Assessment’s finding of a jump in UK productivity emphasises urgent need to appoint a national statistician
The keen new chancellor, John Healey, responded to last week’s better-than-expected economic news by claiming the government was “bringing hope back”. Growth did not plunge as feared after Donald Trump unleashed war on Iran – with GDP expanding at a pretty decent 0.4% in the second quarter.
But what if we should have held on to a bit more hope all along? A new assessment of the UK’s recent productivity suggests this critical measure of the country’s economic strength may have been systematically underestimated.
Instead of stagnation, it points to a “meaningful pickup” in productivity since mid-2024, with annual growth of about 1.6% – up from an average of 0.3% in the previous decade.
This has very much not been the prevailing narrative since Labour came to power. Indeed, Rachel Reeves spent months last year scrambling to respond to a downgrade in productivity projections from the Office for Budget Responsibility (OBR) – from 1.3% annual growth to 1% – with a knock-on effect for the public finances.
Other things being equal, weaker productivity means weaker growth, which broadly translates to lower tax revenues and a bigger public deficit.
The OBR rethink didn’t reflect anything Labour had done, resulting instead from the long-term failure of productivity growth to bounce back after the 2008 global financial crisis. And part of the reason it became so pivotal was because Reeves had left herself so little room for manoeuvre.
But the productivity downgrade contributed to the gloomy sense that Labour was overseeing an economy beset by intractable long-term challenges. And it increased the size of the tax grab Reeves needed to make at last year’s budget to rebuild the headroom against her fiscal rules and pay for Labour’s welfare U-turn.
The new estimates, from the Centre for Economic Performance at the London School of Economics (LSE), where former Reeves advisers John Van Reenen and Anna Valero have now returned to their desks, paint a markedly different picture.
Productivity is defined as how much output each worker produces, but the UK has been botching the job of sizing up the workforce now for several years. The beleaguered Office for National Statistics (ONS) withdrew the status of accredited official statistic from its labour force survey (LFS) in 2024 as it struggled with plunging response rates from consumers.
Instead of using the LFS, which the OBR has to rely on, the LSE co-authors, including Van Reenen and Valero, together with Niki Barbas, use estimates made by the Resolution Foundation thinktank.
Resolution’s approach relies on an alternative dataset published by the ONS, based on what companies tell the tax authorities through the PAYE system (augmented with other sources to account for the self-employed).
The differences are wide. While the LFS records a 377,000 increase in the number of employees since mid-2024, the tax-based measure shows a decline of 133,000.
Of course, depending on what’s happened to those missing workers – retirement, unemployment, sickness, childcare – this may be a different cause for concern. Reeves has been accused of depressing hiring by piling costs on to employers.
But using the smaller estimate for the number of employees suggests that far from flatlining, productivity has jumped. That raises the intriguing possibility that, with better data, the OBR downgrade, and the massive headache it created for the then chancellor, could have been avoided.