It is rather inconvenient for the Chancellor, George Osborne, that his Office of Budget Responsibility has downgraded all the growth forecasts for the next few years. It means for a start that his promise that the pile of debt would start to fall in 2015-16 will be missed - because debt is expressed as a proportion of GDP and GDP is less than previously thought. But even more troublesome is that he also needed to take corrective action to ensure that his other promise - to run a surplus by 2019-20 - is not also broken.
But peer a little more deeply into the OBR's logic and it seems built on some rather shaky assumptions. The Treasury will be feeling fairly confident that the forecasts will change again, either in November or this time next year, and quite possibly in a helpful way.
The OBR's logic goes like this: GDP grew a little bit less than expected in the last three months of 2015. However employment grew a little bit more than expected, meaning that the number of people in work by the turn of the year was 150,000 higher than the OBR had expected only a few weeks before. What is more, the hours that each person worked also went up, meaning that the total number of hours of work in the whole economy was up too.
Now, productivity in an economic context is defined as output divided by numbers of hours worked. It therefore follows arithmetically that productivity was lower than expected at the end of 2015. Fine so far.
But what the OBR has then done is used these few weeks of data to justify revising downwards their assumptions of the potential growth rate of productivity for the next four years; whereas previously it was forecast to grow at an average rate of 2.2%, now it is presumed to grow at 2%.
This may be the case, but it doesn't necessarily follow. Alternative scenarios are:
(1) We could be experiencing a temporary pause to business investment decisions prior to the EU referendum on 23rd June which shows up in the GDP data but not in the hiring decisions of firms; if - as the forecasts also presume - we remain in the EU, then business confidence may well rebound reversing the above calculation. Indeed part of the reason for the fall in GDP at the end of 2015 was due to lower-than-expected business investment, and recent surveys suggest that some companies are waiting for the Brexit decision before committing.
(2) Similarly, a short-term deterioration in the trade balance at the end of last year could dampening total output without having a major long term impact on domestic productivity, particularly since sterling has weakened in the meantime which might boost exports.
(3) The value of production in the oil and gas sector has fallen, caused by dramatically low oil prices, which makes it look as if output has fallen although volumes have remained the same, all being equal. In fact the falling oil price might soon be expected to boost growth through lower input costs. This explanation is hinted at by the ONS' own discussion of the issues in a recent paper on productivity here.
(4) There is no discussion of the effect on productivity of the forthcoming hike in the national minimum wage, even though employers are insisting it will accelerate trends to invest in technological solutions. A recent report from the British Retail Consortium, representing employers in the largest low-paid sector, states bluntly that the digital revolution will be accelerated by "the diverging costs of labour versus technology".
If any of these factors have more of an effect than the OBR has suggested then the Chancellor will find he has far more room for manoeuvre. I suspect that he already knows this: his largest "cuts" in response are either a re-phasing of existing commitments or subject to a review that wont publish until 2018, by which time the picture will be very different.