permanently destroyed productive capacity; as a consequence, the operation of automatic stabilisers in the expected recovery would hit the buffers at a point when a substantial (structural) deficit still existed. Hence the need for still more deficit-cutting. The first sign of dissent seems to have occurred in the run-up to the 2010 general election, when financial journalist Chris Dillow responded to an infamous letter by a group of austerity-supporting economists to the Sunday Times with an article entitled ‘The myth of the structural deficit’ (Dillow 2010). But following the formation of the Coalition government, scholarly attention focused on the big picture of deficit-cutting and its consequences (see e.g. Radice 2010, 2011).

However, the methodology used to calculate the OG has been subjected to a detailed (2012).6 critique by Bill Martin, published as Martin (2011) and updated as Martin & Rowthorn These studies argue, in essence, that the permanent loss of capacity as a result of the crisis was being greatly exaggerated, calling this ‘productivity pessimism’. Initially the OBR analysts had suggested that the crisis had led to the complete closure of productive capacity, notably in the oil and finance sectors, together with a shift to from higher- to lower-productivity sectors. Martin (2011) found that these factors could only have a minor impact, and more recently the focus of OBR and similar studies has been instead on the loss of productivity, and of the potential for productivity growth, of employees in post. As Martin & Rowthorn (2012:6) argue: “The bone of contention is the amount of spare capacity within businesses and their productivity”. Their starting-point is the remarkably different pattern of the present cycle after the peak of 2007: the fall was twice as large as in the most recent previous cycles, and the recovery only half as large, leading to a GDP level in 2012Q1 that is fully 14.2% below the level if the trend up to 2008Q1 had continued. Yet the OBR believes that the true output gap in 2011 was only -2¾%, the main cause being the permanent loss in capacity resulting from the crisis, which has offset any years.7 additional capacity installed to result in no growth in capacity over the last four

Martin & Rowthorn (2012) go on to challenge the main arguments behind this productivity pessimism. They argue that measured productivity per worker has declined, and private-sector employment has unexpectedly grown because of

- • hoarding by businesses, encouraged by falling real wages; here they note in • hoarding by businesses, encouraged by falling real wages; here they note in particular the greater importance today of ‘overhead’ employees whose services are required regardless of the level of output;
- • shift to part-time work, which has increased as the recession continues because • shift to part-time work, which has increased as the recession continues because workers cannot find the full-time work that they seek;
- • the relative growth of low-productivity, low wage sectors such as retail and care • the relative growth of low-productivity, low wage sectors such as retail and care services that are not affected directly by stagnant export demand;
- • which can be added the growing tendency for workers to be forced by economic • which can be added the growing tendency for workers to be forced by economic necessity into low-productivity and low-earning forms of self-employment.

Martin and Rowthorn argue, instead, that low productivity is primarily the result of a lack of aggregate demand in the economy. Their final estimate of the output gap is -9.5%, as against a contemporaneous OBR estimate of -2.5% (OBR 2012a: 8). As they go on to show, this tallies with other features of the current stagnation: the resilience of company profits and cash reserves, the failure of exports to respond to a falling exchange rate, and the inability of British banks to restore the supply of credit. The consequences of this critique for estimating the SD are striking, because an OG of -9.5% would imply that the cyclical component of the current fiscal deficit is