for Budget Responsibility (OBR) decided in this week’s Budget to adopt more pessimistic assumptions about its future behaviour. What’s more, we cannot rule out the possibility that even the new forecasts will turn out to be too optimistic as well.
But we think it more likely that the OBR’s new forecasts will prove to be too pessimistic. Not only does the sheer magnitude of the forecast changes seem hard to justify on the basis of the limited additional information available since March, but there are some more fundamental reasons to think that productivity growth is likely to grow a bit more quickly than the average rates of 1% or so that the OBR now predicts. This could have important consequences for the public finances.
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