“Zombie” companies, kept alive by low interest rates, have contributed to the UK’s low productivity, according to former cabinet secretary Lord O’Donnell.Firms with low productivity have survived, keeping employment high, he said.But that meant lower output per worker.The Office for Budget Responsibility (OBR) is expected to say later that productivity has been growing more slowly than it predicted.The OBR, whose forecasts form the basis of the chancellor’s Budget decisions, is expected to confirm that it has been overoptimistic in its forecasts for productivity growth over the past seven years. UK productivity sees further fall
UK is ‘wasting potential’ of bottom 20%
Productivity has grown only very slowly, which is likely to translate into significantly lower government tax revenues.Smaller pieLord O’Donnell, who served as Cabinet Secretary until 2011, said the lack of productivity growth in the UK could in part be explained by the way the economy was shored up following the 2008 financial crisis.He said moves to increase bank capital meant that lending to new, innovative companies, which would have been more productive, dried up.
“Also interest rates were set to virtually zero which meant a lot of very poor companies that would have gone bust with very low productivity have been kept alive – zombie companies,” he told the BBC’s Today Programme”Our recovery has been quite employment-strong. “Unfortunately it has been productivity light, so those extra people who are working aren’t producing so much, so overall the pie isn’t growing as fast as we’d like it to be.”‘Horribly wrong’While productivity growth has slowed in many countries in recent years, the UK is a particular laggard, presenting a challenge to policy makers.Paul Johnson, director of the influential think tank, the Institute for Fiscal Studies, said things had “gone horribly wrong” with UK productivity since the financial crisis and that the chancellor’s room for manoeuvre in the Budget next month had now “diminished quite a lot”.”It is slightly embarrassing [the OBR] have assumed each year that productivity would return to its long term trend and each year they’ve pushed that back a little bit further,” he said. Mr Johnson said the big question now was how optimistic the OBR’s revised analysis would be, when it is published alongside the Budget on 22 November. “Are they going to say: look this isn’t going to happen any time soon… productivity isn’t going to grow much for another three to four years.”If they do that, that really will drive a coach and horses through the chancellor’s Budget plans,” he said.
Source: BBC Regional