2 December 2020

A Covid silver lining for British business?


The challenges businesses have faced this year can hardly be overstated – and they’re not over yet.

But for all the many challenges this year has thrown up, there is, perhaps. a silver lining. With their back​s against the wall, businesses have been innovating with impressive speed and skill. Services have moved online, supply chains adapted and remote working embraced. In many cases, these adjustments have proven more effective than business-as-usual and will likely stick even once restrictions ease.

Indeed, our latest figures show that over four in five Institute of Directors members have made adjustments they intend to keep for the long run. Just as importantly, over 40% of those who had made permanent changes to their business due to the pandemic said they had had a net productivity-enhancing effect. In some cases, we’ve essentially seen three years of innovation in three months – and all in the eye of the pandemic storm.

This matters because when the virus hit slow productivity growth was one of the UK’s biggest long-term challenges. Over the last ten years, we saw just a 0.3% increase – a figure so stark it became the Royal Statistical Society’s ‘statistic of the decade’. One perceived cause of this stagnation was that British SMEs were lagging behind peers in adopting existing technologies.

For businesses, the benefits of digitisation can be significant. A recent Office for National Statistics study found the combined use of enterprise data software — such as for resource planning, customer relationships, and supply chains — led to a 25% productivity premium. But all too often, smaller firms simply didn’t have the time, money or wherewithal to make those changes.

That changed with the lockdown. As restrictions came into effect, nice-to-haves became must-haves. It was clear that technology and innovation weren’t just important for business performance, but also business resilience. Firms with e-commerce, cloud computing, and ‘big data’ capacity were better able to weather the storm.

With this impetus, and the trend toward online sales accelerating, more and more business leaders are eager to get ahead of the curve.

So does this mean we have finally turned a corner when it comes to productivity? The answer is yes and no: while the crisis may have jump-started creative thinking, businesses don’t have much fuel in the tank to press on.

A debt hangover and ongoing uncertainty around restrictions will make it difficult for directors to get new projects off the ground. Around half of directors we surveyed whose firms had taken on debt over the course of the pandemic felt it would dent their growth and investment plans in the years ahead. While HMT’s Pay as you Grow scheme was an important step, easing payment terms for companies that made use of government loan schemes, businesses will have wider cashflow headaches as the virus recedes. Adding to the challenge, countless entrepreneurs also slipped through the gaps of coronavirus support.

These challenges need to be addressed head on. News of a vaccine and a reduction in restrictions alone may not be enough to buoy business investment. Encouraging business innovation and investment should be a key pillar of the Government’s wider recovery plans. By supporting SMEs’ new-found ambitions in the months ahead, the Government can help firms to scale, innovate, and take on more staff.

The Treasury has taken some initial steps, such as extending the £1m Annual Investment Allowance cap was a welcome move. But the Chancellor should go further, bolstering tax reliefs for SMEs that invest in productivity-enhancing technology.

A new ‘SME Recovery tax relief’, with a clear list of qualifying expenditures, could be one way forward. As a newly signposted incentive it could drive uptake by overcoming complexity around existing allowances. Alternatively, the SME R&D tax relief might be widened to include these investments, as implied in the Conservative Party’s 2019 manifesto.

Ambition from the Government on skills, infrastructure and the green economy will also be key to giving businesses the confidence to invest. The Prime Minister has set out positive targets in this area, but business leaders will be eager to see the momentum persist and progress on the ground.

The UK’s productivity puzzle long predates the virus, and it certainly won’t have been solved over the past few months. Sustained action is needed on the underlying barriers to improvement, from knowledge dispersion to leadership skills. With the right approach from government, however, 2020 could prove a turning point.

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Tej Parikh is Chief Economist at the Institute of Directors.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.