The UK economy has two major weaknesses – low growth and low productivity. Jeremy Hunt may have billed his latest prescriptions as a ‘Budget for Growth’. Sadly, they are nothing of the kind.
Take growth. The economy is set to contract slightly this year before returning to anaemic levels of expansion of around 2% over the next four years. This is a continuation of a depressing trend stretching all the way back to the global financial crisis of 2007-8. Growth rates have halved over the past 15 years.
And growth rates matter. If the UK GDP per person had grown as rapidly in the 15 years after 2007 as it did in the 27 years after 1980, everyone in the country would be over £10,000 a year better off in real terms.
More recent performance is no better. Britain is the only G7 country not to have returned to levels of output seen before the Covid pandemic, albeit we are outperforming most on many measures.
But despite this dire track record and gloomy forecasts, heralding the biggest slump in living standards since the mid-1950s, the Chancellor set his face against the kind of tax cuts we need to get business moving again. Against the grey clouds of sluggish growth, Mr Hunt is pressing ahead with his plans to raise the level of corporation tax to 25% – twice the level of Ireland, which has snaffled up AstraZeneca’s latest £320m new factory.
He seems impervious to research showing that former Chancellor George Osborne’s prolonged cuts in corporation tax almost doubled the revenue raised in levies on business profits. The simple – and well proven message – that low taxes stimulate business expansion and thereby lead to increases tax revenues seems lost on the Treasury. The ultimate cost of this will be borne by shareholders ( lower pensions), employees (fewer jobs and lower wages) and customers ( higher prices).
Our record on productivity is even worse. Annual productivity growth is only 0.3% per year in the decade after the financial crisis. This is a period of growth stagnation more prolonged than any since the 1890s. This lack of growth has profound implications for overall UK living standards and wages.
Growth in output per hour has remained stubbornly below 2% since the crash. This stands in stark contrast to the average growth levels that prevailed between 1998 and 2008, which were most commonly between 2-4% per year.
The UK was the highest European economy for productivity in 1960. Since then, it has fallen behind rival economies. In 2016, GDP per hour worked was an astonishing 35% higher in Germany than in Britain. Moreover, productivity in the UK would be 25% higher if it had continued on its pre-crisis trend. Output per hour was no higher in 2020 than it was in 2008.
So what is to be done?
Tax cuts and deregulation aimed at decoupling the UK from stifling EU restrictions are part of the answer. The productivity puzzle is harder to crack. But a revival in manufacturing, now only a derisory 9% of the UK economy would be a good place to start – not least because unlike the service sector, investment in new plant and machinery more readily triggers a step-change in output per worker.
And there is one other area where there is scope for significant productivity gains. Like it or not (and in some industries I don’t much like it), working from home is here to stay. Surveys show that significant numbers of people (especially in white collar jobs) are WFH at least some of the week.
Yet many of them experience a frustrating time stemming from relying on consumer broadband connections never intended to underpin the extra demands of a business environment.
I have seen analysis from the tech company Actual Experience that digital problems surrounding working from home costs the UK as much as £60bn in lost output.
There is an easy solution to this problem. Currently, companies cannot install business quality broadband in employees’ homes without their staff incurring tax penalties that make the proposition unattractive. One small tweak to the tax regime could unlock the equivalent of 3% of the UK’s GDP – there is no reason not to embrace this opportunity.
Productivity is an area that is crucial area to improving the UK economy – why are we not taking advantage? Why are we not demonstrating ourselves to be the flexible business friendly nation that we could be. The nation that many of us voted to be way back in 2016. There is nothing stopping us and our government from taking a positive step like this to improve productivity and reduce unnecessary tax burdens.
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