Productivity has become a national obsession here in the UK and it’s not hard to see why. Productivity growth is good for businesses, it’s good for workers and it’s good for the economy as a whole but it’s something we’ve seen very little of here in the UK since the Global Financial Crash.
That’s why Montfort Communications brought together a panel of experts to explore what businesses can do to tackle the productivity issue. Joining us on our expert panel were: Ann Francke, the Chief Executive of the Chartered Management Institute; David Smith, the Economics Editor of the Sunday Times; and Simon French, Chief Economist and Head of Research at Panmure Gordon.
Here are the key takeaways from the discussion:
Defining the problem
The start of any useful conversation around productivity, the panellists agreed, was properly defining the problem. Productivity is best understood as a measure of how efficiently a set of inputs are converted into a set of outputs.
The issue is that while this measure makes instinctive sense when evaluating a manufacturing business, it’s much harder for services businesses where the output is frequently knowledge rather than a single product.
Where has the UK gone wrong on productivity?
Productivity in the UK has become a concern precisely because there has been so little growth in this area since the global financial crash. Since 2008 the UK’s productivity has grown slower than all the rest of the G7 bar Italy.
Despite these trends, businesses do not have to accept slow productivity growth as a macroeconomic fact of life. If businesses make the right choices, then they can achieve productivity growth.
Low-Interest Rates
The causes of this problem are complex argued the panellists, with Simon French in particular, attributing part of the blame to long-term low-interest rates. These low rates have stymied productivity growth by allowing businesses to endlessly refinance or borrow for expansion rather than invest for productivity gains. The shift away from super-low interest rates will be disruptive for many, argued French, but in the long run businesses should benefit from it.
Limited Business Investment
David Smith echoed this point on investment and pointed to Rishi Sunak’s MAIS lecture in 2022, which repeatedly highlighted the issue of low rates of business investment in the UK compared with comparable economies like France.
Public Spending and Regional Inequality
Ann Francke added another problem to this litany of systemic factors, pointing to the overly centralised nature of the UK economy, with spending decisions frequently made from Whitehall rather than in the regions.
It was on this point that Simon French disagreed, arguing that public spending in the UK often has a detrimental impact on productivity as it shifts the balance of power in the labour market away from businesses and towards the public sector. Public spending in general can have a detrimental impact on productivity because it prevents the creative destruction necessary in a functioning economy that keeps capital flowing towards more innovative and productive businesses.
How can the services become more productive?
Services make up 79% of the UK economy so any productivity improvements need to start there. The answer, as David Smith put it, is a combination of innovation, investment, infrastructure and skills.
Investing in skills
Ann Francke echoed these points on skills and investment arguing that UK businesses frequently fail to invest enough in staff training to make them more productive. Often businesses will spend significant amounts on training for senior leaders but fail to invest similarly in the middle ranks and on new joiners.
Supporting Innovation
All the panellists agreed on innovation, with AI especially seen as having a significant potential to improve productivity. For Ann Francke, the unwillingness of many British investors to tolerate risk by investing in innovative, loss-making start-ups is holding back productivity. Simon and David echoed this point arguing that regulatory changes had suppressed the appetite for risk and hollowed out some of the growth-supporting parts of the economy.
Infrastructure
On infrastructure as well the UK economy has significant problems, especially outside of London where businesses frequently find themselves grappling with delays and other issues caused by aged infrastructure.
Hybrid Working and Health
In some industries hybrid working has the potential to improve productivity as well, argued Ann Francke, by enabling healthier, happier workers to work more efficiently and create more value. The impact of health on productivity was something echoed as well by David Smith who pointed to the £2bn worth of damage caused by poor mental health.
What is one thing the Chancellor can do in this week’s budget to improve productivity?
Lower childcare costs – Not only would this make it easier for struggling families it would also ensure a more diverse and talented workforce – Ann Francke
Increase investment incentives – Make it easier for businesses to invest in productivity improvements through incentives – David Smith
Scrap stamp duty – Replace stamp duty with capital gains on principal private residences incentivising people to invest outside of the real estate sector – Simon French