The OBR needs to get it right on productivity

If our forecasts carry on being made on faulty assumptions the government will never learn.

The Office for Budget Responsibility is making a critical mistake in being excessively gloomy about a lack of productive potential in the UK since the 2007 crisis.

One of the characteristics of the recession has been how quickly employment levels have returned to pre-recession levels. The OBR interprets this as being a result of severe damage to the productive capacity of the economy. Any demand expansion through fiscal policy to stimulate growth would, in its opinion, quickly run into production bottlenecks and hence price increases rather than an increase in output. OBR estimates put spare capacity, the potential to meet any new demand, at below 3 per cent. The issue is, where's the firm evidence for this view?

Historically, the UK economy has always returned quickly to its underlying long-run trend in productivity growth following a recession, and there's nothing to suggest this pattern has changed. The OBR is simply being far too pessimistic. Based on the evidence from past trends, the current level of spare capacity is likely to be nearer to 12 per cent than 3 per cent, mostly in the form of underemployed labour. Employers have decided to hold onto workers rather than risk running down their workforce.

The OBR has powerful allies in its position on capacity from the Treasury and the Bank of England. So who's right? What can look like an academic detail around the nature of 'spare capacity' has a direct impact on the livelihoods of huge numbers of workers and their families. It's important that such powerful institutions take a closer look at why there is so much disagreement between experts.

The first step is to understand how the current recession differs from those in the past and the implications. The drop in output has been more severe and persisted far longer than all previous recessions in the past forty years. Output has still not reached its pre-recession level after five years and there is little chance of it doing so before 2015. At the same time, employment growth has confounded the forecasters. Employment fell by 600 thousand following the 2008 downturn but recovered to exceed its pre-recession level by 2012. Despite stagnant output growth, employment increased by 700 thousand (2 percentage points) between 2010 and 2012.

The overall increase in employment between 2010 and 2012 is not all that it seems at first sight. Firstly, more than half of the additional jobs have been for part-time, not full-time, workers. For women, nearly three-quarters of the extra jobs have been for part-time workers. Secondly, workers are not working as many hours as they would like. According to the Office for National Statistics, one in ten workers wanted to work more hours than they were offered during 2012; and between 2008 and 2012, the number of workers who wanted to work more hours increased by one million. Thirdly, there were half a million fewer full-time jobs in 2012 than at the start of the recession.

Employers are temporarily "hoarding" labour so that output can be increased more rapidly when demand recovers. They don't want to lose skilled and experienced workers; keeping workers on during periods of slack demand can help build morale and good relations; and laying workers off can be difficult and expensive. There is also, for example, no evidence of large-scale scrapping of plant and machinery as happened in the manufacturing sector during the recession of the early 1980s.

The likelihood that low productivity in the UK is a consequence of labour hoarding is supported by international trends. Employers in the USA are less reluctant to shed labour during recessions than UK employers. The drop in labour productivity following the financial crisis was consequently much smaller in the USA than in the UK despite a very similar drop in output. The German experience has been similar to the UK. Jobs were protected in the early part of the recession through government sponsored short-time working schemes. This resulted in a sharp drop in labour productivity and a rise in labour hoarding.

The OBR is surely wrong to assume there has been no growth in productive potential since 2007. This not only assumes that technological progress has come to a stop because of the recession, which seems most unlikely, but also denies the likelihood that productivity has been held down because of substantial labour hoarding. The existence of large amounts of spare capacity in the UK economy implies that a demand expansion could be achieved without any serious inflationary consequences. Even if the growth in productive capacity has not kept pace with its historical trend, a growth rate of only half the historical trend would still leave enough spare capacity to justify a demand injection in order to bring a quicker end to the recession.

It is surely the right time to get the economy moving forward again by financing much needed infrastructure projects and new housing developments. To do otherwise would be seriously wasteful and ongoing pessimism could lead to a withering of productive capacity over the longer term. It is high time the Treasury took some positive action instead of burying its head in the sand.

A trader sleeps at her desk. Photograph: Getty Images

Jim Taylor is an Emeritus Professor at Lancaster University Management School.

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The joy of only winning once: why England should be proud of 1966

We feel the glory of that triumphant moment, 50 years ago, all the more because of all the other occasions when we have failed to win.

