- UK lags France, Germany and the US in productivity
- Underinvestment in skills, innovation and capital expenditure blamed
Chronic underinvestment, weak output and too many highly unproductive businesses. The Economy 2030 Inquiry, a thought leadership project focused on the UK’s growth strategy for the remainder of this decade, held some hard truths for British business.
In a nutshell, Britain must improve its dire productivity, but there are nuances. Although the last pre-pandemic figures from the OECD showed inferior dollar output per hour compared with the US, Germany, and France, Britain is no less efficient in reallocating resources to better-performing sectors in the economy.
That silver lining is important because economic dynamism will be vital meeting the challenges of building back from Covid-19 and transitioning to a low carbon future. The greatest concern the report authors, from the Resolution Foundation and London School of Economics (LSE), have after their health check on UK plc is the lack of resources British companies have at their disposal to become more productive.
The LSE’s Anna Valero flagged historic underinvestment in capital, innovation and skills. Factors such as the financial crisis in 2007-09 have contributed to this trend throughout the western world but the UK has its own unique problems.
Bank of England monetary policy committee member Professor Jonathan Haskel said uncertainty put off private sector investors; whatever the political arguments, the three-and-a-half-year stalemate following the vote to leave the European Union had hampered capital inflows. To find this investment, businesses will have to go abroad. In the study by Valero et al it is estimated debt would have to increase by 60 percentage points relative to GDP to fund bringing Britain into line, if funded locally.
Ultra-low interest rates do make the borrowing option more plausible, although inflation and possibly currency devaluation could throw a spanner in the works. What’s apparent from comments at the study presentation is the zeitgeist is very much in favour of a dual role for public and private finance.
Both Valero and Rebecca Riley, the director of the UK Economic Statistics Centre of Excellence, referred to the importance of "crowding-in". The phrase is used to describe private capital picking up the slack on projects that were kicked off by the public purse when the payback was less obvious.
Following multi-trillion-dollar spending to support households and companies in the pandemic, such examples of 'Big Government' are far from the taboo they became in the late 20th century.
By the time 2030 comes around it will be half a century since Margaret Thatcher and Geoffrey Howe’s aggressive monetarism. That era was light-years apart from the state-led largesse advocated now, but inflation could yet be the catalyst for similarly painful policy choices that force rethinks on economic strategy.
