Economic Prosperity

Parties need to catch up with the productivity slowdown

Briefing12th November 2019

With the election now in full swing, it’s unlikely that you’ll see today’s productivity statistics feature heavily on the doorstep.

As expected, the first week of campaign has been dominated by populist pledges to confront the legacy of austerity, lift-up left-behind communities, and raise the national living wage. Each of these proposals, however, are sugar-coated solutions: they only treat the symptoms of UK’s deeper productivity problems.

According to the Office for National Statistics, there was no labour productivity growth between July and September this year, and its now around 25% lower than where we’d have expected it to be on the pre-crisis trend. This represents a massive blow to living standards: average wages would be £5,000 higher if productivity growth had followed its pre-crisis trend. The extent of the UK’s slow productivity growth is more severe than in most of our peers, and it’s also one of the worst performances in UK history.

The engine of prosperity has stalled, and this is fanning the flames of populism. Yet, in this election, it feels as though this historically unprecedented situation – and its impact on wages, investment, and public finances – is a bit like the awkward family secret: you keep it locked in the attic and hope it doesn’t eventually burn down the house.

The risk to the UK is that political focus on productivity remains negligible, storing up larger problems for the future, or that politicians spend significant sums of money chasing the wrong or inadequate solutions to the problem.  

But rather than engage on the fundamental causes of the UK’s productivity slowdown, the election has descended into a bidding war between fiscal populists on both sides.

The Conservative’s campaign boils down to hoping the public ignore the impact of Brexit and their imposition of a decade of austerity, failed outsourcing and wage freezes. Labour, by contrast, want voters to look back with nostalgia, and are promising to turn back the clock on public services and nationalisation. The Lib Dem plans for the economy start with stopping Brexit. The Greens, meanwhile, want you to believe there’s a pot of gold at the end of the degrowth rainbow. And, true to brand, the Brexit Party’s main offer is ‘MOAR BREXIT!’

While there is plenty wrong with the parties’ election promises, only focusing on the tax and spend implications of their policies gives them a pass, and misses the more fundamental question: where is growth going to come from?

Even as all the parties avoid this question, the public are clearly worried: a majority expect the economy to get worse in the next 12 months. The Bank of England agrees: last week it lowered its growth forecasts for the next three years by 1% and it signalled it is ready to cut interest rates if the economy slows further.

To deliver growth and revive living standards in an increasingly complex and uncertain world, the next government must define an economic strategy that sets an agenda for growth and uses the full range of policy levers at the government’s disposal. As a start, that strategy must have three fundamental components.

First, government needs to foster competition in a rapidly evolving economy. Growth in the last century was built on oil, coal and steel. In the next century it will be built on new technologies that are already changing how markets work in fundamental ways. "Anything as a Service" models, for example, are improving efficiency and lowering lower barriers to entry. But new technologies give rise to business models that can have anti-competitive side-effects,  stemming from network effects and near-zero marginal costs, for example. These help increase market concentration and incentivise rent-seeking. Ultimately, this risks stifling the innovation, competition and investment the UK needs to boost productivity. Our regulatory, tax, and competition frameworks, were designed for an offline world and need to be overhauled to make the UK economy more dynamic.

Second, the next government needs to boost innovation. Despite some very visible changes in many aspects of our lives, a lack of broad-based innovation is at the heart of the lost decade of economic growth.  Proposals from the parties to raise R&D spending to 2.4% - 3% of GDP set the right ambition, but delivering on them will be the challenge. What’s more that R&D boost needs to benefit all parts of the country. As the IMF pointed out in their recent analysis on regional disparities, the impact of new technology can have long-lasting consequences for jobs and wages in regions that lag behind the national average on productivity. Otherwise, we risk not maximising the economic benefits of any additional R&D spending and entrenching regional disparities that help feed economic and cultural grievances.

Third, we need to make the UK investable again. Businesses and governments in other countries feel burned by the Brexit process. Whatever happens on Brexit, we need to win back their trust so that we can win back their investment.  The Conservatives only offer is signing Free Trade Agreements, but have yet to realise that FTAs are only a means, not an end to achieving your economic and foreign policy objectives. For the rest of the parties, the rest of the world may as well not exist. At a time when rising protectionism is slowing the global economy, the UK needs to offer a positive vision of how to attract new investment to the UK.

Without a return to sustained productivity growth soon, wages will remain stagnant and there will be further tough decisions ahead for public spending and taxation. More communities will feel let down and left behind, risking a further rise in populism.

It remains to be seen whether the manifestos will reflect the scale of the UK’s productivity challenge. Failure to do so could have long-term consequences for the very issues this election is supposedly being fought over: raising living standards, improving public services, and reviving left-behind communities.

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