UK productivity

UK labour productivity (i.e. GDP divided by total hours worked) is an important measure of living standards, which has captured the attention of governments for many years. Evidence suggesting that German, French and U.S. productivity is significantly above the UK has been the usual focus. However, the extent to which this is truly reflective of real productivity differences remains unclear, due to both theoretical and practical difficulties in comparing the living standards of different countries. Sluggish productivity growth since the onset of the financial crisis has puzzled politicians and analysts alike, prompting the Government to publish a productivity plan to respond to "the recent slowdown of productivity growth in the UK and, perhaps more importantly, to the longstanding gap compared to other countries". It is now the subject of an inquiry by the BIS Select Committee, which is exploring whether the plan addresses the main causes of low productivity in the UK, and whether it is likely to achieve the desired results. The productivity plan covers an extensive range of topics, which are divided into two broad categories:

• promoting long-term investment – taxation of businesses and savings, skills, economic infrastructure, science and innovation.
• creating a more dynamic economy – housing/planning, welfare policy, financial regulation, trade and international investment, and devolution of powers to city regions.

The detail and significance of the initiatives announced vary widely across these different areas. At one extreme, the productivity plan largely ignores the root causes of problems in infrastructure investment, and does little more than list high-level aspirations for transport and energy.  However, it was followed by the party conference announcement of the creation of an independent National Infrastructure Commission. This offers an opportunity to address that gap, but as we’ve said elsewhere, it must proactively engage a wide range of interested parties (such as experts, interest groups and local communities) and facilitate an informed debate about the costs and benefits of alternative policy options. At the opposite end of the spectrum, the plan announces initiatives to streamline and speed up local housing planning processes; intervene where local authorities fail to produce housing plans in a timely fashion; give new planning powers to mayors and combined authorities; and create a ‘zonal system’, granting automatic planning permission for some types of brownfield land. Taken together, these reforms mark a significant departure from the past presumptions of pure localism and development control, which our research suggests played an important role in the current housing crisis. However, the plan does not address concerns about the financial capacity of local authorities to accommodate housing development without placing a burden on public services and infrastructure. While the slowness of the recovery in productivity is still not properly understood, the Government is right not to lose focus on structural weaknesses of the UK economy. The creation of the National Infrastructure Commission, and ongoing reforms of the planning system, shows the Government is trying to tackle the institutional dysfunctions that underpin those weaknesses. The Government should press ahead with these reforms and ensure that new institutions are effectively designed. It should also adopt this approach to other areas of the UK economy where there are deep-seated problems, such as tax policy making and economic regulation.