With life outside of the European Union looming, economic prosperity must be at the heart of our approach when shaping our country’s future. As well as promoting an outward-looking and open trade regime with the EU, as well as the rest of the world, it is imperative that the UK economy is as resilient as possible and supported by successful businesses. Improving productivity is a major factor in determining our economic success, or failure, in the coming years.
This is recognised by government, industry bodies, academics and anyone else with at least a little knowledge of the UK economy. Indeed, the Government’s industrial strategy green paper, published in January, mentions productivity no fewer than 87 times. The Prime Minister’s foreword said that: “If we want to increase our overall prosperity, if we want more people to share in that prosperity, if we want higher real wages, and if we want more opportunities for young people to get on – we have to raise our productivity”. So, why is productivity so important, how chronic is the problem and how should we address it?
Deloitte states that since 1850, GDP per head in the UK has risen 20-fold. Had productivity remained flat during that period, GDP per head would only have doubled. Productivity is key to delivering higher living standards, stronger economic growth and higher tax revenues to fund public services. UK productivity was typically strengthening at a rate of around 2% annually until the 2007-08 recession. In recent years, progress has stagnated and economic growth has relied on sharp falls in unemployment. British workers are 19 percentage points less productive than the average for the rest of the G7, languishing behind countries such as France, the US and Germany. All three of those nations have had higher productivity than the UK since the 1970s, but it is the stagnation in the last decade that is particularly concerning and that must be reversed with urgency.
Closing the skills gap is an obvious place to start to improve the quality and efficiency of our domestic workforce, made all the more important due to uncertainty around the exact make-up of the immigration system post-Brexit. Allowing for greater diversity in our education system, such as a major overhaul of technical education, should help align business needs with the pipeline of talent. In addition, the UK needs to embrace significant changes in industry, whether the Fourth Industrial Revolution or the imminent electric car boom.
This points to the underlying principle of productivity growth: investment in innovation and new technologies. It is clear that the recession, then the impending EU referendum and the subsequent result, have caused uncertainty for business. It is for this reason that we should seek the closest possible relationship with the EU and an open trade policy. Firms need confidence to invest and there needs to be clearer rhetoric on our ambitions to prioritise trade in the Article 50 negotiations. A protectionist and isolationist approach would be catastrophic for productivity and prosperity.
To boost investment, not only should the Government upgrade infrastructure and add to the National Productivity Investment Fund (worth £23billion) announced last year, serious consideration should be put to our ability to attract Foreign Direct Investment (FDI). Strikingly, 45% of our stock of FDI originates from the EU. This is yet more evidence of the need to develop the UK’s brand as a powerful and amenable trade partner, not least with European counterparts.
We face potentially turbulent times, to say the least, beyond March 2019. However, we can mitigate against calamitous economic circumstances if we prioritise the resilience of the UK economy. Boosting productivity is central to achieving that aim.
Antoinette Sandbach MP was a member of the Business, Energy and Industrial Strategy Select Committee, 2017. This is an article from Bright Blue’s latest magazine ‘Capitalism in crisis?’
