Solving the productivity puzzle in the UK

Something surprising happened in November: Prime Minister Theresa May, whose government is committed to slashing annual net migration to the UK from hundreds of thousands to the tens of thousands, announced that she was doubling the number of Tier 1 (Exceptional Talent) visas available each year.The hearts of authors and artists around the world might have soared at the news that, suddenly, two thousand of these visas would be up for grabs in 2018. However, these are not the exceptional talents Mrs May is suddenly 
anxious to attract – she is after the techies.“Technology is at the heart of our modern Industrial Strategy, and we will continue to invest in the best new innovations and ideas, in the brightest and best talent, and in revolutionary digital infrastructure,” she says.

The productivity puzzle

Leaders of industrialised nations around the globe might echo such sentiments, but there is a reason why it is particularly pertinent to the UK in the 21st century – it is the productivity puzzle.Britain’s productivity rate – what each worker produces per hour – tumbled during the financial crisis. After 2010, it was expected to pick up, but it has not, leaving the country trailing behind most of the other G7 nations, and this is at a time when the number of people in work soared to record highs while the unemployment rate tumbled to a 42-year low.As he presented his Budget in November, Chancellor of the Exchequer Philip Hammond admitted, “Regrettably, our productivity performance continues to disappoint.”As a result of this disappointment, the Office for Budget Responsibility (OBR) reduced
 the UK’s GDP growth by a quarter for 2017 and suggested it would not recover to 1.6 per cent growth until 2022. On productivity, the OBR revised down its forecast and said it would grow by an average of only 0.7 per cent a year up to 2023.

Autumn budget and Industrial Strategy white paper targets productivity

It is a problem the government has become determined to resolve, and measures in the Budget and this winter’s Industrial Strategy white paper are aimed directly at boosting skills and innovation in areas such as artificial intelligence (AI), infrastructure, life sciences and Research & Development (R&D). Ministers are focusing their efforts on spreading improvements, not just in London and South East England, but in much poorer-performing regions throughout the UK.As the announcement on Tier 1 visas showed, and an upcoming, more wide-ranging review of immigration rules is likely to reveal, ministers are having second thoughts about a further clampdown on migration criteria despite the commitment to cut net migration.The Industrial Strategy white paper insisted that Britain will remain an attractive destination for “the world’s most talented and innovative people” owing to the nation’s thriving and flexible labour market.Mr Hammond voiced a similar message in his autumn Budget speech, as he set out other measures designed – directly or otherwise – to jump-start productivity. These measures include £500 million support for 5G mobile networks, full-fibre broadband and AI; investment in electric car infrastructure and research; £30 million to develop digital skills with distance learning courses; the recruitment of 8,000 computer science teachers and the establishment of a new National Computing Centre; and a £1.7 billion Transforming Cities Fund to boost transport links outside London. The fund will be shared between six regions with elected mayors and other areas.

Geographical nature of the productivity puzzle

Boosting growth in the UK regions is key to the government’s industrial strategy, primarily because the productivity puzzle is also a geographical one. A recent report by the Centre for Cities think-tank revealed that output per worker in South East England, including places such as London, Slough, Reading, Milton Keynes and Aldershot in Hampshire, was 44 per cent higher than in other parts of the country and, indeed, 7 per cent higher than the national average in Germany.Outside of the South East, Aberdeen, Bristol, Edinburgh and Swindon were the only towns or cities to record productivity levels above the national average, while towns such as Stoke, Blackburn, Mansfield and Doncaster had productivity levels of around 25 per cent below it.In Bristol, Tim Lincoln, practice leader for the South West at Grant Thornton, says, “The West of England Combined Authority region is showing itself to be one of the country’s most successful for productivity and prosperity. We have a huge amount to be proud of, with burgeoning technology and financial services sectors, and some ambitious growing businesses that are attracting and retaining the top talent.”

Funding transportation in the UK

Under the Transforming Cities Fund, the West Midlands will receive £250 million for better transport links, including a £200 million expansion of the Midland Metro from Wednesbury to the newhigh – tech DY5 Enterprise Zone at Brierley Hill.Andy Street, mayor of the West Midlands, adds, “The importance of this extension is difficult to under state. It will open up sites for housing and regeneration and reconnect Dudley and Brierley Hill to the rail network for the first time in decades.Perhaps, most importantly, it connects the DY5 Enterprise Zone to the network and superchargers proposals to create thousands of jobs in Brierley Hill.“We can now begin looking at the next projects we want to fund, with the extension of the Metro to Eastside to connect with the HS2 station at Curzon and the reopening of the Camp Hill line very much in our sights.”

