UK productivity has likely been underestimated, according to fresh analysis by economists at the London School of Economics’ Centre for Economic Performance (CEP), a finding that recalibrates the economic backdrop to recent fiscal policy choices.
What the study finds
The CEP’s work, produced by former government advisers who have returned to academic posts, indicates a “meaningful pickup” in productivity since mid‑2024, with annual growth running at around 1.6%. That contrasts sharply with the long, weak run of productivity growth — averaging roughly 0.3% in the decade before — which has informed official forecasts and strained public finances.
The study arrives amid a period of relatively resilient headline output: gross domestic product expanded by 0.4% in the second quarter, a figure the new chancellor, John Healey, seized on when saying the government was “bringing hope back”.
“bringing hope back”
Why this matters for budgets and policy
Productivity is central to how much the economy can grow without inflationary pressure and underpins tax receipts. Official forecasters, notably the Office for Budget Responsibility (OBR), cut medium‑term productivity expectations last year — a revision that fed into a downgrade to potential growth. The OBR’s adjustment from an earlier assumption of about 1.3% annual productivity growth to roughly 1.0% was a key factor behind tighter fiscal choices made by the previous chancellor.
That downgrade increased the scale of the fiscal consolidation required to meet the government’s stated rules. As the CEP analysis points to stronger productivity, it prompts a reappraisal of whether the scale of last year’s taxes and spending adjustments was dictated by genuinely weak supply capacity or by measurement problems.
Data, measurement and the ONS
The study emphasises that the UK has struggled to measure workforce output and the effective size of the economy since the global financial crisis. The Office for National Statistics (ONS) has been described as “beleaguered” in public debate about data quality, and systematic underestimation of productivity would have important consequences for how policymakers interpret growth, public borrowing and wage prospects.
- CEP estimate: productivity growth ≈ 1.6% annual since mid‑2024.
- Prior decade average: ≈ 0.3% annual.
- GDP Q2: growth of 0.4%.
- OBR revision: from ≈ 1.3% to ≈ 1.0%.
Implications for wages, inflation and jobs
Stronger productivity growth typically supports higher real wages without stoking inflation, because firms can pay more while keeping unit labour costs in check. If the CEP’s figures are sustained, the case for a less austere fiscal stance strengthens: more productive workers raise potential tax revenues and reduce the need for deep short‑term spending cuts or tax rises to stabilise the public finances.
However, the study does not directly alter current inflation readings or labour market conditions; it affects medium‑term expectations about living standards and fiscal headroom. For workers, meaningful productivity gains are the most reliable path to pay growth that outpaces prices.
Questions for ministers and forecasters
The CEP research raises three practical questions for government and independent forecasters:
- Are official productivity estimates and workforce measurement now sufficiently robust to underwrite policy choices?
- Should the OBR and ONS reassess their modelling and assumptions in light of new academic estimates?
- What does a revised productivity profile imply for tax, spending and wage trajectories over the coming years?
Those questions matter because they go to the heart of recent fiscal trade‑offs: how much to tax, where to cut or invest, and what level of public debt is prudent. The CEP paper does not resolve these debates on its own, but it does shift the terms of discussion from an inevitability of weak supply to a more contested picture of recent economic performance.
Key voices in government and independent forecasting bodies will now have to decide whether to revise their assumptions, and any change could have tangible effects on public spending plans and household finances in the years ahead.
