Solving the “productivity puzzle” is consuming a lot of brain power in UK business and economic circles. But is it quite the conundrum it’s made out to be?
Productivity is certainly a serious issue. The latest data offers a hopeful sign – as reported output per hour was 1.3 per cent higher in the first quarter of 2015 than a year ago, the fastest annual growth rate in three years – though this is low compared with the pre-crisis norm of about 2 per cent a year. Global financial crises, fortunately, are beasts that rarely rear their heads, but can have a dramatic impact on growth and employment in their aftermath. Luckily, we’ve had a phenomenally jobs-rich recovery, with 424,000 more people in employment between February-April 2015 compared with last year.
So part of the reason why productivity growth has been weak is actually positive when compared with the alternative of higher unemployment. What’s more, the type of hiring has had an impact. Young people who get jobs at the lower end of the career ladder drag down productivity because they have less developed skills. Of course it’s better to get people into starter jobs, where they can gain in experience, improving productivity scores over time.
But for the economy to continue to grow, we need to boost productivity – and both business and government have their parts to play: furnishing employees with the skills they need to succeed, and investing in new IT and machinery to make workplaces more efficient and innovative. That’s why we’ve called on the chancellor to set a permanent level for the Annual Investment Allowance of at least £250,000 to encourage this type of investment.
When I met the chancellor recently, I set out business’ priorities in a five point plan. First, we need to support the UK’s medium-sized businesses (MSBs). CBI research shows that MSBs make up less than 1 per cent of all firms but represent 16 per cent of UK-wide employment and generate 23 per cent of private sector revenue. But the UK lags behind major international peers, such as the US, in terms of helping firms scale up. Ensuring “gazelles” have access to the capital they need from across a range of sources – through, for example, building on steps to kickstart a UK private placement market – is central to addressing the productivity challenge.
Second, we need to make the best of the UK’s talent by ensuring the government’s school reform programme effectively prepares young people for adult life. The focus on making exams more rigorous is not enough on its own. The education system must also develop people’s attitudes and aptitudes for later life. Businesses want to see a new and stretching curriculum for 14-18 year olds which has the space for a personalised approach, mixing key academic and vocational options. We want to see a full review announced by the end of the summer. We must also ensure businesses get the skills they need to succeed. An immigration system that does not put barriers in the way of hiring staff is vital to creating jobs and fueling growth.
Overall, we need to maximise participation in the labour market. The government is already taking welcome steps to improve childcare provision, but we want to see the gap closed between the end of maternity pay at nine months and the start of large-scale government support at three years.
Third, infrastructure is our economy’s hard wiring and transport quality has a significant impact on productivity. If it takes longer to travel between meetings or to transport goods, productivity takes a knock. That’s why we need the government to back the Airports Commission decision and plough ahead with getting spades in the ground at Heathrow. The five year Roads Investment Strategy, HS2 and other substantial rail network commitments must also be delivered on time. Further, building sufficient affordable homes will help people live closer to work. The government should push forward with planning reforms so we can build the 240,000 new homes a year we desperately need. Creating 10 new garden cities would also be a step in the right direction.
Fourth, the UK is way behind on R&D investment, spending just 1.8 per cent of GDP compared with 2.9 per cent in competitor countries. In the last Parliament, industrial strategy proved critical in unlocking billions of pounds worth of investment in key sectors and supply chains, and businesses want the government to reaffirm its commitment. We must do more to encourage the development of innovative ideas into world-beating products manufactured in the UK. Wonderful ideas come to light here but get produced overseas, so we need a supercharged R&D tax credit which would apply to the “D” (development) as well as the “R” (research).
Finally, we need to boost UK exports. The coalition government took welcome steps to expand its support for firms at home and abroad. But we must ramp up marketing to ensure small and medium-sized firms are aware of what’s on offer.
It may not be so much of a puzzle why UK productivity is suffering, but it is important that both business and government work together to improve productivity to support long-term sustainable growth.