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Guest blog

Britain’s productivity problem is a crime mystery with multiple culprits

Giles Wilkes on growth and productivity

By Giles Wilkes, senior fellow at Institute for Government and specialist partner at Flint Global

The topic of growth tends to attract a certain kind of obsessive. The great economist Bob Lucas said that once you start thinking about it, it is hard to think about anything else. The consequences of making the right or wrong decisions on growth are staggering to contemplate. Arguably, Britain is suffering some of these consequences right now.

A couple of weeks ago, Nesta gathered a dozen or so of the growth-obsessed to debate stagnation in the UK economy. The gathering came on the heels of a ‘Delphi’ exercise intended to collate the views of many more such experts and kick off the discussion. The ultimate point of this: to feed into Nesta’s UK 2040 Options project that will generate policy options to spur growth.

There’s a well-worn joke about a camel being a horse designed by a committee. It is meant to be a dig at committees – though I have always thought it rather mean about camels – and the idea of decision by consensus. Of course, sometimes this is justified. I have particularly excruciating memories of Whitehall roundtables convened to puzzle through solutions to an impending no deal Brexit. Gathering generalists in a room to deliver ceremonial five-minute speeches is no way to plan the future of the country. I cannot recall much ever being decided on the back of such meetings, and it is probably just as well.

Thankfully, Nesta’s gathering of productivity professionals could not have been more different. There were experts on skills, regional growth, macroeconomic policy, investment, politics, technology, energy, tax and more. Such heterogeneity is vital. Britain’s productivity problem is a crime mystery with multiple culprits. The worst trap to fall into is impatience, which can lead to an urge to use ‘one simple trick’ to solve something as longstanding, multifaceted and intractable as the UK’s productivity problem, like it is some clickbait article about losing weight.

There is a fine line to tread between due acknowledgement of the scale of the problem and trying to eat an indigestible everything-burger of economic ailments, and I think our roundtable managed to tread it. Certain strong themes emerged. Lagging investment, and the structural reasons for this, was one of them. It is hard to find anyone who really thinks the country’s centralised-yet-fragmented political structure is good for investment. Too much is hoarded to an overburdened, under-resourced and politically-diverted Westminster, and the only power to have been thoroughly devolved – planning – is one that holds up growth. Local communities are disengaged and consequently obstructive.

This is a problem that will take an act of political courage to break out of the loop. People are used to blaming central government for the state of their neighbourhood. Never being given full responsibility, local actors never gain the skills to take on the powers they need. Central government, in turn, evaluates devolution as a risky idea, given the lack of local capacity. Some future government needs to go ahead anyway, take the risk that money will be spent badly, and stay the course. Waiting for the perfect moment means nothing happening.

It would have been odd if the problem of inconsistent policymaking was not brought up. What passes for industrial strategy in the UK has been started, stopped and started again too many times to count. Once-a-generation strategies appear every year or two. Institutions to support a more consistent policy framework are missing, or are scrapped soon after coming into existence. Policy uncertainty also shows itself through a lack of long-term budgets, and a consequent inability of local authorities, businesses or government departments to plan ahead or even gain the skills to.

The last theme I would like to emphasise is the closest I will ever come to the ‘one simple trick’ delusion. Economic growth is a scale game. The more exposure there is to customers, ideas, competition and capital, the better the economy will be. You can see this at the level of the business, which is an inherently geared creation, always trying to generate more sales out of the same fixed cost base, and the same applies to the whole economy. Scale is what motivates investment, and scale is what justifies government intervention. There was definitely a lot of frustration that the UK government, when it does act, does so in such a tentative way, as if every footstep it takes needs to be piloted first. The problems are not going to be solved with subscale ideas that fail to be followed through.

Once again, in my view if there is an answer it has to come from the politicians. When they set out a policy goal – be it to build a series of giga factories, become a world-leader in quantum technology, or install five million heat-pumps – they need to become much more demanding about the “how” of the policy, not just the press release on the day of its announcement. Too often the government machine reacts to ambition with concern about the risks; with pilot schemes, consultations and so forth. The politicians need to demand to know what will actually happen, and then stay on the case to make sure it is delivered. Officials will be nervous, because they are blamed when things go wrong, which means the politicians being clear that they, not their staff, are to be held responsible.

Far more was debated than can be summarised in a short post like this; had I enough words, I would love to relate more what was said about tax, energy, skills and the labour market. We barely touched upon the immediate choices facing the next government, whatever it may be: its fiscal pressures, the relationship with Europe, and how to push greater devolution. At the end I was relieved we had been set a 15+ year timescale to think about, rather than the more typical “give me five good ideas for a speech next Thursday” schedule that is regrettably normal in politics. But as the UK 2040 Options programme proceeds, I expect the sense of urgency to increase and the focus to narrow. There’s an election next year and the need for genuinely good ideas has never been greater.

Economic growth and productivity: the fundamentals

Economic activity and the productivity that underlies it has a major impact on our ability to provide things that people value – from homes to hospitals to holidays. If we are to achieve continued improvement in the standard of living for UK citizens by 2040, growth will be key.

Where is the UK economy now, and where is it heading? There is no shortage of commentary, data and debate. These fundamental facts aim to distil the wealth of information into the core, foundational evidence and trends that policymakers should have front of mind as they consider the options, providing clear signals amongst the noise. Unsurprisingly, they illustrate that the UK economy is having significant difficulties at the moment with GDP per capita, real wages and productivity performing poorly both absolutely and comparatively. There is also some indication of the proximate causes of this: regional imbalances and low investment both now and historically appear as prime culprits. Whilst employment looks healthier there are warning signs there too, from growing long-term sickness to the impact of demographic changes by 2040.

Of course in considering these foundational facts it is worth bearing in mind that economic outcomes are just one way of measuring social progress. Whilst overall GDP growth, rising productivity and real wages tend to be associated with higher living standards, economic measures don’t give us the whole picture. Not least, aggregate economic growth can mask inequality in varying forms. Across the UK 2040 Options project, we will be considering a wide set of outcomes from health to education and wealth inequality.

Read the ten things we think people working in economic growth and productivity should know, by downloading our fundamentals document.