Viewpoint: The trouble with the productivity puzzle? Too many pieces


‘Productivity’ is the buzzword of the moment, setting the mood music to the government’s plans for the economy. Majeed Neky suggests that in an institutionally complex and fragmented landscape, devolution just might be the key to fostering a more productive nation.

The summer Budget, and the parallel launch of a ‘Productivity Plan’ (LGiU members’ briefing here) sought to establish a fresh narrative on the economy: the business end, if you will, of ‘One Nation’. While deficit reduction and job creation remain major themes, boosting productivity (and thereby wages, living standards and international competitiveness) looks set to provide a new focus. What does this mean in reality?

The national ‘productivity gap’ and ‘productivity puzzle’ are not new issues, as Andrew Sentance highlights. Britain’s output per hour worked has consistently been lower than G7 or European comparators, and has failed to recover since the financial crisis. With wages depressed, firms have often retained or hired employees despite the economic conditions, but not necessarily invested in skills, technology or otherwise boosting those workers’ output. Early in his Chancellorship, Gordon Brown identified five ‘drivers of productivity’: all are reflected, albeit with a conservative gloss, in George Osborne and Sajid Javid’s ‘Fixing the Foundations’ plan.

As the length of the document demonstrates, the Chancellor is using productivity as a positive political frame for a range of decisions which, in reality, have disparate origins and impacts – most controversially, significant welfare changes. To be meaningful, at a time of institutional change, the focus on productivity must also address deep-seated structural issues affecting individuals and businesses’ interactions with each other and with the state.

The increase in the National Minimum Wage (critiqued by some as premature without underpinning productivity gains), restrictions to in-work benefits and the deregulation of planning (LGiU members’ briefing here) dominated the headlines. But the Budget and ‘Fixing the Foundations’ cover important ground elsewhere, particularly on skills, where a new apprenticeship levy seeks to address the perceived underinvestment in skills by employers. Meanwhile, an explicit signal of departure from per-qualification funding for further education responds to longstanding calls from local government and has profound implications for devolution: combined authorities and LEPs are likely to shape what this means in practice, while taking ownership of the difficult choices occasioned by Skills Funding Agency cuts.

The Productivity Plan also included further detail on Sajid Javid’s vow to renew the Coalition’s ‘Red Tape Challenge’ deregulation drive, along with a slew of other initiatives (many reheated or requiring further reviews) – on innovation, exports, business finance, transport and broadband infrastructure and more.

A critical common thread is the role of strong, coherent institutions in fostering economic resilience. The invention or reinvention of structures is much beloved of Ministers seeking an announcement. Yet the institutional landscapes relevant to productivity are complex and fragmented. Examples abound: in response to failures which led to the postponement of Northern rail electrification projects, the bulk of transport infrastructure announcements in the plan concern overhauling Network Rail, including hiving off a new commercial arm. On innovation, the plan includes a review of Research Councils; re-announcements of three research initiatives, one of which (on cities and infrastructure) will create a national network of observatories and laboratories; references to several generic (Innovate UK) and sector-specific funds for research and development; and mentions of the Challenger Businesses Programme and Catapult Centres. On skills, LGA-backed ‘Hidden Talents’ research in 2012 identified that youth provision was funded by eight different national organisations, via 33 schemes spanning 13 different age ranges. In response, Fixing the Foundations references academies, free schools, studio schools, University Technical Colleges and National Colleges and introduces yet another designation in ‘Institutes of Technology’.

There is clear evidence that this complexity is confusing to business: last year’s London Business Survey, for example, found that SMEs were far more likely to consult an accountant than a Government service for advice, with more than half of SMEs forced to seek advice on regulation or taxation. Successive reviews, meanwhile, have found confusion amongst employers on how best to implement apprenticeships: while Coalition reforms did recognise this, Governments have not been wholly able to resist the lure of layering on new initiatives.

Hope comes in the form of less frenetic measures: a stronger Office of Tax Simplification and a Business Tax Roadmap, for example, could help business spend less time thinking about tax and create greater certainty to underpin investment. A review of UK economic statistics is a similarly unassuming measure that could improve the setting and measurement of economic goals – not least in relating the national picture to local challenges and innovations, as Centre for Cities has recently done to good effect. Yet such measures are in the minority. On business finance, for example, the Productivity Plan seeks to bring together two separate regulators to ensure a common focus – by setting up another new unit, to foster new banks. Simultaneously, Javid’s Red Tape Challenge is driven by the instinct to streamline precisely such regulatory complexities. As explored here by the Centre for Urban and Regional Development Studies, discussing Local Enterprise Partnerships, such ‘endemic institutional churn’ jeopardises both economic and social goals.

While such ‘initiativitis’ is nothing new, it presents a challenge and an opportunity to localities advocating devolution. The progress of the devolution agenda – featured prominently and helpfully in ‘Fixing the Foundations’ as a central part of the productivity narrative – provides a huge potential opportunity to consolidate institutional complexity at the place level, demonstrated for example by the devolution of disparate business support budgets agreed with Greater Manchester, or London’s plan’s for a single apprenticeship ‘offer’ for the capital.

Yet the Government’s deal-based approach to devolution places the onus squarely on localities to prove their case for how devolution can boost productivity, moving on from a focus on job creation to show how local solutions can support objectives such as progression in work which link individual living standards to the overall economic picture. A strong narrative, backed by tangible, rapid results on the ground, will be needed to convince Whitehall, the mainstream media and public opinion that devolving functions and responsibilities can simplify, streamline and strengthen the institutional landscape, rather than complicating it further. The furore over elected Mayors, including concerns over adequate scrutiny and widespread dubiety over adding an ‘extra layer of government’, demonstrates that this argument is far from settled.

Importantly, a further set of tensions are added by the most explicit acknowledgement yet, via the launch of the Spending Review, that the Chancellor views devolution as part of Government departments’ potential cost-cutting arsenal. Departments may face the ‘stick’ of renewed Treasury pressure to devolve, but this will be accompanied by the ‘carrot’ of diverting the blame for the further cuts to come.

Navigating this minefield successfully, responsibly and democratically poses a major challenge to cities and regions. But as the Chancellor has perhaps recognised, in seeking a long-term plan to address systemic issues around Britain’s productivity, devolution still represents perhaps the firmest hope of truly ‘Fixing the Foundations’ – rather than papering over the cracks.

Majeed Neky is an LGIU briefing associate; this blog post was adapted from his recent LGiU members policy briefing.

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    1. John Matthissen says:

      No mention of Andy Haldane (Bank of England Chief Economist) saying businesses paying out too much dividends, too high salaries instead of investing to improve productivity. That doesn’t fit the Osborne ideology.

    2. Meb Neky says:

      One of the key determinant of productivity is Investment. Small company owners often take very low salary in earlier years or when times get tough so that they can invest. These SME owners rely on dividends when there is a surplus to get their rewards.

      A policy like taxing dividends at marginal tax rates just introduced will now affect SME behaviour. The way forward for many will be to reduce investment when it is most needed just because of taxation policy. The consequence will be that SME’s will take higher salaries in all years at the expense of Investment, resulting in lower productivity

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