Zombie businesses are partly to blame for the UK’s productivity problem

Britain’s productivity is not being helped by the number of “zombie” companies in the country, a former senior civil servant has said.

Lord O’Donnell, the former Cabinet Secretary, said that low interest rates had helped keep many struggling businesses afloat.

While this has helped keep levels of employment high, it has also resulted in a low level of output among workers.

This contrasts with the situation in countries such as France, where there is more of an employment problem but businesses are generally producing more.

“Interest rates were set to virtually zero which meant a lot of very poor companies that would have gone bust with very low productivity have been kept alive – zombie companies,” Lord O’Donnell told Radio 4’s Today programme.

“Our recovery has been quite employment-strong. Unfortunately it has been productivity light, so those extra people who are working aren’t producing so much, so overall the pie isn’t growing as fast as we’d like it to be.”

The Office for Budget Responsibility (OBR) was expected to announce today that productivity had been growing more slowly than it had projected, which is likely to compound concerns at the Treasury.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), said that problems had been escalating ever since the financial crisis and the situation was likely to leave the Chancellor, Philip Hammond, with little room for manoeuvre in the upcoming Budget.

“It is slightly embarrassing [the OBR] have assumed each year that productivity would return to its long term trend and each year they’ve pushed that back a little bit further,” he said.

“Are they going to say: ‘look this isn’t going to happen any time soon… productivity isn’t going to grow much for another three to four years’.

“If they do that, that really will drive a coach and horses through the Chancellor’s Budget plans.”

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