This week Bank of England chief Mark Carney – and the University of Manchester’s own Ken Clark – highlighted the problem with productivity that our economy faces. Here Chris Bones offers some solutions.
Whilst the coalition government delivered employment and growth it did far less well on productivity. The Bank of England reports that UK productivity is 16% behind the pre-crisis trend. The bank suggests possibly 4% of this ‘gap’ is mis-reporting and offers possible explanations for another 6-9% specifically at underinvestment in R&D, inefficient allocation of capital to lower performing enterprises and higher firm survival rates due to cheap finance linked to quantitative easing. So what about the rest?
Regardless of how economists explain our ‘under performance’ this is a gap that needs to be addressed as a matter of priority if real wages are to recover, unemployment to fall much below where it is today and the deficit/debt challenges resolved.
Without a single lever that can be pulled, what is required is leadership from the new government not mere administration. Without it there will be no ‘northern powerhouse’ or any other regional economic revival and we will continue with an unbalanced economy both geographically and in our dependence on financial services.
A recent Financial Times article (April 22nd 2015) argued that closing the productivity gap could be driven from government activity that focused on the efficient use of capital, land and labour.
Whilst the new government has a deregulatory, if not laissez-faire flavour this would require our new business ministers to intervene actively to deliver a step change from the track record of the last five. Here are three issues that new ministers should have at the top of their agendas:
- Capital: SME Financing
SMEs account for almost half of turnover in the private sector and 60% of all employment. Last year (December 2014) a report from the Coalition created ‘British Business Bank’ reported that there was a need to drive the growth through diversification of finance options for SMEs as supply of finance to young and growing firms was constrained.They argued that this was due to structural information failures and lack of diversity of supply. The recession saw a tightening in credit conditions that disproportionately affected bank lending to smaller businesses. While the decline in traditional loans and overdrafts to SMEs has slowed, any recovery is tentative. The report suggested that growth will be constrained unless there was action taken to diversify
- Land: Infrastructure investment
We are in the midst of a critical housing shortage the impact that has created income to house price ratios of 1:11 in 2013 according to the ONS (London was 1:14). At the beginning of the 1970s nearly 400,000 homes were built, last year the UK built 141,000 at a time when population growth levels have increased significantly. The knock-on consequences in rental markets and in rural communities are potentially driving significant labour market distortions as skilled younger workers can’t stay in their own communities, reducing the opportunities for SMEs and other businesses to grow and they can’t necessarily move to high growth areas as they are ‘priced out’ of housing. This may well be seeing them take lower paid and less ‘productive’ employment.
- Labour: Skills investment
In the labour market access to skills and the availability of an agile workforce able to respond to changes in requirements has hampered productivity for decades. It is the single biggest driver of working-age immigration into the UK as people enter to fill gaps in skilled and semi/unskilled markets that locals are unable or unwilling to apply for. The mismatch of skills at all levels is a critical issue and one that additional apprenticeships alone will not solve. There is little support or structure for mid-late career retraining, professional development or investment in up-skilling. Without this the there is a worst case scenario, as others such as the CIPD (Feb 2014) point out, is that the UK could finish the next decade as a ‘low road’ economy with large numbers of low paid employees and a high rate of in work poverty.
No responsible government can ignore the need to address the productivity question. These are complex issues and require a leadership programme – good government wont necessarily bring popularity, but it can take actions that improve the chances of our having the resources to continue to fund the health and social services needs of a rapidly aging population.
Ministers should act now and with productivity in mind:
- Speed up the entry of challenger banks and the diversification of new forms of finance such as peer-to-peer that have been revolutionised through the growth of digital.
- Double (from the election promise of 200,000) their ambitions on house building, driving greater change into the planning system, using compulsory purchasing if necessary, to liberate land and change the dynamics of the housing market to enable both greater labour mobility and to challenge labour shortages caused by an inability of younger skilled workers to enter the housing market.
- Enhance and extend the professional and career development loan programme creating more time for re-payment, greater time from completion of development until repayment is required and enable it to be used for a much greater range of re-skilling and up-skilling.