UK productivity priorities for the incoming Prime Minister and new Chancellor

The UK’s productivity problem is well known. In the decade prior to the pandemic, output per hour worked grew at less than half the rate it had averaged in the years leading up to the financial crisis in 2008, and data shows that in 2019 UK productivity was around 15% below the US and France. 

Productivity is one of the key measures for improvements to living standards, as well as economic growth. And with the UK facing a wave of macro challenges - including a cost of living crisis, post-pandemic recovery, inflation, Brexit and supply chain complexities - understanding how to improve productivity in the UK should be a key focus of the government. 

However, Britain has been sidetracked for months by controversy after controversy, which has resulted in current Prime Minister, Boris Johnson, announcing his resignation. The result is a leadership contest that will likely not see a new Prime Minister put into post until Autumn, with a Cabinet in situ that doesn’t know how long they will be in position for. 

This means that Britain is currently in policy limbo, at a time when clear direction and swift action is most needed. However, a new report out today by MPs on the Parliamentary Treasury Committee provides some interesting food for thought, as candidates battle it out for their leadership positions. 

The report - ‘Jobs, growth and productivity after coronavirus’ - pulls into focus where the UK could be doing more to boost productivity, which highlights a lack of technological investment and management skills amongst SMEs, as well as weak investment in research and development. 

Commenting on the findings of the report, Mel Stride MP and Chair of the Treasury Committee, said:

We have a new Chancellor and shortly will have a new Prime Minister. Getting a grip on productivity will be key to kickstarting economic growth and stimulating greater business investment in the UK. The evidence that we received suggests there needs to be greater stability and long-term certainty in Government policy making.

Key point

The overarching consensus from the Committee is that the government is not taking a long-term view of improving productivity, which is hurting the UK’s progress. For example, previous Prime Minister Theresa May announced a pretty comprehensive Industrial Strategy for the UK, which was well received, but was then replaced by Boris Johnson’s Plan for Growth. 

Witnesses before the Committee were largely unpersuaded by arguments for the abolition of the Industrial Strategy and the Committee has expressed concern about the lack of ‘long-termism’ in growth strategy and policy. 

Witnesses suggested that there was no overall strategic vision of what the UK’s economic problems were, how they should be prioritized, and what policies and interventions were therefore effective. 

However, the report does not advocate for the new Plan for Growth to be discontinued, let alone for the Industrial Strategy to be revived. Rather, it calls for a renewed effort at a co-ordinated growth strategy across government, with clearly defined and measurable metrics for success. 

Digital adoption and management skills

The Committee’s core takeaway, having heard evidence from witnesses, is that there are two interlocking factors behind the UK’s ‘long-tail’ of low productivity - firms adopting digital tools and deficiencies in business management skills. Particularly amongst smaller firms. 

Bart van Ark, Professor of Productivity Studies at the University of Manchester, told the Committee: 

A lot of the technology challenges that we are seeing are not around the fact that the technology is not available and not even that it does not get diffused but that it does not get absorbed by many companies. To make this happen, we need to facilitate the companies that can do this and, indeed, the companies that will ultimately not do it should be allowed to fail.

These new technologies—in particular the latest vintage of digital technology: mobile, data analytics, the move to robotics and artificial intelligence—are quite complicated technologies for companies to integrate into their business models. It tends to be larger companies, companies that have been able to invest significantly. [...] This is investment in organisational capabilities, management capabilities and reskilling the workforce, who are able to advance most quickly on their journey. [...] A lot of the research has shown that the long tail [...] is very much due to the fact that they do not absorb technologies properly. A lot of that relates to management competencies and a lack of intermediate skills in the workforce.

In written evidence to the Committee, Be the Business, a government and business-funded organization that provides support to businesses to improve productivity, said that its focus is on “two levers that have a proven link to higher productivity, the first being [...] good management practices [...] and the second being that UK businesses still compare poorly [...] in terms of ICT adoption.”

The Committee also notes that business investment has seen little recovery so far, following the pandemic. It had fallen by over 20 percent between 2007 and 2009, but subsequent growth saw it closing the gap on the pre-financial crisis trend up until 2016. It was then broadly flat until the pandemic. 

In addition, the level of business investment in the UK is low by comparison to other major advanced economies - at 10 percent of GDP compared to a G7 average of 13 percent of GDP. 

This theme of the UK underinvesting and expecting great gains, compared to its international peers, persists when we look at research and development. 

At present, the UK spends less on R&D than the US, Germany or France - and currently sits mid-table when compared to other OECD nations. 

And at the 2020 Budget, the Chancellor set out a target to raise public expenditure to £22 billion by 2024/25 - but at the Autumn 2021 budget he pushed this target back to 2026-27, citing competing demands for public investment. 

The Committee said: 

The target to spend 2.4 per cent of GDP on research and development (R&D) is an important aspect of growth policy. We reiterate our disappointment over the pushing-back of the target to spend £22 billion of public money on R&D and continue to warn against any further slippage.

My take

The key to all of this, in my mind, is the UK’s unwillingness to invest now in order to get long-term rewards. Too much of the government’s policy in recent years has felt reactionary and like fighting fires. If we want an economy post-Brexit that delivers results for the people of this country, we need one that is focused on highly skilled people, wide-ranging digital adoption, and with huge investments in research and development. The government’s previous promises to build a nation of science and tech innovation were welcome, but this isn’t going to happen by magic overnight. It requires deep, structural change, coupled with investment that may not return results for a decade. However, unfortunately, it seems we are in a period of deep political instability, which makes any sort of long-term thinking very, very difficult. And the UK economy will suffer as a result.