New budget 2015: George Osborne uses CBI speech to lay out government plans to tackle the productivity puzzle

 
Billy Ehrenberg
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George Osborne (Source: Getty)

George Osborne offered a glimpse of what to expect at the 8 July budget when he gave a speech to the Confederation of British Industry (CBI) this evening, with productivity a major focus.

Also top of the agenda is the merging of the Shareholder Executive – the body that runs the government’s financial interests in state-owned businesses, and UK Financial Investments, which is responsible for the government’s shares in UK banks.

Read more: Osborne pushes transfer of public assets to the private sector

Tackling the productivity puzzle

Osborne announced the start of a major push on productivity, which the government says will complement work already done on rebalancing growth and the creation of a Northern Powerhouse.

The productivity puzzle has been a worrying feature of the UK’s economy in recent years. Productivity, a measure of what workers put into the economy, has not kept up with the growth in employment.

Osborne said:

Now a lot has been written about the productivity puzzle. Why, for so many years, have British workers been less productive than their German or American counterparts? Why has productivity been so damaged by the Great Recession?

…Let me be clear: improving the productivity of our country is the route to raising standards of living for everyone in this country. So by the Budget I will publish our Productivity Plan, our plan to make Britain work better.Our future prosperity depends on it.

It is now within our grasp to make Britain the most prosperous country in the world, and the best place to do business. It would be very easy at the beginning of a second term to take our foot off the pedal. That’s not what we’re going to do.

In response to Osborne's speech, John Cridland, CBI Director-General, said:

Productivity is a missing piece of the growth puzzle and the Chancellor is right to focus on this issue. By improving vocational education for 14-18 year olds, investing more in innovation and upgrading the UK’s infrastructure we can make sure the benefits of growth are felt by all.

Businesses fully support prioritising deficit reduction, which is critical to maintaining the UK’s credibility in international markets and keeping the costs of borrowing low for growing firms.

As the unemployment rate has been dropping, the Bank of England doesn’t believe the puzzle is caused by spare capacity in companies. It said in a recent report:

The recent strength in hiring and modest pickup in productivity growth suggest that spare capacity within firms is unlikely to explain much of the current weakness.

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