The writer is professor of public policy at the University of Cambridge and a research theme lead at The Productivity Institute
Why are economists — and politicians — obsessed with productivity? For two reasons. The first is that unless productivity is rising, living standards stagnate; productivity growth reflects businesses and public services using inputs of labour, capital and materials more effectively, producing more for less. That is what drives economic progress.
The second is that productivity is flatlining in the UK, diverging sharply from its previous year-by-year growth. Other economies have also experienced a productivity growth slowdown since the mid-2000s, but the UK now has lower levels and weaker growth (or both) than other G7 countries. The succession of economic shocks — the financial crisis, the pandemic, Russia’s invasion of Ukraine — help explain the general slowdown, as does demographic change. But what explains the UK’s specifically dismal productivity problem?
Some culprits will be depressingly familiar. A new report from The Productivity Institute (TPI) documents the consequences of the decade of declining spending per capita on education at all levels above primary school, the way expenditure on research and development as a share of GDP has fallen far behind other G7 economies and the confusing mishmash of small business support schemes. There is no shortage of diagnostic evidence about the wide range of productivity-limiting challenges. But two overarching weaknesses stand out: long-term under-investment and policy churn.
Investment in the UK has been lower, as a share of GDP, than in other G7 countries for decades. This is true whether investment by businesses in equipment and buildings, or by public and private sector alike in R&D, or in human capital through education and health. Recent TPI work shows that even industries we think of as Great British success stories, such as finance or software, invest less as a share of their own value added than their global comparators. Increasing investment is a top priority for a more prosperous economic future.
The second UK weakness is part of the explanation for this dire investment record: policy churn has been widely documented in areas including taxation, education, local and regional government and industrial policy. Policies are not well co-ordinated, either across departmental boundaries or between national, devolved and local government. Edicts from the centre land on under-resourced regional authorities with insufficient regard for local needs and strengths.
The combination of the confrontational Westminster style of politics and the UK’s extreme political and economic centralisation seem to make the churn worse than elsewhere. No wonder the uncertainty deters investors, whose time horizon is far longer than that of politicians.
This political economy context is why this week’s report, which captures the views of many of the UK researchers investigating productivity, calls for a new independent and statutory body to monitor, evaluate and report on policies for productivity and growth.
This institution would parallel the Office for Budget Responsibility, with a remit covering supply-side policies. It would co-ordinate across areas of policy and levels of government, with a focus on spatial economic growth, and would involve relevant stakeholders in its assessments. And it would need to be protected from policy churn itself with a statutory footing.
Many other countries, such as Australia, have now established similar commissions that can offer insights on how to design an authoritative and expert body. This would not solve the UK’s productivity problem — sadly, there really is no silver bullet. But it would help curtail the damaging uncertainty that is deterring investment in productivity and hence our future standard of living.
Source: Economy - ft.com
