The keen new chancellor, John Healey, responded to last week’s better-than-expected economic news by claiming the government was “bringing hope back”. Growth did not plunge as feared after Donald Trump unleashed war on Iran – with GDP expanding at a pretty decent 0.4% in the second quarter.
But what if we should have held on to a bit more hope all along? A new assessment of the UK’s recent productivity suggests this critical measure of the country’s economic strength may have been systematically underestimated.
Instead of stagnation, it points to a “meaningful pickup” in productivity since mid-2024, with annual growth of about 1.6% – up from an average of 0.3% in the previous decade.
This has very much not been the prevailing narrative since Labour came to power. Indeed, Rachel Reeves spent months last year scrambling to respond to a downgrade in productivity projections from the Office for Budget Responsibility (OBR) – from 1.3% annual growth to 1% – with a knock-on effect for the public finances.
Other things being equal, weaker productivity means weaker growth, which broadly translates to lower tax revenues and a bigger public deficit.
The OBR rethink didn’t reflect anything Labour had done, resulting instead from the long-term failure of productivity growth to bounce back after the 2008 global financial crisis. And part of the reason it became so pivotal was because Reeves had left herself so little room for manoeuvre.
But the productivity downgrade contributed to the gloomy sense that Labour was overseeing an economy beset by intractable long-term challenges. And it increased the size of the tax grab Reeves needed to make at last year’s budget to rebuild the headroom against her fiscal rules and pay for Labour’s welfare U-turn.
The new estimates, from the Centre for Economic Performance at the London School of Economics (LSE), where former Reeves advisers John Van Reenen and Anna Valero have now returned to their desks, paint a markedly different picture.
Productivity is defined as how much output each worker produces, but the UK has been botching the job of sizing up the workforce now for several years. The beleaguered Office for National Statistics (ONS) withdrew the status of accredited official statistic from its labour force survey (LFS) in 2024 as it struggled with plunging response rates from consumers.
Instead of using the LFS, which the OBR has to rely on, the LSE co-authors, including Van Reenen and Valero, together with Niki Barbas, use estimates made by the Resolution Foundation thinktank.
Resolution’s approach relies on an alternative dataset published by the ONS, based on what companies tell the tax authorities through the PAYE system (augmented with other sources to account for the self-employed).
The differences are wide. While the LFS records a 377,000 increase in the number of employees since mid-2024, the tax-based measure shows a decline of 133,000.
Of course, depending on what’s happened to those missing workers – retirement, unemployment, sickness, childcare – this may be a different cause for concern. Reeves has been accused of depressing hiring by piling costs on to employers.
But using the smaller estimate for the number of employees suggests that far from flatlining, productivity has jumped. That raises the intriguing possibility that, with better data, the OBR downgrade, and the massive headache it created for the then chancellor, could have been avoided.
Van Reenen says that “the best current guess does suggest we are getting more out of our workers than we used to”.
He dismisses the idea that what has happened is just layoffs among low-skilled workers, pushing up average productivity. “I don’t think that’s the main story: a chunk of this appears to be real.”
It’s too early to say what may be driving an uplift in productivity, let alone whether it will be sustained – but one hypothesis is that AI is starting to bear fruit in some sectors.
“It’s certainly a possibility that we are seeing the first signs of that starting to happen,” Van Reenen says.
Not surprisingly, he points to his former boss Reeves’s policies – including a significant increase in public investment and the stripping back of planning rules – as reasons to hope the improvement could continue.
The latest official GDP figures showed business investment – widely seen as one determinant of productivity – rising strongly, though experts were quick to caution that it could be reversed as high energy prices take their toll.
Whatever the future brings, the wide discrepancy with the official figures underlines how urgent a priority it should have been to fix the gaping holes in the UK’s jobs data earlier, and more effectively.
The poorly resourced ONS has been doggedly developing a new, online version of the LFS. Instead of the cumbersome 40-45 minute phone call needed to complete the existing questionnaire, it takes about 15 minutes.
In an update last week, the ONS acknowledged that the refreshed survey design appeared to be turning up slightly different results – including, for example, lower levels of long-term sickness. It also confirmed that it would be November next year at the earliest before it could switch over to the new version.
The UK has had no national statistician, the head of the ONS, for more than a year since Ian Diamond resigned in May 2025. The vacancy hardly speaks of burning urgency in Whitehall.
