To paraphrase a famous American rapper, the UK got 99 problems but growth ain’t one. This seemed to be the gist of some of last week’s announcements from government. One of the biggest of these problems remains productivity growth across the economy.
Last week government rolled its sleeves up to get stuck into the challenge, setting out the size of the prize if we can move productivity growth onto a stronger trajectory and producing a 15 point plan (an approach Jay –Z is no doubt keeping a close eye on) to help us get there.
The productivity sums
Economic growth has been strong. Labour market improvements have been significant. But productivity growth had stalled. And as the plan sets out – ‘over the longer term, productivity is the more essential ingredient.’
Matching the productivity of the US would raise GDP by 31%, equating to around £21,000 per annum for every household in the UK.
Raising annual trend growth by just 0.1% would mean the UK economy would be £35 billion larger in 2030.
The Office for Budget Responsibility (OBR) estimated in 2014 that in a high productivity scenario public sector net debt would fall to 56.7% by 2019-20.
The productivity problem
The size of the problem is well understood, even if the exact causes are not. Economists can point to a number of structural and cyclical factors that attempt to explain the underlying causes of the UK’s productivity weakness – declining activity in high productivity sectors such as financial services and North Sea extraction; long-term underinvestment; an inefficient allocation of resources resulting from the financial crisis; comparatively high levels of labour and wage flexibility; a fall in the creative destruction of firms following the recession and unprecedented growth in self-employment.
A multi-pronged plan of attack
Given the multiple contributors to the gap between current productivity levels and where we might expect to have been if growth had continued on its pre-recession path, there isn’t one policy response that will crack the puzzle.
The government has set out an overarching framework covering the key economic variables that policy will need to support in order to get productivity growing more strongly.
The policy specifics built on the tax measures announced at the Budget to support investment sand infrastructure investment with reforms to planning, a review of export support and more action on further education.
For the UK’s productivity performance to go from stumbling to soaring during this parliament we need a whole government focus on productivity. The opportunity was missed to say more about where the potential gains were greatest. We think there has to be a focus on the sectors that have the best track record on generating productivity growth – in the UK, as in most advanced economies – this includes manufacturing. In practice this means working with industry to grow the sector sustainably and to close the gap between the best in class and the tail of underperformers.
The focus on sustained growth in business investment, better skills, reliable infrastructure and innovation – resonates with EEF’s analysis on productivity and the focus of our lobbying ahead of the election. But the policy specifics are just a down payment on what will be needed to ensure the pay rise the government has ambitions for by the end of this parliament is affordable, while at the same time we start closing the productivity gap with competitors. The next instalment will be the Spending Review later this year, when the government’s plans will need to ensure that their framework for long-term growth and prosperity – investment, skills, infrastructure and innovation– remains a priority in the face of tough decisions.
Calling all manufacturers
We know there are lots of great examples of companies transforming productivity and efficiency in their businesses. If you have one you want to share, enter our 2015 Future Manufacturing Awards – find more information here.