9 July 2020

In the rubble of the pandemic lies a solution to the UK’s productivity woes

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When the pandemic hit, Rishi Sunak took radical action to freeze the economy into place, protecting jobs and keeping businesses afloat. It was the right response at the right time and won him praise from across the political spectrum. As I argued at the time, this isn’t a normal recession. Many good and otherwise profitable businesses were hit hard. The usual logic against bailouts, that they incentivise bad behaviour and lock capital in unproductive uses, simply didn’t apply.

As restrictions have been lifted, we are now entering the great defrosting. We are still not back to normal. Social distancing is imposing major costs upon businesses as they reopen and consumers are not yet fully confident to go out and spend.

It was in this context that Sunak set out his ‘Plan for Jobs’. It would be wrong to characterise it as simply old-school Keynesian stimulus spending. As much as the aim was to boost demand and hiring, it was also to keep vulnerable businesses afloat as we wait for a vaccine or effective treatments. In almost any other case, the unfortunately named ‘Eat Out to Help Out’ discount would have been inappropriate. The problem is less aggregate demand and more sector-specific shortfalls.

One thing is clear – it can’t last. We will soon have to move from temporary to permanent measures, or else risk fiscal ruin. The Chancellor recognises this and has foreshadowed a ‘Rebuild’ phase for the Autumn. It’s welcome then that he’s already talking about long-term regulatory reforms such as making it easier to build homes in the places people want to live.

Before the crisis hit, the economy was not in strong shape. Record levels of employment aside, since the financial crisis productivity has been stagnant. If productivity had grown at its pre-crisis trend, the average worker would now earn £5,000 more a year. This is why we can’t freeze our economy in place forever. At some point, we will need to return to the process of creative destruction and adaptation.

Strangely, the crisis has highlighted part of the solution to the UK’s long-run productivity woes. Many SMEs will have started selling online or pivoted to delivery, while offices will have become remote. Even in the extremely challenging trading conditions of the lockdown, SMEs will have spotted new opportunities. As life returns to normal, some businesses will find remote working cost-effective. For others, the shift online was overdue and is here to stay.

Two new reports published this week highlight the opportunity to tackle our productivity problems through digital adoption. In the Centre for Policy Studies Platforms for Growth, Eamonn Ives busts the myth that tech platforms like Amazon and Google have been bad news for small business.

My own report Upgrade: Closing the digital gap and lifting productivity for SMEs, commissioned by digital accountancy platform Xero, highlights the potential to raise wages through increased digital adoption among the UK’s SMEs. An analysis of the Enterprise Research Centre’s Micro Business Britain survey finds that the 4.09m workers employed by micro businesses (businesses with fewer than 10 employees) would receive a £4,050 average productivity boost, if digital adoption rates among micro-businesses were doubled. To put that in context, it would restore four-fifths of lost productivity growth since the financial crisis, enabling businesses to bounce back faster post-lockdown.

There is significant potential to boost SME uptake. EU data reveals the UK has a particularly large proportion of businesses (38%) with very low levels of digital adoption. By contrast, in Sweden and the Netherlands just over a fifth (23%) of firms have very low levels of digital adoption. In Finland, just one in ten (11%) have low levels of adoption.

On what to do about it, there is a lot of agreement between the two reports. Upgrading the UK’s SMEs will require making it easier to finance digitisation by modernising the R&D tax credit’s 70’s style definition of research. It will also mean making it easier for workers to self-fund training and learn new digital skills. For instance, at the moment a graphic designer cannot claim tax relief for taking a course in digital marketing, even though it could lead to new business in the future.

It’s also important to make it easier for businesses to identify digital opportunities. Advice serves an important role, but the Government must not overstep its mark. Businesses are more likely to trust other businesses than politicians who describe working at the corporate social responsibility department of a PR agency as ‘the coalface’. That’s why it’s important to outsource advice to trusted business organisations. Funding is useful, but delivery should be left to the real experts.

At the Summer Economic Update, Rishi took the necessary steps to stem the tide of job losses. To borrow a phrase from the PM, his focus must now be to “rebuild, rebuild, rebuild.”

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Sam Dumitriu is Research Director at The Entrepreneurs Network.

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