UK OBR: Set To Cut Next 5 Yrs Productivity Growth Estimates

--Cut To Productivity Growth Likely Largest Impact On Public Finances

By David Robinson

     LONDON (MNI) - The Office for Budget Responsibility expects to

substantially cut its estimate of UK productivity growth, and says that this

will likely have the biggest impact on its public finance projections that will

underpin the November Budget.

     The OBR, in its Forecast Evaluation Report (FER), made clear that it is

likely to paint a gloomier picture of the outlook for the public finances when

the Budget is published on November 22. UK productivity growth has persistently

come in below expectations and the OBR is now set to lower its projections.

     On the upside for the public finances, the OBR noted that the equilibrium

jobless rate appears to have fallen and average hours worked have increased, but

these are unlikely to offset the impact from anaemic productivity growth.

     "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 downward revision

to productivity growth is likely to have the largest quantitative impact," the

FER stated.

     The OBR noted that weakness in UK productivity growth has lasted for almost

a decade, with the ground lost at the outset of the global financial crisis

never being recovered. 

     The OBR at one time assumed productivity would rebound once the banking

system was repaired, but despite banks becoming much better capitalised this has

not happened. Another assumption, that firms hoarded labour during the financial

crisis, has become less relevant as time has passed.

     The OBR said a more relevant explanation for current productivity weakness

is that business investment growth has been very weak and is currently estimated

at just 5 per cent above its pre-crisis peak. The UK electorate's decision to

leave the European Union also does not appear to be helping.

     "The renewed weakness of productivity so far in 2017 may in part be a

temporary effect of the Brexit vote and the uncertainty that it has generated.

But given the bigger picture - both over time and across countries - it is clear

that we will need to revisit our trend productivity growth assumptions again in

November," the OBR said.

     A recent report in the Financial Times citing Treasury officials said that

they believed the OBR's anticipated cuts to productivity growth could wipe out

two-thirds of the cushion relative to its fiscal goal of getting the target

deficit below 2% of GDP by fiscal year 2020-21.

     The OBR in its March 2017 forecasts assumed trend productivity growth would

rise gently to 1.8% in 2021, compared to 2.1% pre-financial crisis, but instead

it has average a paltry 0.2% over the past five years.

     "We continue to believe that there will be some recovery from the very weak

productivity performance of recent years, the continued disappointing outturns,

together with the likelihood that heightened uncertainty will continue to weigh

on investment, means that we anticipate significantly reducing our assumption

for potential productivity growth over the next five years in our forthcoming

November 2017 EFO (Economic and Fiscal Outlook)," the OBR said.

     It did not specify precisely how low its new estimate of productivity

growth is likely to be.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,MFB$$$,MGB$$$]