OECD warns UK must fix productivity problem to raise living standards

Leading economic thinktank says UK's failure to raise output per worker since the downturn has held back wages and well-being

Britain must fix its productivity problem to secure future economic growth and improve living standards, a leading thinktank has warned as it highlights a failure to grow output per UK worker since the downturn.

The Organisation for Economic Co-operation and Development (OECD) has also downgraded its outlook for the UK this year but still sees it enjoying one of the fastest growth rates among advanced economies. Growth in 2015 is now projected to be 2.6%, matching last year's pace but down from a forecast for 2.7% made in November. The 2016 forecast remains at 2.5% GDP growth.

Weak labour productivity since 2007 has been holding back real wages and well-being. The sustainability of economic expansion and further progress in living standards rest on boosting productivity growth, which is a key challenge for the coming years," says the OECD report, to be launched at a news conference with chancellor George Osborne on Tuesday morning.

Income and wealth are below the G7 average and real earnings have been exceptionally weak as they have continued to reflect poor productivity," its report into the UK says.

Developing a knowledge-based economy, strengthening infrastructure investment and improving the financing of the economy are all critical in this regard," the thinktank adds.

Weak export performance and productivity could be driven by infrastructure weaknesses and difficult access to bank finance, especially for small and medium-sized enterprises (SMEs), holding back the emergence of new firms and high-skilled jobs."

In addition, house prices have increased rapidly and may create risks to financial stability in the case of a downward adjustment."

The chancellor will likely welcome the OECD's comments on his austerity programme. The Paris-based thinktank notes the budget deficit has been "significantly reduced since the peak of 2009, but at a slower pace recently notably as growth has been insufficiently tax-rich."

It recommended the government "continue to pursue the medium-term fiscal consolidation path" while letting in-built stabilising mechanisms kick in as necessary and it urged ministers to ensure further cuts are "fair". It also recommended the government look for further efficiency gains in health and education, and broaden the tax base, including by changing the way self-employed workers are taxed.

Banks remain very large ... and if they are not well capitalised they could pose a risk to the economy. In addition, banks have been cutting back net lending, making it more difficult for small and medium-sized enterprises to get financing. Part of this financing has been replaced by alternative credit providers, which are creating new regulatory challenges."

Income inequality is high. However, relative income poverty is comparatively low and has been falling. The average income of the richest 10% of the population is nearly ten times that of the poorest, but the gap shrunk between 2009 and 2011 to slightly below the OECD average. Moreover, the share of wealth held by the top 10% is among the lowest in the G7."