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Economists reject Labour’s 'absurd' plan for Bank of England productivity target

Tim Wallace
John McDonnell, the shadow chancellor, said he would set the Bank of England a target to grow productivity by 3pc per year - Matthew Chattle / Barcroft Images

Labour’s plan to give the Bank of England a new target of boosting productivity by 3pc per year has been roundly rejected by economists as “absurd” and “crazy”.

A survey of more than 50 academics by Chicago Booth found none who supported the idea.

The proposal, from a report launched by shadow chancellor John McDonnell last month, argued that productivity growth is crucial to boosting wages while also keeping a lid on inflation, helping the Bank of England keep to its 2pc price target.

It comes as productivity has barely grown at all in the past decade, contributing to weak economic growth and poor wage increases.

However economists do not see how the Bank can practically target productivity.

Labour to set Bank of England productivity target

Professor Christopher Pissarides at the London School of Economics said “monetary policy has nothing to do with it [productivity]”.

“Productivity growth depends on technology, infrastructure and the like.”

Jan Pieter Krahnen at Goethe University, Frankfurt, said the proposal is “quite an absurd suggestion, vastly overestimating what monetary policy can achieve – in the end frustrating central bankers and the public.”

Rafael Repullo, professor of economics at CEMFI in Madrid, said: “What a crazy idea."

Former chief economist at the International Monetary Fund, Olivier Blanchard, agreed it would not work: “Why not ask for 10pc productivity growth?” he said.

The most supportive comments were from economists who thought the Bank of England might be able to achieve a short-term, but not long-term, boost to productivity, or that there could be some indirect link between interest rates and productivity.

“Traditional central banking tools don’t directly affect productivity,” said Christian Leuz at Chicago Booth.

“Indirect effects via demand [are] conceivable, but [it is] not clear how large and persistent [they may be].”

The survey asked economists to consider Labour's proposed 3pc target and asked if they agree with the statement: “Central banks cannot significantly increase productivity growth over a ten year horizon, except perhaps by promoting macroeconomic stability.”

It found 46pc strongly agree, 27pc agree, 4pc were uncertain and 2pc had no opinion – with none backing Labour’s plan.