21 March 2016

The chancellor’s productivity plan isn’t working

By Izzy Hatfield

Last week’s budget confirms that productivity growth is lower than forecast, suggesting that the chancellor’s ‘productivity plan’, announced at the budget last July, isn’t working. Projections for output per hour work have been downgraded, meaning that the OBR has revised GDP growth forecasts by around 0.3 percentage points a year for the rest of the decade.

As a result additional measures to boost the UK’s ailing productivity have been pencilled in, including cuts to business rates and investment in infrastructure. But tax cuts and new roads aren’t enough to support Britain’s businesses and the chancellor should and could be doing more.

The National Living Wage – a higher minimum wage for over 25s – comes into force next month, bringing a welcome pay rise to millions of workers in the UK. With the right support, this could provide the incentive businesses need to invest in their workforces and their equipment in order to boost productivity. Higher productivity will make the chancellor’s central aim of achieving a budget surplus by the end of this parliament much easier, as it will feed through into higher tax receipts.

The path to higher productivity is not necessarily smooth, however, and the business sectors facing the greatest uplift to their wage bills – retail, administrative services and accommodation and food – have responded with alarm at the hike in the minimum wage.

IPPR analysis shows that there is considerable scope for raising productivity in these sectors. The low-wage sectors employ a third of our workforce and are roughly a third less productive than the economy as a whole. In neighbouring economies – Belgium, France, Germany and the Netherlands –the gap between productivity in these sectors and the whole economy is much smaller.

Our calculations suggest that if the UK low-wage sectors were as productive as the average in these countries then we could catch up more than two thirds of our average overall productivity gap with these countries.

This shows that the UK’s low-wage sectors could drive productivity growth in the UK. To catch up with other western economies doesn’t necessarily mean developing new technologies and processes but merely encouraging adoption of existing best practices. The chancellor can play a role in ensuring that the National Living Wage delivers higher productivity, better economic growth and better jobs by encouraging businesses to invest in productivity boosting measures.

Adopting new processes, investing in firm training and redesigning jobs could go a long way to helping businesses in low-wage sectors to increase productivity and pay a higher wage. The chancellor has announced a number of changes directed at small businesses including cuts to business rates and capital gains tax. While these tax changes will offset some of the costs of the National Living Wage, the chancellor needs to think about how to help move British businesses on to a higher-productivity path.

The National Living Wage will begin to generate a fiscal windfall when it comes into force next month. We propose this money should be reinvested in to a number of business support measures targeted at the sectors who will be most impacted by the costs of the National Living Wage. This will help businesses to raise their productivity and allow the chancellor to report better productivity forecasts at his next budget.

Izzy Hatfield is IPPR research fellow specialising in economic policy. She tweets at @izzyhatfield