How could the UK budget drive productivity?

One of the recurring problems with UK policy is that, whenever a new initiative is announced, almost every elected politician immediately responds with the question: “How many jobs will this create in my area?”

As a result, we have a succession of policies that are designed as though the fundamental problem in the UK is one of unemployment and the primary objective is to stimulate demand for labour.

This is particularly pertinent as the Chancellor of the Exchequer, Rachel Reeves, prepares to unveil her latest budget. 

While I would not suggest either that the UK has zero unemployment, or that everyone has the job they want, typically the country does not have an unemployment problem. What it does have is a productivity problem.

What would happen if instead, politicians asked: “What would this do for productivity in my area?” I would argue that we would have a different set of policies and potentially a much better outcome for the UK economy.

Why the UK has a productivity problem

I do not intend to go into detail on the nature of the structural productivity problems in the UK. These are comprehensively addressed by the Productivity Institute and various other research organisations.

Essentially, they can be summed up in a single phrase - lack of investment. By that I mean low levels of capital investment, of infrastructure investment, and investment in skills acquisition. One could therefore explore how the budget might stimulate investment in any of these three areas.

Taking them in order of importance, the first thing I would do is to increase funding for the further education sector.

If the UK is to compete in the modern world, then far more young people need to achieve Level 3 and 4 qualifications (the equivalent of A-levels and the first year of a university degree respectively), whether these are in battery technology, life sciences, or digital and creative technology.

These qualifications should not only be a route into more productive jobs, but also facilitate further study and skill acquisition.

This also requires making working in further education more attractive, and improving the incentives for business to take on apprentices. This would include, for example, employing strong financial incentives for hiring young apprentices, National Insurance contributions breaks, and funding for training costs.

At the same time, one needs to demonstrate, at the level of the individual, the broader benefits of apprenticeships like improved employee retention and a pipeline of skilled talent. This should also put the onus on business groups to demonstrate the benefits of individuals investing in themselves.

Underinvestment is undermining outcomes

Secondly, outside of the South East, travel to work areas are too small. Earnings and productivity gaps are huge over very small distances, often mirroring weak public transport links.

This means that not only do people in areas with weak connections find it difficult connecting with job opportunities, but also it limits the extent to which productivity spills out from cites to towns.

While one can bemoan years of underinvestment in transport, there are many schemes ready to go that have been on hold for too long.

Finally, and perhaps the thorniest issue, is that of private sector investment. It is too simplistic to argue that one simply needs to reduce corporation tax, because in many ways, when considering investment in either fixed capital or intellectual property, it is the capital allowances rather than the headline rate of tax that determine return on capital employed (ROCE).

The standard responses to encouraging private sector investment include:

• Establish a coherent policy and regulatory landscape that prioritises economic growth and provides certainty for investors
• Reform of the planning system to expedite approvals for new business properties and infrastructure to unlock investment, particularly for job-creating sites

• Support research and development (R&D): Implement 'demand-pull' policies like R&D tax credits and 'technology-push' policies that increase the supply of new knowledge to overcome barriers in private sector research and development. Encourage collaboration between universities and business
• Aligning with international standards for regulating technologies like AI and by developing the workforce's skills to meet changing needs
• Leverage public-private partnerships: Utilise mechanisms like the Catapult Network and Innovate UK's Investor Partnerships to help innovative firms access finance and match them with investors. 

What is potentially more important is that these areas are joined up. For example, aligning incentives at the level of the individual to engage in training, with greater incentives for private investment (and in turn insuring that people can then reach the new opportunities created).

This means aligning incentives for both local business and inward investors, with business support to encourage innovation and skills. While this sounds simple, it requires co-ordination across at least five Government departments (the Treasury, Transport, Education, Business & Trade, and the Ministry of Housing, Communities and Local Government).

This has proved to be a task beyond any Government for at least 40 years - and poses a significant challenge for the Chancellor and her budget.

Further reading:

How to improve UK productivity

What is the key to levelling up the UK economy?

How policymakers can win the global war for talent

Can the UK become a high-wage, high skill economy?

Nigel Driffield is Professor of International Business and Deputy Pro Vice Chancellor for Regional Engagement. He is also the Organisational Capital Research Lead at the Productivity Institute.

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