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Will Osborne's Productivity Plan Be Enough to Get the UK Back on Track?

10/07/2015 15:18 BST | Updated 10/07/2016 10:59 BST

Sorting out Britain's faltering productivity was at the heart of George Osborne's first Conservative budget. The focus makes sense: getting more people into work during the last parliament delivered the beginnings of an economic recovery; but if the Chancellor wants to create sustainable economic growth he is right to concentrate on getting productivity back on track.

IPPR's new analysis - to be released later this summer - shows that half of the UK's productivity weakness over the last three years was due to an unfavourable shift in the sectoral mix of jobs. The biggest sectoral effects come from an increase in the proportion of jobs in below average productivity sectors such as accommodation and food and a fall in the share of higher productivity sectors such as finance and manufacturing. This means improving productivity in areas like retail and hospitality should become a government focus alongside more traditional efforts that have targeted productivity gains in highly-skilled manufacturing, for example.

The Chancellor's productivity plan included announcements on some of the key drivers of productivity: skills, infrastructure and investment, but the increase in the over-25s minimum wage may prove to be just as significant.

One reason for Britain's stalled productivity has been low real wages. Hiring new workers over the past few years has been so cheap that employers have had little incentive to invest in the productivity of their staff. Rather than providing training and better equipment, businesses have been able to tick over by recruiting more and more staff. But a decent increase in the minimum wage could well force employers to think harder about their business models; shifting investment towards much-needed new equipment and training for existing staff. Since the rise in the minimum wage will have a greater effect on low-paid sectors, which employ a lot of staff on the lower end of the pay scale, this may help to kick start productivity in areas like retail and hospitality. Certainly, the chancellor should continue to concentrate his attention on low-productivity sectors to ensure that we see living standards rise in sectors which are employing a growing proportion of the workforce.

The rest of the chancellor's productivity-related announcements were more conventional, targeting skills, infrastructure and investment as ways to increase our productivity.

On skills the chancellor promised three million more apprenticeships, to be funded through an apprenticeship levy, charged to all large employers. In the past, IPPR has called for an apprenticeship levy as a way to encourage employer involvement in training. This charge will mean that employers have a vested interest in ensuring that the money is well spent on skills that they require; and they may even be incentivised to provide training themselves. This will help to ensure that we do not just get more apprenticeships, but crucially more high quality routes to more productive and better paid work.

On infrastructure the chancellor has pledged to treble investment in improvements to the national road networks; investing over £28billion in enhancements and maintenance of national and local roads. To fund this the government will make reforms to vehicle excise duty for new cars, promising to put this money into a dedicated Roads Fund. The chancellor also declared his ambition to close the productivity gap between the north and the south; announcing further devolution deals in the pipeline for Sheffield, Liverpool and Leeds city regions.

On investment the Chancellor will set the level of the Annual Investment Allowance to £200,000 from January 2016, which is the highest ever permanent level. This allowance allows businesses to deduct the value of plant and machinery from profits before tax, providing an incentive for firms to invest in upgrading their physical equipment.

While spending in these areas is welcome it is not clear that Osborne's adjustments will be enough to get the UK back on the path to productivity-led growth. The OBR's latest forecast shows GDP growth of 2.4% growth over the next five years, which will most likely require productivity to rise significantly. As the OBR itself admitted, its forecasts of productivity growth have in the past been overly optimistic which means that the chancellor cannot afford to be complacent about productivity.

The budget and productivity plan are only the first instalment of the Chancellor's 2015 economic package; the second is the spending review. One way in which we will be judging the spending review is by how it addresses the requirement for more resources in the areas of skills, infrastructure and innovation at a time of overall cuts to budgets. The chancellor showed a willingness to be innovative in this area at the budget by introducing an apprenticeship levy, but it remains to be seen whether he will continue to invest in Britain's productivity growth after he delivers his Plan for Productivity.