26/10/2018 10:12 BST | Updated 26/10/2018 10:53 BST

Productivity Should Be At The Heart Of The Government’s Budget Plans

The root of our problems is as deeply boring as it is fundamentally important. The UK is not productive enough and we do not share wealth widely enough.


Is this the least hyped Budget in British political history? It certainly feels that way as, with only a few days to go until the major economic set piece of the year, the national conversation struggles to escape the gravitational pull of the Brexit black hole. There is a deep irony in this. If you believe as I do that the causes of Brexit can largely be found in the fallout of the deep structural economic changes over the previous decades and that the major consequence of our decision to leave will be another violent realignment of the tectonic plates beneath our economy, then it seems bizarre that as we stand in the eye of the storm there is almost total silence about the economy.

The truth is that, even without Brexit, there would be a mammoth task facing the Chancellor. Yes unemployment may be historically low, but public satisfaction with the economy is also low. Nearly three-quarters of the public think that more should be done to improve the quality of jobs. Less than one in ten think all jobs are fair or decent. Eye-wateringly deep cuts over nearly a decade have failed to eliminate the deficit, growth is sluggish and against the RPI measure of inflation, real average hourly pay is almost 10% lower than it was in 2008.. In this age of seeing everything through Brexit glasses it is easy to forget that these problems predated the 26th June 2016, and even easier to forget that they will remain long after we have forgotten what the row over the ‘backstop to the backstop’ was all about.

The root of our problems is as deeply boring as it is fundamentally important. The UK is not productive enough and we do not share wealth widely enough. UK productivity performance post-crash remains absolutely woeful, with a growth of 0.3% per year leaving us trailing behind other G7 economies whose output is now, on average, 20% higher per hour of work. This is not evenly spread across the economy, but on aggregate it is acting as handbrake on our attempt to accelerate away from the financial crisis. Growth forecasts were not rosy in 2015, but every year since the EU referendum forecasts have been downgraded as growth targets have been missed. There is some recognition of this at the top of government, but the central economic challenge facing the country is something that requires more than episodic engagement and half-hearted policy initiatives. What is needed is an understanding that poor productivity growth is not something that can be put right by pulling a few levers in Whitehall, it is intrinsic to our current economic model. If we want to change it, we need to change that model.

The appointment of the Bank of England’s Andy Haldane to lead the government’s work on productivity may herald the advent of some badly needed fresh thinking. In a forensic speech this summer Haldane explained what he sees as the root causes of our current malaise. There was a lot in the speech, but two themes stand out: lack of innovation and the lack of institutional economic infrastructure.

Simply put, the UK spends far too little on innovation, research, and development. Around a year ago the government announced an ambition to raise R&D spending from its current pitiful rate of around 1.7% of GDP to 2.4% over the course of a decade. The claim was that this would make us “the world’s most innovative economy”. In fact it would still leave us below the OECD average. As we stand on the brink of a new industrial revolution with emerging technologies such as AI, robotics and breakthroughs in renewable power generation set to redefine what is possible, it is more essential than ever that the UK invests in innovation. This cannot be done without the public sector, which can generate around £1 in private sector R&D for every 30p invested. If the government is serious about innovation then they need to show that commitment with serious investment in public research spending.

But it is one thing developing new tech, integrating it into the workplace is a different challenge altogether. The potential human costs of getting this wrong are huge, yet the institutions that help to manage change at a national and company level have been dangerously hollowed out. If the so-called fourth industrial revolution is something that is done to workers rather than with them then it will result in huge economic and political blowback. It should not be revolutionary to suggest that companies that listen to their workforce are more productive and have more capacity to successfully manage the changes needed to increase that productivity further. Most CEOs would pay lip-service to this idea. But moot the idea that companies should be compelled to listen to their workforce through compulsory collective bargaining and it is as if you have suggested ending capitalism itself.

It is time to call time on this top-heavy economic model and its defenders. The belief that all wisdom in a company is contained within the boardroom is central to our productivity and wages crisis. If we are serious about ending it, we need to shake up the power imbalance in companies, reverse the decline of collective bargaining and involve everyone, government, employers and trade unions in a national mission to raise productivity. Because after all, as Paul Krugman said, “productivity isn’t everything, but in the long run it is almost everything”.

Mike Clancy is general secretary of Prospect