2026 could be a turning point for productivity

The Resolution Foundation has warned that 2026 could be a turning point for UK productivity, but expects short-term pain from the collapse of struggling ‘zombie’ firms. Rising interest rates, energy costs, and higher minimum wages are likely to force inefficient businesses to exit the market, creating opportunities for more productive replacements.

The Foundation says that weak productivity growth is the main reason that incomes have risen so slowly since the financial crisis. A key driver of productivity growth is ‘creative destruction’, whereby newer and better firms, products or processes replace older, less-efficient ones. One way to measure how much this is happening is by how many jobs are created by new, growing firms, and how many are destroyed by old, shrinking ones. In fact, this sort of reallocation of labour has been slowing for much of the 21st century, in the UK and elsewhere, for reasons that are not fully understood.

But last year, there were signs of a turnaround. In particular, the share of jobs destroyed by firms that are closing increased to the highest level since 2011, as did the number of firms becoming insolvent. The share of employment that moved between sectors has also started to increase. The Foundation predicts a triple whammy of multi-year increases in interest rates, energy prices and the minimum wage is finally beginning to finish off some of the low-productivity ‘zombie’ firms that managed to stay afloat in the 2010s, and this is forcing a reallocation of employment across firms and sectors. It’s also possible that we’re seeing the early effects of AI.

The Foundation’s estimates of productivity suggest a turnaround in growth over the past year or so. Not because output has been growing especially quickly, but because the number of people working to produce that output has been falling.

Child poverty is set to fall sharply in 2026, thanks to the abolition of the two-child limit that applies to those receiving Universal Credit. The Government should be congratulated on finding the fiscal space to address a growing problem and a deep unfairness in the system. But it cannot rest easy. The poverty rate is set to start rising from this new lower base in 2027.

The rising rates from 2027 onwards are because other cuts to working-age benefits continue to bite. The benefits cap remains in place as a limit (frozen in nominal terms) on the total benefits families can receive if they are out of work. And the amount of benefits paid to cover rents also remains frozen, while rents continue to go up. Thanks to the Government’s action in the Budget, the rate of child poverty will be 3.5 percentage points lower than it would have been had the two-child limit remained in place. So it only ends the Parliament less than 1 percentage point lower than it was in 2024-25.

The poverty trends for children also look a bit different depending on whether you focus on the numbers or the rate. The number of children in poverty falls from 4.6 million in 2024-25 to 4.3 million in 2029-30, with that 300,000 fall much more than you would expect from the fall in the rate. Why? Because the overall number of children is falling. Demographic trends are flattering the Government’s record.