Productivity in the UK – Report from UK Parliament
The briefing provides latest statistics on UK productivity including breakdowns by sector and region/country of the UK. It also explains why productivity is important to growth, the public finances and living standards, analyses whether the stagnation in productivity is temporary or permanent, looks at the impact of Brexit on productivity growth and outlines Government policy. International comparisons are also included.
Why productivity is important
Productivity – how much is produced for a given input (such as an hour’s work) – is directly linked to living standards, with a country’s ability to improve its standard of living over time almost entirely dependent on productivity growth.
Productivity is also crucial in determining long-term growth rates of an economy. In other words, stronger productivity growth leads to stronger GDP growth. This, in turn, increases tax revenues and lowers government budget deficits. Of course, lower productivity growth results in the opposite: lower GDP growth and higher budget deficits.
Productivity has stagnated since the financial crisis
Historically, UK labour productivity has grown by around 2% per year but since the 2008/2009 recession it has stagnated. The level of labour productivity in Q4 2016 was only a little higher (+0.5%) than it was nine years earlier in Q4 2007 (the pre-recession peak level). Preliminary estimates point to annual productivity growth of 0.6% in 2016.
The persistent weakness in productivity has puzzled economists and there are many alternative theories to explain it, including: weakness in investment that has reduced the quality of equipment employees are working with; the banking crisis leading to a lack of lending to more productive firms; employees within firms being moved to less productive roles; and slowing rates of innovation and discovery. None is sufficient on its own to explain entirely what has happened. This makes it difficult to predict when and if productivity growth will return to pre-crisis rates of growth.
The impact of Brexit on productivity will be felt principally via trade and investment. Economic theory and academic literature show a link between an economy’s degree of openness to foreign trade and investment and its productive capacity.
The UK’s new trading and investment relationships in a post-Brexit world, and its impact on the amount and pattern of trade and investment that takes place, will be important in determining Brexit’s impact on productivity and economic growth.
The end result of all the changes to the UK’s trading arrangements with the EU and rest of the world will take time to develop and come into effect. Given the importance of UK-EU links in trade and investment a majority of economists believe that the final post-Brexit settlement will leave the UK economy less open, likely lowering the UK’s long-term productivity and growth rates compared to a scenario where the UK had stayed in the EU.
In July 2015, the Government published its 15-point productivity plan: Fixing the foundations: Creating a more prosperous nation. The plan aims to improve the UK’s transport and digital infrastructure, increase investment in the economy, enhance the skills of the workforce, build more houses, move people off welfare and into work, encourage exports, and rebalance economy away from London.
Prime Minister Theresa May’s Government has published a green paper on its industrial strategy. The paper states that improving productivity is a key objective of the strategy.
In the November 2016 Autumn Statement the Chancellor announced the creation of a National Productivity Investment Fund (NPIF). Over the course of the four years from 2017/18 to 2021/22, the Government has allocated £23 billion in spending for the new fund to be spread across four main areas: housing, transport, digital communications, and research and development (R&D).
Regional and international comparisons
London has the highest levels of productivity, by some margin, of any region or country in the UK. Wales has the lowest.
International comparisons of labour productivity show that the UK is ranked equal fifth (with Canada) among the G7 countries, with Germany top and Japan bottom. In 2015, UK productivity was 18 percentage points below the rest of the G7 average, the same productivity gap as in 2014 and the largest since at least 1991 when the ONS data series began. Since 2007, only Italy has seen weaker productivity growth than the UK among G7 countries.
source: House of Commons Library – www.parliament.uk