What one policy should the Government follow to boost productivity?

Author(s): Graham Atkins; Sam Dumitriu; Jake Sumner; Paul Swinney; Dr Jamie Whyte

April 25, 2018

Commit to institutional infrastructure

By Graham Atkins (Institute for Government)

The Government is going to invest in infrastructure – one of the five foundations of its Industrial Strategy – to boost productivity.

If infrastructure is going to boost productivity, the Government must deliver timely, cost-effective, and high quality projects. Currently, the overall quality of UK infrastructure is not as good as it should be: the UK ranks 24th out of 140 countries, behind most advanced economies.

Over the past year the Institute for Government has undertaken a large infrastructure programme, covering appraisal and finance to engagement and leadership. If we could change one thing to deliver better projects, we would change the way UK makes infrastructure decisions. Successive governments have not considered long-term consequences and put off important decisions – the South East airport capacity debate has dragged on for more than half a century.

In order to take a long-term approach, the UK needs a cross-government strategy, informed by independent advisors which can take a view beyond the electoral cycle. Establishing the National Infrastructure Commission was a good first step, but the Government must put it on a firmer footing as an independent public body.

Once the Commission publishes its National Infrastructure Assessment, the Government must respond with a cross-government infrastructure strategy. This will allow it to prioritise and co-ordinate the 8 departments and 26 ministers nominally accountable for infrastructure.

The Government has ambitious plans in energy, transport, utilities and digital communication; it needs now to commit to institutional infrastructure to deliver the economic infrastructure of the future.

How to boost productivity? Accelerate capital allowances

By Sam Dumitriu (Adam Smith Institute)

In the EU, only Portugal and Greece invest a smaller share of their national income than the UK. Any plan to boost Britain’s sluggish productivity levels should start by removing the barriers in the tax system to higher rates of investment.

All things being equal, lower rates of corporation tax should incentivise firms to deploy new equipment and machinery by increasing the after-tax return to investment. But when George Osborne slashed corporation tax all things were not equal. Rather than boosting domestic investment, Osborne’s aim was to attract foreign capital and keep multinational corporations in Britain. This isn’t necessarily a bad aim, but it does explain why the policy failed to move the needle on business investment. In order to fund the lower tax rates, Osborne lengthened depreciation schedules and scrapped them altogether for industrial buildings. As a result, it became harder for firms to recover the cost of capital. The Oxford Centre for Business Taxation found that while the headline tax rate fell by more than 10pp, the effective marginal tax rate on new investment only fell by 3pp.

The US didn’t make the same mistake when they passed the biggest overhaul of their tax code since the 1980s. They combined rate reductions with full expensing of capital investment. This allows firms to deduct the costs of new equipment and machinery from their tax bill immediately in the same way they can with day-to-day running costs. One study found states that brought in full expensing had 17.5% more investment and saw wages grow an extra 2.5%.

The tax bill may have been contentious, but there’s agreement from policy experts on the left and right that full expensing will deliver the biggest boost to economic growth. We should try it.

A conversation between government, industry and employees is needed

By Jake Sumner (ResPublica)

Solving the UK’s ‘productivity puzzle’ is essential to afford the public services people demand. But business as usual hasn’t worked, and we need new answers. Evidence demonstrates that engaged workforces are more productive, which is why there now needs to be a genuine conversation between government, industry and employees on the nature of work. In particular, a renewed and rethought role for unions in workplaces is required to drive productivity growth.

This is an issue at the heart of ResPublica’s new report, ‘A New Bargain: People, Productivity and Prosperity’ which identifies the crucial role played by unions in anchoring pay, spreading innovation, upskilling workforces and sharing the proceeds of growth. By exercising their voice, unions have highlighted key issues and achieved important changes around workplace safety, holiday entitlement, low pay and the gender pay gap. There are clear lessons from high-performing advanced economies elsewhere in the world. These show a clear pattern of deep employee engagement, including collective bargaining, delivering higher productivity and a fairer distribution of prosperity.

Collective approaches do exist in the UK, but they are largely determined by employers without reference to employees. As a result, the Government has had to step in to perform a collective bargaining role as the negotiator of last resort for workers on low pay via the minimum wage. This approach is less effective and more bureaucratic than a direct conversation between the employer and the workforce. New forms of collective voice and bargaining through unions, as workplace representatives, are therefore needed at the firm level.

A city centre renaissance is needed to tackle the UK’s productivity problem

By Paul Swinney (Centre for Cities)

In public debates about the UK’s sluggish productivity, what’s often missing is a sense of how this plays out across different parts of the country. Cities in the Greater South East are among the most productive in Europe, but most cities elsewhere in the country are lagging badly behind.

To address the UK’s productivity problem, the priority therefore has to be getting big cities outside the Greater South East punching at their weight.

One way the Government can do this is by dedicating its National Productivity Investment Fund – worth £31bn – to transforming city centres across the country, and making them more attractive for highly productive businesses to locate in.

The UK’s most productive cities – such as Bristol, London and Reading – are those with vibrant city centres, packed with knowledge-intensive firms and jobs. This doesn’t happen by accident – businesses locate in city centres because of the access they offer to clients, other relevant businesses, workers and infrastructure.

To push up productivity levels in underperforming cities, the key is to help them attract more of these kinds of businesses by improving the offer of their city.

That means investing in bolstering infrastructure in these places, improving the quality of office space on offer (which may mean pulling down more old offices than new ones built), and removing planning restrictions in city centres to bring forward new developments.

The health of our UK city centres will be evermore important to the national economy in the coming years – especially if we can enable our underperforming city centres to punch at their weight.

Liberalise planning laws so it’s easier to build homes and business premises

By Dr Jamie Whyte (Institute of Economic Affairs)

Some policies aimed at boosting productivity, such as building new transport or energy infrastructure, are expensive and of uncertain value. The best way to improve productivity in the UK, by contrast, would cost no more than the stroke of a legislative pen. Planning laws should be liberalised to make it much easier to build homes and business premises where there is demand for them.

Property development is now constrained by a permitting process that gives objectors (or NIMBYs) considerable power to stop projects going ahead. On top of this, various policies require building in certain areas rather than others. For example, the Green Belts which surround major UK cities (and comprise little green land) may not be used for either residential or commercial buildings.  And the “town centre first” policy requires supermarkets to be opened inside towns even when out-of-town locations would be more cost effective.

These restrictions constrain the supply real estate in places where there is demand for it and thereby drive up its price. Workers in depressed provincial towns do not move to places where there is demand for labour – such as London and Cambridge – because they cannot afford the inflated housing costs. Businesses that might have flourished had they been located in a city centre cannot afford the rent, and so open in an inferior location, or do not start at all. High rents drive up childcare costs and mother who might have entered the workforce choose to stay home.

Liberalising planning law now!