A more productive economy is being delivered under this Labour government

“The Labour government set raising economic growth as its central target while in power. The new figures published by the Office for National Statistics suggest that the economy is doing a lot better than expected. John Van Reenen makes the case for how this Labour government is overseeing productivity growth. Enjoying this post? Then sign up to our newsletter and receive a weekly roundup of all our articles. With so much political and economic hysteria in the news, it is wise to step back and take a look at what fundamentally matters. Famously, productivity growth — how much output can be generated per worker — is almost the only thing that matters for long-run economic health. Productivity growth drives real pay growth and allows more spending on public services. Its dismal performance since the global financial crisis has been the number one reason for the nation’s social and political ills. This is why raising growth has been Chancellor Rachel Reeves’ priority from her first week in office . On May 14 th , the Office for National Statistics released national output figures for the first quarter of 2026. Overall output growth of 0.6 per cent was impressive, but the real news was actually even better. When combined with the best current estimates of employment, we calculate that since Labour was elected in the third quarter of 2024, output per worker has risen by about 2.4 per cent. This is an annualised rate of 1.6 per cent, which compares with less than 0.3 per cent per year in the previous decade. Figure 1 shows a spectacular improvement. This trend isn’t just a flash in the pan. It was also visible in just the first year of this government through 2024Q3. So why — with honourable exceptions — has this remarkable turnaround to our key barometer of material wellbeing gone unnoticed? The problem with labour market data Apart from the traditional British love of misery and the media’s obsessive negativity towards the government, the blame lies in our main source of labour market data, the long-suffering Labour Force Survey . Due to a collapse in the proportion of people responding, the survey has greatly overestimated the increase in worker numbers over the last few years. This fiscal stability meant that prior to the Iran War, the inflation rate was expected to fall to 2 per cent from April. We know this because we have the “ground truth” in the administrative Real Time Information data. The administrative information doesn’t rely on a selected group of people voluntarily filling out a form, but on mandatory payroll information held by HMRC. When using this population data on the number of employees combined with an estimate of the self-employed to calculate productivity, we see a chunky rise – compared to almost no rise at all in when the faulty survey data are used. Achieving fiscal stability In her Mais lectures both before the election and again in March , Rachel Reeves laid out her growth strategy of fiscal stability, investment and reform. Despite the toxic economic and fiscal legacy that this government inherited, and the headwinds cause by Trump trade wars, the strategy has started to deliver results. Public finances have been brought under control through tough but necessary decisions on tax to bring fiscal consolidation with stronger fiscal rules balancing the budget over a shorter time horizon. This fiscal stability meant that prior to the Iran War, the inflation rate was expected to fall to 2 per cent from April. Despite the toxic economic and fiscal legacy that this government inherited, and the headwinds cause by Trump trade wars, the strategy has started to deliver results. Moreover, rather than implementing real cuts in public capital investment as planned by the previous government, the Chancellor expanded investment by £120 billion in energy, transport, housing and R&D. Low investment has historically been a major cause of slower UK productivity growth, due to the kneejerk reaction to cut it in the face of fiscal pressure. And structural reforms have been delivered in areas such as planning. For example, the December 2024 housing reforms were judged by the independent Office for Budget Responsibility to increase output by 0.2 per cent (about £60bn per annum) by the end of this parliament and double that amount over a decade. A productivity boost from AI? Now, not all of the remarkable rebound in productivity is due to such government policies – they take longer to fully bed in. For example, we might be witnessing the first macro-economic flowers of the AI boom, as seems to be happening in the US . Britain is well placed to benefit as we are a knowledge-intensive service exports superpower in areas such as higher education, finance, law, accounting, consulting and marketing. Indeed, productivity growth has been strongest in high-tech sectors such as Information and Communication, rather than just in lower wage sectors disproportionately affected by hikes in the minimum wage and Employers’ National Insurance. Naysayers will say that the output numbers will be revised down. They could. But they could equally well be revised up – they are simply the best current guess at output growth. There is still a huge amount of work to do such as unlocking more private investment through pension funds, the National Wealth Fund and the British Business Bank. There is an urgent need for more radical changes to planning, tax, welfare and defence. Having worked side by side with the Chancellor, I know how passionately she wants to make these changes happen. Despite higher energy prices, the adverse market movements reflect the fact there is no credible political alternative to continuing and deepening the government’s growth strategy. Figure 1: Annualised Productivity Growth, 2014-2026 Annualised productivity growth rate (%) Productivity growth using alternative measures of worker numbers 2014q3 to 2024q3 2024q3 to 2026Q1 RTI E + HMRC SE Administrative measures of Employment and Self Employment 0.26 1.61 RTI E + LFS SE Administrative measure of Employment and LFS Self Employment 0.43 1.85 RTI E Administrative measure of Employment 0.15 1.64 LFS E + LFS SE LFS measures of Employment and Self Employment 0.53 0.25 Notes: LSE Analysis based on various data sources. These are the implied annualised productivity growth rates over the pre-Labour (ONS RTI data only begins in 2014) and post-Labour period. All measures of output (real gross value added) per worker indexed to 100 in 2024Q3. Output is the same in all four series and taken from ONS recent report ,only the definition of workers in the denominator changes. “RTI E + HMRC SE” defines workers as sum of RTI ( Real Time Information) employees plus SE (self-employed) based on administrative HMRC data. The SE adjustments follow those in the Resolution Foundation .This series is in bold as it is our preferred measure. “LFS E + LFS SE” are employee and self-employee numbers from the LFS. Since worker data is not available at the time of writing for 2026Q1 we assume employment is constant (this will under-estimate productivity growth if employment continues to trend downwards). Enjoyed this post? Sign up to our newsletter and receive a weekly roundup of all our articles. All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science. Image credit: Ronnie Chua on Shutterstock The post A more productive economy is being delivered under this Labour government first appeared on LSE British Politics .

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