Budget watchdog OBR says UK productivity estimates to be 'significantly' lower than forecast

The group conceded that after reviewing its own previous forecasts it would have to "significantly" lower its estimates for the productivity of British workers as a result of a decade of minimal growth in the wake of the last financial crisis.

OBR estimated that productivity had grown a mere 0.2% over the past five years, significantly lower than the 1.6% it had expected to report back in March, leading the group to warn chancellor Philip Hammond, who was set to present his next budget on 22 November, that he would have significantly less money to play with in the Autumn budget.

"Other things being equal 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 OBR said.

The Trades Union Congress (TUC) said the government had shot itself in the foot, blaming Downing Street for the "self-inflicted wound" of poor productivity.

"Years of cuts, low public investment, and rising job insecurity have taken a heavy toll," said TUC general secretary Frances O'Grady.

However, a treasury secretary spokesman rebutted that analysis, saying the economy had seen strong growth in the last few years.

"Productivity has been a longstanding challenge for the UK economy, which is why we are focussed on boosting our performance to deliver higher living standards and build an economy that works for everyone," he said.

The report singled out low investment by firms, as well as low interest rates, for the soft growth in productivity over the preceding years, saying that interest rate policies had kept several weak businesses afloat that if it weren't for those rates, would've sunk.

Paul Hollingsworth of Capital Economics said the OBR's autumn budget forecasts would likely disappoint the chancellor.

"The OBR now thinks that the factors depressing productivity are more persistent and as a result, that there is much less scope for a pick-up in productivity over the coming years than previously assumed," he said.

"This will have a significant impact on the public finances and is likely to limit the extent to which the chancellor can ease the fiscal squeeze over the coming years if he still wants to meet his fiscal mandate."