How can the UK Budget boost business productivity?

Restoring growth is a key priority for the UK Government. One of Andy Burnham’s first promises as Prime Minister was to deliver “economic growth in every postcode”. 

And during a recent visit to the Manufacturing Technology Centre in Coventry – just a short drive from Warwick Business School – the Chancellor, John Healey, pledged to turn Great Britain into “growth Britain”. 

However, if the Government is serious about raising long-term productivity, the Chancellor's first Autumn Budget, which is due to be delivered next Wednesday, needs to go further than making short-term changes to taxation.

It should address the structural weaknesses highlighted by our research at the Productivity Institute. Our work suggests that productivity depends on four interconnected priorities. 

1 Attracting transformational investment 

The Budget should focus on attracting transformational foreign direct investment (FDI) rather than simply maximising the number of inward investment projects. 

My research has found that not all FDI generates the same productivity benefits. The greatest gains come from investments that bring advanced technologies, high-value activities, skilled jobs, and strong links with local firms. 

Government policy should encourage investment that increases local productive capacity and creates spillovers into regional supply chains. This requires targeted support for research-intensive industries, the expansion of investment incentives linked to innovation, and stronger partnerships between multinational firms, universities, and local businesses.  

2 Building the ability to apply new ideas

The Budget should invest more heavily in the absorptive capacity of the different regions – by which we mean their ability to recognise the value of new ideas, assimilate, and apply them. 

Productivity gains arise when workers, suppliers, and local businesses are able to learn from and collaborate with incoming firms. In order to do this, local firms need the right skills, management capabilities, and technological sophistication. 

Therefore, increased funding for technical education, lifelong learning, apprenticeships, and business innovation support should accompany any inward investment strategy.  

3 Strengthening firm performance and export capability 

Drawing on the work of my Jun Du, a colleague at The Productivity Institute, the Government should support productivity through policies that improve firm-level performance and export capability. 

Professor Du's research has repeatedly demonstrated that more productive firms are more likely to export, and that participation in international markets can drive productivity improvements through competition, innovation, and knowledge acquisition. 

The Budget should expand export finance, simplify trade procedures for small and medium-sized enterprises (SMEs), and provide greater support for firms seeking to enter overseas markets.  

Policies that encourage digital adoption, management upgrading, and innovation within SMEs would also help spread productivity gains beyond a small number of frontier firms. 

4 Tackling regional productivity gaps

The Budget should address the UK's persistent regional productivity gaps. 

This is a central theme of my colleague at The Productivity Institute, Philip McCann's work. He argues that for an advanced country, the UK’s geographical economy is remarkably unbalanced. Excessive economic concentration in London and the South East has coincided with weak productivity growth across many towns, cities, and regions. 

Increases in national spending are unlikely to reduce that gap as long as resources continue to be allocated centrally and uniformly. The Budget should commit to genuine fiscal and economic devolution, giving regional and local institutions greater control over investment priorities, skills programmes, and infrastructure spending. 

Infrastructure investment should also be targeted at improving connectivity. Professor McCann's analysis suggests that productivity is enhanced when firms can access larger markets for labour and customers, and diverse knowledge networks. 

Transport, digital infrastructure, and innovation ecosystems should therefore be prioritised in places with the greatest potential for productivity catch-up rather than concentrated in areas that are already prosperous. 

How to create a long-term productivity strategy 

More generally, my colleagues and I would support a more coherent industrial strategy and a more significant role for the Industrial Strategy Advisory Council. The UK has often suffered from short funding cycles and fragmented institutional arrangements, a situation that has not been improved by recent political instability. 

A successful productivity strategy requires long-term commitments to innovation, skills, infrastructure, and regional development. The Budget should therefore provide multi-year funding settlements for research and development, strengthen university-industry collaboration, and create stable policy frameworks that encourage firms to undertake long-term investment. 

In summary, the UK's productivity challenge cannot be addressed simply by cutting tax or increasing spending. A more strategic approach that focuses on attracting transformational investment, supporting innovation and exports, and devolving economic decision-making would offer the strongest prospects for sustainable growth and higher living standards across the whole country.

• A version of this article has also been published by The Productivity Institute.

Further reading:

Levelling up: Four key questions to tackle regional inequality

Can the UK win back the investment it lost after Brexit?

Growing pains: How to help small businesses scale

Nigel Driffield is Professor of Strategy and International Business, Deputy Pro Vice Chancellor for Regional Engagement, and a member of The Productivity Institute. He has conducted research and consultancy projects for the World Bank, the European Commission, the Department of Business and Trade and Organisation for Economic Co-operation and Development (OECD).

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