Osborne warned over UK productivity

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Published: Tuesday 24th February 2015 by The News Editor

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George Osborne has been warned that the economic recovery is in jeopardy unless Britain’s productivity problem is tackled.

A report from the Organisation for Economic Cooperation and Development (OECD) highlighted the UK’s strong growth and employment levels.

But it cautioned that a failure to boost productivity was “holding back real wages and well-being”.

It also suggested a surge in house prices could be a threat to the economy, and said progress in reducing the deficit had slowed.

The analysis came in the OECD’s latest survey of UK plc and its prospects.

The body notes that the 2.6% growth last year was the strongest of any G7 country.

The recovery had “benefited from the cumulative impact of wide-ranging domestic policies”, including very low interest rates, and government-backed lending to support business and “revive the housing market”.

“Employment has recovered to its pre-crisis trend and is now at record levels,” the report said. “However, weak labour productivity since 2007 has been holding back real wages and well-being. The sustainability of economic expansion and further progress in living standards rest on boosting productivity growth, which is a key challenge for the coming years.”

The economists said inflationary pressures from measures such as low rates and quantitative easing (QE) had so far not materialised due to spare capacity in the economy, falling prices of oil and other commodities and exchange rate movements.

“Credit constraints have been partly addressed by the Help to Buy and Funding for Lending programmes, which seem to have been effective at reviving lending to households and strengthened housing demand,” the report said.

“However, housing supply has not risen to meet demand.

“In addition, house prices have increased rapidly and may create risks to financial stability in the case of a downward adjustment.”

The OECD pointed out that the Funding for Lending programme had been closed for mortgages in late 2013.

But it suggested that much of the other support seemed to be going to “inefficient” firms.

“Net lending to firms has continued to fall while the large share of loss-making companies could suggest that new loans could have been skewed to inefficient firms to the detriment of young and innovative ones, which could restrain productivity,” the report said.

The OECD said despite economic growth low tax take was holding back efforts to cut the deficit.

“The budget deficit has been significantly reduced since the peak of 2009, but at a slower pace recently notably as growth has been insufficiently tax-rich,” the report said. “Public debt as a share of GDP is projected to rise further.”

It stressed the importance of improving infrastructure for the UK’s prospects.

“Historic underspending in infrastructure is being tackled by the authorities within tight budget constraints, but greater private infrastructure spending is still needed,” the body said.

“Difficulties in attracting private investors can be partly attributed to insufficient long-term infrastructure planning and long decision-making processes that generate investment uncertainties, which the National Infrastructure Plan is starting to address.”

The report noted that regulators and the Bank of England were taking action to ensure the stability of the financial system and restrain lending to heavily indebted households.

But it warned: “Banks remain very large, however, and if they are not well capitalised they could pose a risk to the economy.”

Published: Tuesday 24th February 2015 by The News Editor

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