Britain's 'productivity hedgehog' could put a spike in Reeves' budget

The British people like hedgehogs.

- Ben Zaranko

They regularly top polls of our favourite wild animal. In 2013, they were even chosen as the best natural emblem for the British nation. It is fitting, then, that a chart that looks a bit like a hedgehog is emblematic of the structural weakness of the UK economy. It's possible that a version of this chart will ruin Rachel Reeves's autumn.

Putting small nocturnal mammals to one side for a moment, the key issue at hand is productivity. Loosely speaking, that's the amount of stuff we can produce with an hour's work. It's one of the most important determinants of our collective economic prosperity.

As the economist Paul Krugman famously once wrote: “Productivity isn't everything, but in the long run it is almost everything.”

More prosaically, the judgment about the UK's potential rate of productivity growth is one of the most important inputs into the Office for Budget Responsibility's (OBR) economic and fiscal forecast, because of its outsized impact on economic growth and tax revenues. That forecast will sit behind the budget this autumn and determine what - if anything - Reeves needs to do to meet her fiscal rules for borrowing and debt.

And here comes the rub. The OBR is known to be undertaking a review of its productivity assumption.

It’s highly likely that it'll decide to downgrade its judgment of the UK’s growth potential this autumn, adding billions to the chancellor's fiscal headache. Why is this under consideration? Have a look at the chart right, which displays successive OBR forecasts for growth in UK productivity since 2010, including the forecast from March this year, and the out-turn (ie what actually happened). There are three key things to take away.