We need a Budget to boost flagging productivity growth

20 November 2017

By Andrew Sentance, Senior Economic Adviser, PwC

The Chancellor has not been short of advice about his Autumn Budget. More money is being requested for the health service, education, benefits, public sector pay and housing. Many of his Cabinet colleagues have pitched into the debate – including the Prime Minister herself.

But Philip Hammond faces a problem. The forecasts for economic growth and tax revenues from the Office for Budget Responsibility (OBR) are likely to be weaker than earlier projections. The key reason for this is disappointing productivity growth. The UK’s productivity growth rate has slipped from just over 2% a year before the financial crisis to just 0.7% over the course of this economic recovery.

This decline in productivity is a major economic policy challenge. The unemployment rate is already at the lowest level we have seen since the mid-1970s. Migration from overseas has dropped recently and could be even more constrained after Brexit. Future economic growth is therefore crucially dependent on raising the productivity of our existing workforce.

The UK is not alone in facing this productivity slowdown – which has affected all the major advanced economies. However, the UK is second from bottom in the G7 productivity growth league during the 2010s.

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Boosting productivity growth therefore needs to be at the heart of the Chancellor’s Autumn Budget. If he can take measures which will make our economy more productive, he will find it easier to boost spending on public services and housing.

How might he do this? There is a limit to what can be achieved in one Budget, so a long-term strategy is needed. There are three key ways in which government spending and tax changes can help boost productivity growth.

The first action area is to boost the skills of the workforce. The main weakness for the UK is our system of vocational training – the way in which people already in work acquire new skills and enhance their existing capabilities. Businesses are now paying an apprenticeship levy, which is set to raise nearly £3bn a year. There is a strong case for allowing businesses to use the proceeds from this levy to support a much wider range of training activities – a change which could be implemented in Wednesday’s Budget.

Second, the government is a key player in developing the transport and digital infrastructure in the UK. A number of major projects are underway – including Crossrail and HS2. But smaller transport projects - which can reduce local bottlenecks and link towns to neigbouring city centres - need more focus and better funding.

Third, the tax system should be reformed and streamlined so it is more supportive of business growth and investment. This is not a matter of making snap changes in this Budget. The Chancellor should signal a major review of all forms of business taxation in the UK (including National Insurance and business rates) with the objective of encouraging the high-tech, dynamic and growth-oriented businesses which can underpin the future success of the UK economy.

Our ability to pay for high quality public services hinges crucially on the UK’s future productivity growth. Boosting productivity should therefore be at the heart of Philip Hammond’s Budget on Wednesday.

For more information, please see our Industrial Strategy Paper and latest UK Economic Outlook

Andrew Sentance:
Read profile | Contact by email | Tel: 020 7213 2068

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