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Find out more about the government's Industrial Strategy white paper:

• Industrial strategy set out to boost productivity in UK
• Pharma leader MSD announces major UK investment
• Industrial Strategy ‘falls short on management and skills’

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In addition to pressing ahead with HS2, the high-speed link between the capital, the Midlands and the North, the new industrial strategy envisages progress on a host of other rail infrastructure projects, including reopening lines in the regions that were closed en masse in the 1960s, the Crossrail 2 in London, and projects such as £30 million to improve mobile and digital connectivity on the Trans Pennine Express rail route.Transport Secretary Chris Grayling explains, “Investment in transport is crucial to a strong and resilient economy. The Transforming Cities fund will drive productivity and growth in cities where it is most needed, connecting communities and making it quicker and easier for people to get around.“We have already seen the impact of better integrated transport links for passengers and the local economy in cities such as Nottingham and Manchester. This new fund will enable more English cities to reap these benefits, helping to deliver the opportunities and ambition of the industrial strategy across the country, as well as driving forward the Northern Powerhouse and Midlands Engine.”

Infrastructure, skills and R&D

Jon Neale, head of UK research at professional services firm JLL, said the plans illustrated that the government was starting to put in place measures which recognises that, after Brexit, Britain will need to invest more heavily in infrastructure, skills and R&D.“It is also clear that this will increasingly be done through the city regions,” Mr Neale adds. “The £1.7 billion fund for transport city regions – with half of those earmarked for those with mayors – will help to open up areas in cities such as Birmingham, Manchester and Bristol for new investment.“Likewise, the commitment to increasing R&D spending will go some way towards helping to improve the UK’s poor productivity levels outside London. The investment in 5G and fibre broadband is particularly welcome in this regard.“Crossrail 2 will be a vital piece of new infrastructure for London, but perhaps more importantly is the opportunity to connect new communities in Hertfordshire and Essex to central London.”JLL also said that recently announced plans for five new towns, with the emphasis on the new infrastructure investment in the corridor between Oxford and Cambridge, showed that the government is “poised to make radical long-term decisions to link housing, infrastructure and employment in the new digital revolution”.

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Related articles from the Winter 2017 issue of Relocate Magazine:

• Aiming for Innovation on the UK’s business horizons
• Requests for proposals: what are the alternatives?
• Will AI make work more human?

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Enterprise zones – 48 of which have now been created in England over the past five years, supporting some of the country’s most vital industries, including manufacturing, technology and renewable energy – are also vital, innovative components of the government’s Industrial Strategy white paper, which is aimed at increasing productivity.Offering entrepreneurs and start-ups discounts on business rates, tax breaks and a simplified local planning process, the zones have attracted more than £2.6 billion of private investment and over 700 new businesses, creating more than 29,000 jobs.Local Growth Minister Andrew Percy says, “Our modern Industrial Strategy paper is about creating the right environment for businesses to grow – enterprise zones are making sure that this happens across the country. They will help businesses up and down the country seize the opportunities presented by leaving the European Union.”

Using the power of universities to boost productivity

Universities are also playing their part.“Universities’ connections with industry are vital to the success of their local area. More than 100 university-owned science and enterprise parks bring together the best companies, personnel and ideas from academia and the private sector, driving productivity and innovation and offering further opportunities for graduates to bring their skills into the local jobs market,” comments Universities UK.Yet many experts believe more needs to be done if the productivity puzzle is to finally be solved. Ian Brinkley, acting chief economist at the Chartered Institute of Personnel and Development (CIPD), the professional body for HR and people development, does not believe government proposals are adequate to meet the challenge and wants to see “a bold package of reforms and radical investment in skills” to tackle the productivity problem.“If the government wants to build an economy that is fit for the future then we need a much greater investment in the skills agenda, including how skills are used in the workplace,” Mr Brinkley explains. “The CIPD believes that at least 5 per cent of the National Productivity Investment Fund should be allocated to boosting investment in skills and, particularly, for life-long learning.”

Productivity in the high-tech era

There are also questions over whether the method of measuring productivity is practicable in the high-tech era. Neil Collins, financial markets commentator at the Financial Times, says the OBR’s productivity figures at a time of record high employment suggests that instead of getting more efficient, companies are simply employing more people.“But what if we are measuring the wrong things?” Mr Collins asks. “It’s simple to count cars from a factory – although less simple to capture model improvements – but in a service economy like Britain’s, measuring output is hard. Is a longer newspaper article more productive than a shorter one? What about making telephone calls on the train? Search? Emails? Same-day delivery? All are short-circuit problems that took hours or even days to solve in the pre-internet era.”Kevin Gardiner, global investment strategist at Rothschild, is also highly sceptical. “Product proliferation and complexity, quality change, innovation and altered delivery get in the way of determining final output,” Mr Gardiner explains.It could turn out that the UK’s productivity puzzle is, in fact, the 21st century, high-tech version of Winston Churchill’s “riddle, wrapped in a mystery inside an enigma”.

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Read more about the future of UK industry and technology in business in the Winter issue of our magazine

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