The UK productivity crisis is dragging on the economy, a new report has said, which could be £83bn a year larger if laggard areas could make up just half the efficiency gap.
The next government has a major opportunity to increase investment in infrastructure and encourage the private sector to better train its workers to tackle the problem, the latest UK economic outlook from professional services firm PwC said.
Britain has suffered a lost decade on productivity, which is defined as output per hour worked and is the main driver of long-term economic growth. Since the financial crisis, it has grown by just 0.6 per cent a year on average, compared to two per cent a year before the crash.
UK productivity is currently more than 30 per cent behind the US and around 10-15 per cent behind Germany. Within the UK, the inequalities are stark. In London, output per job is around 40 per cent above the UK average, but in Wales it is around 18 per cent below.
“Evidence suggests that this productivity shortfall is due to low levels of investment and research and development spending,” said Alex Tuckett, senior economist at PwC. Also a factor is “a longer tail of companies and workers with relatively low productivity and skills”.
PwC suggested that governments invest “to improve the quality and capacity of local infrastructure” which can boost the productivity of a place by making it better-connected.
This is something the Labour party has made a key part of its manifesto. It justified its radical policy to provide free broadband across the country by the boost it could give productivity, for example. Critics said it could put off private investment, however.
The Tory party has also said its extra funding for education and infrastructure would help boost productivity. Its plans are much less ambitious than Labour’s, however.
Tuckett said: “The economic prize would be significant if the UK were to close the per-worker gap to German levels.” He said it “could see the UK economy grow £180bn per year larger”.
Such a target may be overly ambitious, however, given the weakness of UK productivity in recent years. Yet PwC said even if those regions that lagged behind others close the gap by just 50 per cent, it could add around £83bn to the economy, equivalent to almost 4 per cent of GDP.
PwC said one way of doing this was to encourage private firms to increase the skills of their staff. A previous PwC report showed that the desire of UK employees to learn new skills is not being met by employers.
Another is to invest in better transport links for less productive regions. John Hawksworth, chief economist at PwC, said: “Physical connectivity also matters, which reinforces the case for increased investment in transport infrastructure for areas that tend to lag behind, whether in the North of England or the far South West such as Cornwall.”