Expert Blog

Can Osborne solve our country’s productivity problem?

You can’t have missed the first half of George Osborne’s Budget. It was the part that he delivered to Parliament last Wednesday, and its contents were splashed across all of the front pages the following morning. A National Living Wage. A new arrangement for Vehicle Excise Duty. An 18 per cent rate of corporation tax. Cuts to tax credits. These policies, and the rest, are still being dissected this week.

But what about the second half of George Osborne’s Budget? That was easier to miss. After all, it wasn’t delivered to Parliament last Wednesday, but was instead published on Friday. It had an unwieldy title that didn’t exactly scream ‘read me!’ – Fixing the foundations: Creating a more prosperous nation. Yet it was important nonetheless. This was the Government’s new plan for dealing with one of our economy’s most testing problems. As such, it shouldn’t be ignored.

And it’s not just us who are calling this report ‘the second half of the Budget,’ either. This is how Treasury officials described it when spreading the word to newspapers last week. The problem behind this report is so big that they’re trying to give the report itself a big billing.

So, what is the problem? It’s the problem of productivity. And it’s best expressed in terms of what has happened to our economy since the recession. By the end of last year, as per the graph on page 8 of this document, GDP had regained its lost ground and then some – in fact, it was 3.4 per cent higher than it was at the beginning of 2008. Yet not all economic metrics have recovered in this way. The output per hour worked, as shown here, is still just below where it was before the crash. This means that people are working less productively then they were.

A growing economy with less productive workers – what’s all that about? The answer is quite simple. The number of employed people has risen by almost one million since the beginning of 2008. These new workers may be less productive than they used to be, but there are a whole lot more of them. Quantity has overcome quality.

What’s more difficult to explain is why the workforce has become less productive. Even the smartest economists differ with each other on this point, and most of their theories are just that – theories. Some suggest that employers held on to workers during the bad times, with the intention of giving them more work when the good times returned. Others reckon that it’s because employers have found room for people with lower-than-average productivity, such as young people and the long-term unemployed. Others warn that we’ve just become lazier.

But whatever the explanation, this productivity problem needs resolving. It represents a mass of squandered potential. Without it, the recovery could be happening even faster. Without it, employers might feel like paying out higher wages. The macro- and the micro-economy stand to gain.

Which brings us back to the second half of the Budget. This report is almost immediately striking, as it does what ministers don’t generally like to do: it admits that there’s a problem in the first place. The foreword, signed by both Osborne and the Business Secretary, Sajid Javid, observes that ‘the UK has a long-term productivity problem, which has been made worse by the financial crisis.’ Perhaps the Conservatives realise that, having won a majority, and with Labour in disarray, now is the best time to ‘fess up to these economic anomalies. Then they have five years to try to fix them.

What follows is the Government’s plan to, hopefully, do just that. Not all of the policies it contains are novel. In fact, many – such as cutting the main rate of corporation tax to 18 per cent in 2020, or creating a new Roads Fund from the proceeds of Vehicle Excise Duty by 2021 – were revealed in the Budget properly. But there are some fresh announcements in there, particularly when it comes to planning regulations. The Chancellor wants new flats and houses to proliferate during this Parliament, presumably for the good of both would-be homeowners and the construction industry.

But more than the specifics, it’s the generalities of the document that stand out. Among these is its overall emphasis on transport infrastructure. As we know, this became a motif of Osborne’s Chancellorship in the last Parliament; especially with his £15 billion plan for renovating Britain’s roads. And that is going to continue into this Parliament. The productivity report makes commitments to improve the country’s rail network; better join-up the towns and cities of the north; and, crucially, ‘take a decision on airport capacity in the south east by the end of the year.’

Which is all well and good. Here on this blog, we have often pointed out the deficiencies of Britain’s transport network – and a productive economy will require them to be overcome. Trains, planes and automobiles are the literal drivers of our workforce, carrying them from their homes to their jobs and back again. It’s very easy to imagine how a worker’s productivity suffers if he always has to leave early to beat the traffic jams.

But a word of warning, which we’ve also issued before: transport policy is much easier to write than to achieve. The decision on airport capacity is a case in point. The Government may make their decision by the end of the year, but then they face the gauntlet of public and backbench opinion, as well as the general delays and difficulties that attend any major infrastructure project. We’ve already had protestors disrupting flights at Heathrow this week, in anticipation of that being the airport that will get the nod. There’ll be lots more to come.

In the meantime though, some optimism. We’ve just seen a Government admit to our country’s productivity problem, which is the one of the first steps on the road to fixing it – and that’s something. The second half of the Budget might even have been more important than the first.  

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