Tax cut vows are a distraction from the UK’s woeful productivity
The writer is professor of public policy at the University of Cambridge
The IMF has made it official: growth will be slow and inflation high for the foreseeable future. For the UK, expected to be one of the worst-performing major economies, this grim outlook comes on the heels of slow growth since the financial crisis. There has been little increase in household disposable incomes for well over 10 years and the squeeze on living standards in the next 12 months will be painful.
What is to be done? You would not have picked this up from the Conservative party leadership contest, but the biggest issue facing the UK economy is the absence of productivity growth. Productivity does not get pulses racing among Tory members, but it is essential if living standards are to improve. While many OECD economies have experienced a post-2008 productivity slowdown, it has been more severe in Britain than in comparable countries. It is essential to restart productivity growth.
If this were easy, it would have happened already. The challenge is all the greater when any money the Treasury can find in public coffers is being pledged on tax cuts that attract headlines but whose impact on long-term potential growth will be minuscule. That rules out some obvious productivity boosts such as additional funding for research, early years education or skills.
One silver lining to the economic storm clouds is the boost that might come from less productive companies either improving or going under during an economic downturn. Recessions often raise average productivity through their effect on the weakest firms. But rather than relying on the destruction part of Schumpeter’s dynamic of capitalism, what might encourage some creative productivity enhancement? Here are some low-cost suggestions.
First, ask the new chief executive of the Competition and Markets Authority — when finally appointed — to act on the worrying indications it flagged in its recent State of Competition report. It said markets have become increasingly concentrated, corporate mark-ups are elevated and the poorest households are likely to suffer the most harm. Businesses will complain that this is the wrong time to make their life tougher, but it will do no harm for pressure from market forces to be augmented by competition enforcement.
Second, focus on productivity in public services. The public sector makes up about a fifth of UK gross domestic product and public services form the “soft” infrastructure enabling the market economy to operate. Rather than cutting their funding further, empower managers to improve their processes through more flexible budgets, devolved decision-making and above all policy stability. A forthcoming report from the Productivity Institute has some excellent practical advice, but it will require politicians and Whitehall to stop undermining the capacity of those charged with delivering services.
Further devolution of Whitehall and Westminster powers is also essential if productivity is to grow faster outside London and the south-east. While unbalanced funding helps explain why the UK economy can only fly on one engine, over-centralised decision-making plays a part. Local authorities cannot respond properly to local needs, such as the mismatch between skills and employers’ demands.
Among the other low-cost options is encouraging technology start-ups through regulation and policy. This does not mean brainless demands to “cut red tape” or deregulate. Rather, the need is for clear and stable regulation and standards that will enable market growth and de-risk investment for the private sector.
Again, this calls for sufficiently stable policies. The transition to net zero energy, transport and construction, for example, needs technical and safety standards to be set early enough, and may require future minimum market guarantees or the use of public procurement to steer investments. There are ample opportunities for digital enterprise if a framework is set that enables access to data in a competitive environment, and sets a clear legal framework for privacy, security and sharing.
There is little point calling for additional public spending at exactly the time when such calls will have no traction with whoever becomes the next prime minister, but not all productivity-boosting policies require governments to spend much money. Unfortunately, though, they may need something seemingly even harder for the government to deliver: a strategic view of what the economy needs and a stable policy framework.