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How does Britain solve its productivity problem?

Does Britain have a productivity problem? It is increasingly difficult to answer ‘no’. HS2’s Birmingham to Manchester link is now cancelled (putting the United Kingdom’s (UK) rail network even further behind that of peer nations France and Spain), and the latest data from the Office for National Statistics shows there are over 2.6 million people in Britain unable to work due to being sick – a record high. Research shows that productivity growth in Britain began to slow down after the Great Financial Crisis of 2008, to an average rate of 0.5% a year (it was 2.3% between 1974 and 2008). The Economist argues the problem lies with the UK’s welfare system. But is it more extensive than that? The Council on Geostrategy asked five strategic experts how Britain can solve its productivity problem in today’s Big Ask.

Ben Brittan, Council on Geostrategy

Before Brexit, the UK’s economic model was to act as a liberal, softly-regulated entry point for American and Asian companies to the European Union’s (EU) single market. Post-Brexit, these fundamental foundations have collapsed, and have not been replaced with a coherent vision.

It is the job of His Majesty’s (HM) Treasury and wider government to ensure that the long-term vision of the UK is right. However, macroeconomic policies and the politics that surround the policy do matter; it is simplistic to suggest Britain can generate long-run productivity growth through tax cuts by themselves.

To boost productivity, you need to boost growth. To do that, HM Government needs to give businesses what they need – which is to get out of their way. Britain should ‘get Brexit done and innovate’. This means establishing a new economic model based on innovation. To achieve this we would need to diverge further from the EU.

The UK should scrap the outdated and cumbersome EU regulation on data protection and financial services; out with the EU’s general data protection regulation – a decadent feature in an information age – and in with something that is more suitable for the growth opportunities of Britain’s specialist sector clusters. The competition policy should also be scraped, as it is an inappropriate piece of legislation designed to protect industrial companies in Germany. Alongside that, reform of the financial service regulations is long overdue.

Solving our productivity problem does not require a revolutionary overhaul in the macroeconomic regime. It is entirely down to one thing: regulation. To enhance a phrase: it’s the regulations, stupid.

James Rowlands, Nationwide Building Society

Everyone needs a home and the inability to access one easily that is suitable and affordable represents a major challenge to British productivity. For too long we have not built enough homes where people want to live, making it more difficult and expensive to move to the places with the best economic opportunities and well-paid jobs. While these areas will have higher land values, more land should be freed up for development by increasing genuine community engagement around developments and providing more funding for local authority planning departments. Furthermore, giving housebuilders certainty over the rules they will operate under, for example clear direction on the Future Homes Standard, would enable them to make long-term investment decisions.

Low levels of supply cause practical difficulties when people seek to move. Lack of new homes and landlords responding to piecemeal tax and regulatory changes by selling properties has made renting a home more costly and complicated. This risks putting private renters at a disadvantage, people who play an important role in providing homes for skilled workers – particularly those who are young or from abroad – in our major economic centres. Another way to boost British productivity would thus be a coherent government private rental strategy, which would help landlords make long-term decisions and support continued provision of rented homes.

Mann Virdee, Council on Geostrategy

Britain’s productivity problem is caused by poor governance, underinvestment, and weak transport connectivity between regions of the UK.

Britain lacks a long-term strategic vision. There has been significant policy churn in the UK’s industrial strategy and attempts to address regional inequalities from governments of all stripes. Constant policy rehashing is not good for productivity. It is expensive, does not create an environment of stability conducive to investor confidence, and means that strategies are not given time to bear fruit.

UK public investment is well below the G7 average, and it has been as a proportion of gross domestic product (GDP) almost consistently since 1990. Business investment is also lower in Britain than in any other G7 country. But it is not only a lack of investment; poor governance in the UK means that investment is highly volatile, which harms their delivery. This has implications for areas such as housing, hospitals, schools, and transport.

Transport connectivity in Britain is a significant barrier to productivity. London has been ranked as the most congested city in the world; each driver loses an estimated 156 hours a year sitting in traffic, and congestion across the country is estimated to cost £9.5 billion a year. But it is not just the UK’s roads that are a problem. The poor state of Britain’s public transport is estimated to cost the UK more than £23 billion per year in lost economic activity. 

The UK needs to stick to a clear coherent strategy that prioritises investment in public infrastructure and transport, as well as in science and technology.

Rian Whitton, Bismarck Analysis

Britain is said to have a ‘productivity puzzle’. In fact, the reasons for our relative stagnation are apparent. The UK has a toxic combination of low capital investment, high energy prices, a poor record of constructing large projects close to their original timeframe and budget, and a relative lack of large capital-intensive corporations.

Today, Britain has the lowest gross fixed capital as a percentage of GDP in the G7 and the lowest percentage of the workforce in manufacturing – historically a driver of productivity growth. It also has the lowest density of robots in the workforce in the developed world. 

The UK lacks consolidation and big corporate spenders. For example, when looking at the top 2500 research and development spenders for 2021, 95 British companies spent a cumulative £29 billion on research and development and £55 billion on capital expenditure. Meanwhile, 56 French companies spent £24 billion on research and development and £67 billion on capital expenditure. 53 South Korean firms spent more on research and development and capital expenditure than both. 

While HM Government should look to lower energy costs as much as possible, another mission is to facilitate the development of big British businesses. This involves reappraising the competition and markets authority; as well as famously stymying Microsoft’s acquisition of video games developer Activision, it blocked British chemical corporation Ineos from purchasing the Swiss concrete additives company Sika earlier this year. 

Big, capital-intensive firms define great economies. Britain needs far more of them. HM Government should be more demanding of businesses to invest in this country and more lenient regarding antitrust.

Cecilia Wong, University of Manchester

The UK’s ‘productivity puzzle’ masks a complex spatial puzzle. Statistical analysis shows that, in Britain, the ‘gross value added (GVA) per hour worked index’ (a measure of labour productivity) hardly bore much relationship with its change rate (as the two were only weakly correlated). 

Between 2015 and 2019 (before the Covid-19 pandemic), many high-productivity areas had stalled in their pace of growth or even declined, including many London boroughs such as Kensington and Chelsea (-10.6%) and even the City of London (-0.7%). However, growth was found in areas with low levels of productivity in the North and the Midlands such as Calderdale (18.3%), North Tyneside (16.3%) and Sandwell (16.0%). The paradox is that most local authority areas experiencing high employment growth had a low or even negative change in labour productivity, and the employment growth bore no significant relationship with labour market indicators such as education qualifications.

These complex local economic dynamics have continued after the Covid-19 pandemic, which means that HM Government policies have to set out a longer-term, strategic spatial framework to build synergy and encourage investment across the country. The level of GVA per hour worked is associated with the industrial mix of an area and certain high-paid industrial sectors (e.g. information and communication, professional services, and science) which tend to cluster geographically. There is thus a need to develop industrial strategies that transcend administrative boundaries to foster synergy and innovations across Britain’s industrial clusters.

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