There’s a phrase in football that I really hate. It used to be “Thirty years of hurt”. Each time the England team crashes out of a major tournament it gets regurgitated with extra years added. Rather predictably, when England lost to Iceland in Euro 2016, it became “Fifty years of hurt”. We’ve never won the European Championship and in 17 attempts to win the World Cup we have only won once. I’m going to tell you why that’s a record to cherish.

I was seven in 1966. Our telly was broken so I had to watch the World Cup final with a neighbour. I sat squeezed on my friend Colin’s settee as his dad cheered on England with phrases like “Sock it to them Bobby”, as old fashioned now as a football rattle. When England took the lead for the second time I remember thinking, what will it feel like, when we English are actually Champions of the World. Not long after I knew. It felt good.

Wembley Stadium, 30 July 1966, was our only ever World Cup win. But let’s imagine what it would be like if, as with our rivals, we’d won it many times? Brazil have been World Champions on five occasions, Germany four, and Italy four. Most England fans would be “over the moon” if they could boast a similarly glorious record. They’re wrong. I believe it’s wonderful that we’ve only triumphed once. We all share that one single powerful memory. Sometimes in life less is definitely more.

Something extraordinary has happened. Few of us are even old enough to remember, but somehow, we all know everything that happened that day. Even if you care little about the beautiful game, I’m going to bet that you can recall as many as five iconic moments from 50 years ago. You will have clearly in your mind the BBC commentator Kenneth Wolstenholme’s famous lines, as Geoff Hurst tore down the pitch to score his hat-trick: “Some people are on the pitch. They think it’s all over. It is now”. And it was. 4 - 2 to England against West Germany. Thirty minutes earlier the Germans had equalised in the dying moments of the second half to take the game to extra time.

More drama we all share: Geoff Hurst’s second goal. Or the goal that wasn’t, as technology has since, I think, conclusively proved. The shot that crashed off the cross bar and did or didn’t cross the line. Of course, even if you weren’t alive at the time, you will know that the linesman, one Tofiq Bakhramov, from Azerbaijan (often incorrectly referred to as “Russian”) could speak not a word of English, signalled it as a goal.

Then there’s the England Captain, the oh-so-young and handsome Bobby Moore. The very embodiment of the era. You can picture him now wiping his muddy hands on his white shorts before he shakes hands with a youthful Queen Elizabeth. Later you see him lifted aloft by his team mates holding the small golden Jules Rimet trophy.

How incredible, how simply marvellous that as a nation we share such golden memories. How sad for the Brazilians and Germans. Their more numerous triumphs are dissipated through the generations. In those countries each generation will remember each victory but not with the intensity with which we English still celebrate 1966. It’s as if sex was best the first time. The first cut is the deepest.

On Colin’s dad’s TV the pictures were black and white and so were the flags. Recently I looked at the full colour Pathe newsreel of the game. It’s the red, white and blue of the Union Jack that dominates. The red cross of Saint George didn’t really come into prominence until the Nineties. The left don’t like flags much, unless they’re “deepest red”. Certainly not the Union Flag. It smacks of imperialism perhaps. In 1966 we didn’t seem to know if we were English or British. Maybe there was, and still is, something admirable and casual about not knowing who we are or what is our proper flag. 

Twelve years later I’m in Cuba at the “World Festival of Youth” – the only occasion I’ve represented my country. It was my chance to march into a stadium under my nation’s flag. Sadly, it never happened as my fellow delegates argued for hours over what, if any, flag we British should walk behind. The delegation leaders – you will have heard of them now, but they were young and unknown then – Peter Mandelson, Trevor Phillips and Charles Clarke, had to find a way out of this impasse. In the end, each delegation walked into the stadium behind their flag, except the British. Poor Mandelson stood alone for hours holding Union Jack, sweltering in the tropical sun. No other country seemed to have a problem with their flag. I guess theirs speak of revolution; ours of colonialism.

On Saturday 30 July BBC Radio 2 will commemorate the 50th anniversary of the 1966 World Cup Final, live from Wembley Arena. Such a celebration is only possible because on 16 occasions we failed to win that trophy. Let’s banish this idea of “Fifty years of hurt” once and for all and embrace the joy of only winning once.

Phil Jones edits the Jeremy Vine Show on BBC Radio 2. On Saturday 30 July the station celebrates the 50th anniversary of the 1966 World Cup Final live from Wembley Arena, telling the story of football’s most famous match, minute by minuteTickets are available from: www.wc66.org