Productivity gains won’t win elections, but they will secure growth for decades
We used to lead the world in productivity, and now we lag behind. We need to invest more to be productive. It might not be the most exciting political slogan, but it will pay off, writes Josh Williams
Last week, there was only one story and it was the continuation of a British tradition that now borders on the ancient. No, it wasn’t our Byzantine method of electing local councillors. Nor was it even our centuries old method of appointing and anointing our monarch. Instead, it was the release of some very important data.
The Office for National Statistics has now released the most recent figures for UK productivity. The number-crunchers figures were as dismal as their science. In the final quarter of 2022, we were just 2.1 per cent more productive than in 2019. Across the whole of 2022, our productivity was flat. Since 2021, it had actually fallen.
Productivity growth – measured as output per hour worked – matters because it is the only way of sustainably growing an economy. For a while you might be able to squeeze out a little more growth by forcing people to work longer hours, but eventually you will run out of hours in the day. The only answer then is to get more out of each hour worked.
There was a time when Britain led the world in productivity. Throughout the nineteenth-century, the constantly innovating and rapidly mechanising British economy was more productive than any other. While America took our crown in the twentieth-century, and other developed nations caught up with us over the years, between 1997 and 2007, Britain had the second fastest growing productivity in the world.
In 2008, that all changed. In the years since, we have experienced our worst productivity performance in 250 years. Today, we are a sixth less productive than workers in the United States, France and Germany. The cost of this is considerable. If Britain could lift its productivity to US levels, we would be generating £6,600 more GDP per person. Productivity growth could be our route out of persistently stagnant GDP growth.
The question is: how?
Firstly, we must invest more. The most productive countries are those that invest the most. In Britain, investment has persistently lagged behind other OECD nations.
This demands more public-sector investment, backing investments that will reap long-term rewards that the private-sector is not able to fund itself. The creation of ARIA, the UK’s Advanced Research and Invention Agency, modelled on a US-equivalent, is a vital step in the right direction here though its budget is far too small.
This also requires more private-sector investment. Since the financial crisis, under-confident British firms have warily kept their powder dry, holding back investment. This trend was further aggravated by the uncertainty first of Brexit and then of Covid. Britain’s firms must be encouraged to invest more. The Chancellor’s Spring budget offered a three-year £27bn tax relief programme to do so, but in the eyes of the Office for Budget Responsibility (OBR), this is insufficient. Unless the programme becomes permanent, the OBR says, it will simply encourage businesses to push existing spending forwards, increasing investment today but depressing it tomorrow.
If we are to increase productivity, however, we must invest in people too. Britons today are poorly prepared for the world of work, ill-equipped with the skills required of a modern economy. Too many of those who leave our education system before university do so at 16, without a technical education that would prepare them for the world of work. Just 32 per cent of those who do not go on to university stay in school after they are 16. The OECD average is 10 points higher.
As with so much else in Britain, this is made worse by considerable regional inequalities. Britain is one of the most regionally wealthy nations in the world. Nearly half of Britons live in areas as poor as former East Germany, which is home to just 20 per cent of Germans. As with so much else in Britain, low productivity is a regional problem. London, for instance, is 50 per cent more productive than the rest of the nation.
Britain’s economy is in the doldrums. We are trapped in a 1970s-like state of persistently low growth and alarmingly high inflation. While inflation is likely to fall of its own accord, as disrupted global supply chains find a new harmony, growth requires action. While no political campaign was won on the promise of “increasing productivity”, the Chancellor who solves Britain’s long productivity puzzle will be the finest we’ve ever had.