Invest in industry and technology to boost economy

This week we were all reminded of a government success – that employment in Britain is at a record high, with 3million jobs created since 2010 and most of them full-time.

This achievement has been the result of policies enacted over the past seven years, and I don’t think its importance can be overstated. In 2010, one in five households had no one in work.

Our welfare reforms were the catalyst that enabled us to get millions off welfare dependency and into work. 

And they will continue to do so, for work is the surest route out of poverty. Not only does it give an individual dignity and purpose – we also know that long-term unemployment is linked with almost every social malady there is.

But employment alone is not enough. Having a good job, well paid, and with a chance of progressing up to better jobs is also important.

That is why, today, the Centre for Social Justice (CSJ) has published an in-depth report on the factors behind the UK’s sluggish productivity rate. This highlights some deeply worrying trends – namely low levels of business investment and a growing regional divide between London and the rest of the UK.

At a time when government is borrowing £100,000 a minute and budgets are squeezed, it is only by increasing productivity that pay rises can be afforded, for it is low productivity that is the cause of British industry’s addiction to cheap labour.

The truth is that, while the employment figures may be spectacular, our productivity figures make for less happy reading.

Over the last decade and beyond, they have stagnated. We appear to have fallen behind almost all of our main competitors and it is a puzzle that continues to vex economists and the Treasury.

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Today the CSJ publishes a significant contribution to this debate and offers a solution. Whilst there is no simple answer to such a complex problem, our report looks at answers right across the financial and social landscape.

There is a consensus that the UK’s productivity problem is a result of the 2007-2009 financial crisis which triggered a recession, a period of low investment, easy monetary policy and relative strength in the labour market.

This report argues, however, that these short-term factors only exacerbated economic pressures that already existed – and that, in fact, there have been longer-term causes of productivity stagnation. 

Figures in the report show that the trends have been present since before the crash in 2008. 

There are several key factors to address if we are to change this. Firstly – barring some exceptions such as in the car plants in the North East – investment and innovation in this country is on a steady downward trajectory and falling far behind our competitors. 

There is obviously a role for government to play in reversing this trend but industry itself must also take a good look in the mirror. It has talked for too long about investment but now is a time to act. Businesses must take some responsibility.

The CSJ report shows the UK lagging far behind competitors in Sweden, the Netherlands and Germany in terms of how much we invest in employees, and this has been the case for over a decade. 

Almost 30 years ago, after re-unification, Germany faced similar problems to those we have now. It took an immense effort for German businesses to get together and put a huge investment into industry and technology. But they are now reaping the benefits. We must do likewise here.

The advent of Brexit and the increase in the minimum wage only make this imperative more urgent. 

We need to see increases in capital investment right across the British economy: an increase in business and government spending in research and development; simplification of the tax system to encourage capital investment; greater support for entrepreneurs; and support for business to increase the take-up of new generation technologies.

Secondly we must invest in our human capital. There has been no wage growth as well as low levels of occupational progression – workers moving up the jobs ladder – among those in the bottom 20 per cent earners for over two decades, suggesting there has been little productivity growth for the most disadvantaged in society since well before the financial crisis.

This report establishes that the education system has over the years failed generations of disadvantaged students, most of whom have not reached the basic level of attainment at GCSE level. 

Recent reforms will help but the report finds there are too few alternative routes through education and into employment for school leavers today. The low levels of professional development training and in-work progression also need urgent attention.

Lastly, the gap in productivity performance between London and the rest of the UK is stark and growing. Astonishingly, productivity rates in some boroughs of London are more than ten times those of some of the poorest areas in the UK. 

The standard measure of productivity – GVA or Gross Value Added – is below the national average in every single area of the UK outside London and the South-East.

Understanding productivity growth requires an understanding of the regional dynamics that have shaped the British economy and addressing them through changes to both the physical and social infrastructure.

We must pair up local growth plans with a radical anti-poverty agenda, to ensure that growth in productivity benefits the poorest in society. And we must develop means of attracting big employers to conurbations outside London and the South East.

Sir James Dyson, the British vacuum cleaner tycoon, recently made the point that, despite the many warnings about the ‘risks’ of Brexit, well-run businesses will actually see these supposed ‘risks’ as opportunities.

What this report makes clear is that for the UK to take advantage of such opportunities, we will need to become more competitive.

The worryingly low level of productivity, particularly in many of the regions highlighted in this report, makes it imperative that we tackle this with real urgency. 

At the heart of this lies the need for a long-lasting solution to the problem of the UK’s addiction to cheap labour.

If we want to improve the income of the bottom 20 per cent of workers, we can only do so by boosting business productivity which will require substantial investment, not least in training.

For too long, this has been spoken of as a challenge for government, yet perhaps the most powerful point emerging from this report is that British business needs to recognise that it has an enormous part to play. 

Other countries have managed to boost productivity and so can we – but only if there is honesty about the nature of the challenge.