It’s time to solve the productivity puzzle once and for all

The annoying thing about overused economic sayings is that they tend to be true. That the UK is stuck trying to solve the productivity puzzle, one of those phrases that’s become common parlance over the past 15 years, is no different.

Britain has performed particularly badly on productivity growth relative to comparable economies across Europe for nearly two decades. Average productivity growth rates rank in the bottom half of the league tables for advanced economies. Its performance is well below the likes of France, Germany and the United States.

The knock-on effects cut deep. Low levels of productivity make the country more vulnerable to economic shocks, such as inflation, and in turn reduce the resilience of businesses and places. All that stymies our overall prosperity, but particularly hurts people, companies and regions that don’t have much wriggle room to deal with yet more headwinds.

There are a host of factors at play, but we’ve identified three big challenges facing the nation’s economy that are proving a drag on productivity growth and need to be addressed with urgency.

First, UK investment has experienced a slowdown in recent decades that is broadly based and includes public and private capital. This runs across industries, especially within the likes of manufacturing, finance and insurance, and the regions. The chancellor’s recent move to make capital expensing permanent is helpful, but spending on training and skills improvement has been inadequate and inconsistent, making new investments in technology and innovation less profitable. Many businesses have become trapped in a low-skill, low-wage, low-productivity cycle that is difficult to escape.

There’s also a lack of diffusion of best-practice-sharing between a relatively small number of highly productive businesses and their peers operating at levels below them. That can be seen in firm-level data from the Office for National Statistics. This shows that companies with above-median productivity levels, but below the top 10 per cent group, have accounted for the lion’s share of the productivity slowdown enjoyed among non-financial businesses since the 2008-09 financial crash.

And while Britain has a few sectors, including life sciences and digital technology, where it can be held up as a genuine global leader, the narrowness of its specialisms within subsectors of these industries means that the sharing of best-practice knowledge and technologies is often inadequate.

Finally, the UK lacks a cohesive, joined-up set of policies aimed at boosting productivity across central and local government. That means national government policy is difficult to translate into effective regional policy, while local governments are also under-resourced and lack the autonomy to develop and implement place-specific and integrated investment strategies.

We’ve seen tweaks to policies and new initiatives intended to address these issues come and go in recent years, but without a longer-term strategy, growth will remain stagnant. What is needed is an integrated range of long-term, pro-productivity policies to address the performances of people, businesses and places throughout the UK. These policies need to be shaped in consultation with national, devolved nations, as well as local governments.

The Productivity Institute, together with the Centre for Economic Performance at the London School of Economics, has proposed a new statutory Growth and Productivity Institution for the UK focused on fixing systemic issues and ensuring the effectiveness of pro-productivity policies over the long term. The institution could replace the Industrial Strategy Council, which was started in 2017 but was abandoned in 2021, and could come with a broader remit.

It would be crucial to get the focus, role and design of this new institution right. Rather than duplicating the work of other bodies, it should play more of a co-ordinating role. It also will need to be protected from daily changes in the political weather and meddling, giving it the space needed to focus on long-term, strategic solutions to address growth and to make it flexible to respond to changes in government or new developments.

The productivity problem has been with us for a while, but the time to commit to a strategic focus is now. Doubling or even tripling today’s anaemic productivity growth rate of less than 0.5 per cent is not a remote possibility and the prize of ridding ourselves of the cliché by solving the productivity puzzle is too big to pass up.

Bart van Ark is managing director of The Productivity Institute and professor of productivity studies at the University of Manchester