In quite a few recent blogs, I have written about the overwhelming negative media narrative about the state of the UK economy.

The intensification of what I believe is a totally false narrative was stepped up in recent weeks following the publication of a UK economic forecast from the NIESR, a research institute whose lamentable forecasting record is ignored, but whose apocalyptic outlook for the economy and the government’s finances has been accepted by other organs of the media as a new truth. Now, none seem capable of commenting on the upcoming budget on the 26th of November without parroting its fiscal blackhole narrative and the implications of that fiscal deficit on further tax increases.

I sometimes wonder if the sinister “illusion of truth,” or, more basically, if a lie is repeated often enough, it becomes the truth, is driving this lemming-like media behaviour. Either way, it’s damaging, and maybe intentionally so.

In the face of this false media narrative one has to hope that the Chancellor and her team at the Treasury have developed a sufficiently thick skin that they can ignore this economic drivel and focus on what is really going on, because what she eventually decides to do on tax in the budget will have a very important impact on what happens next in the UK economy. Increasing taxes in an already over-taxed economy will deliver the damaging outcome so many in the media seem to want.

Once again, of pivotal importance to the outcome, here are the prognostications of the Office of Budget Responsibility, which was created by George Osborne in 2010. This unelected, powerful, seemingly unaccountable organisation (it oversees itself through the Budget Responsibility Committee) effectively holds the reins of power over what the Chancellor will be able to do. Twice a year (once would do), the OBR, in huge detail, produces forecasts that evaluate the government’s performance against its fiscal targets. It also assesses the long-term sustainability of the public finances based on five-year forecasts.

In a long blog piece I wrote last year (The OBR: What would Einstein Say?), I looked at the OBR’s forecasting record. My analysis not only showed that the OBR’s forecasts were consistently wrong, but it was also too bearish. Like the Bank of England, the OBR’s forecasts have profound implications for the health of the UK economy and yet much of its longer term analysis relies on economic assessments that the organisation itself admits are an “educated guess”, like productivity for example, which the OBR tries to calculate not just at a macro level but also in response to individual measures like planning reform.

Other theoretical but completely unmeasurable concepts it relies on include the economy’s output potential or capacity, its deviation from that theoretical output potential (the output gap), and so-called “fiscal multipliers” to understand the indirect or second-round effects of policy changes on economic output.

At a time when the ONS is incapable of accurately measuring basic things like the total population, the number of people in work, inactivity and joblessness, retail sales, the producer price index and its services equivalent, and overall GDP, one has to ask if it’s really that smart for the government’s contemporaneous fiscal policy decisions to be driven by so many long term “educated guesses”? (Aside: OBR economist David Miles said last year that productivity forecasts are "an educated guess, and maybe not even terribly educated”.) The answer to that has got to be an unequivocal no. The current situation is the economic equivalent of looking for a black cat in a dark room that isn’t there.

There is a better way to conduct policy, and that’s to rely much more on a pragmatic, contemporary real-world analysis of the economy. Longer-term forecasts can be informative, but they are inherently unreliable and subject to frequent and large revisions. They should no longer be the sole basis on which contemporary fiscal policy decisions are made. The problem we have right now is that reversing out of the current situation requires a level of political bravery and acumen seemingly absent in this government, and recent precedents, not least in the form of what happened to Kwasi Kwarteng and Liz Truss, are hardly going to encourage today’s politicians to grasp this nettle.

Perhaps the right time to do something radical, including reforming the current arrangements between the government and the OBR, is when the country’s fiscal position is stronger than it is today and when there is less ill-informed hysteria gripping the financial media. Sooner or later, though, the government needs to recognise that the current arrangements make no sense and need to be changed.

Equally, the OBR should be aware of the suboptimal prevailing situation. Maybe the way forward is for the OBR to mimic what happened recently at the Bank of England following Ben Bernanke’s criticism of its forecasting system and follow his advice, which was to de-emphasise the Bank of England’s forecasts in its policy-setting decisions, something it appears now to be doing in practice.

My perspective is that academic economics, which so preoccupies the musings of these powerful institutions, has an excessively rigid attitude to many economic variables, including productivity measurement. These forecasting bodies see productivity, for example, as the result of a pre-determined mix of labour, capital and technology, which is typically reflected in an estimate for its trend growth rate over the medium term.

My experience of analysing thousands of different companies over nearly forty years is subtly, but importantly, different. In my pragmatic world, productivity is not a forecastable input, but an output based on how companies seek to optimise their performance over the longer term, combined with how much activity flows through the organisation.

For example, in economies with relatively free labour markets, when the relative cost of labour is low and suppressed, businesses will maximise their use of that resource and, where they can, substitute labour for potentially more expensive capital. When these relative costs shift, or labour market rigidities increase, just as they have done in the UK over the last year, companies will respond by using less of the now more expensive labour and deploy more capital.

In the UK, productivity trends over many years have reflected these shifting relative costs, and comparisons with our close economic peers (for example, France) also reflect these differences.

Most companies also operate with (unmeasurable) surplus capacity. Consequently, if demand for a product or service exceeds what a business had anticipated, most companies typically absorb that better demand environment by using up slack in the organisation. The result is better productivity, but it is determined not by a fixed relationship between its deployed capital and labour, but by the simple fact that demand turned out to be better than expected.

So, in simple terms, productivity outcomes result from shifts in the relative cost of labour, changes in technology, labour market flexibility, and changes in demand. In my world, given the increasing relative costs of labour in the UK, companies will be substituting more capital for labour where they can, in the future, but perhaps more importantly, I see productivity increasing simply because demand in the economy will surprise to the upside over the next two to three years.

Finally, it would seem very odd to expect that the AI industrial revolution unfolding right now will bypass the UK economy. It will undoubtedly have a very positive impact on both public and private sector productivity over the next five years.

I expect (and hope) that the OBR won't change its medium-term productivity forecasts materially. It might revise them down a bit, reflecting the current economic mood music, but it will be very odd if the OBR’s trend growth rate differed from the Bank of England’s pretty pessimistic 1.5%. That, combined with about a 2% or slightly higher medium-term inflation forecast, should result in nominal growth of at least 3.5%, meaning there would be no need to bash the economy again with higher taxes over the medium term.