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Spectator Briefing

The problem with Britain’s productivity

8 January 2018

11:59 AM

8 January 2018

11:59 AM

Britain has a productivity problem – it lags behind Germany, France and the US, even Italy. But what, if anything, do we need to do about it?

Over time, says economist Gerard Lyons, productive economies outperform less productive ones, but productivity statistics are not everything. Unskilled people who in Britain are working in less productive sectors of the economy would not have a job at all if they lived in France. There, productivity figures are high – but so too is unemployment. Yet those unskilled workers act as a drag on Britain’s productivity figures. However, Britain can improve its productivity, and therefore its overall economic performance, by moving into higher quality areas of the economy. The problem is that the UK has the lowest investment, relative to GDP, of any G7 country – something which has been the case for the past 25 years.

There was a time prior to that when Britain seemed to be taking a different route – in the 1980s we expected rapid automation, bringing high productivity but fewer jobs. Yet the incentive to invest in automation has been lowered thanks to arrival of cheap Labour from Eastern Europe. Transport secretary Chris Grayling recalls a conversation with the logistics director of a large retailer who was concerned about the effect of Brexit on his ability to employ staff from Eastern Europe. It emerged that the firm could have automated its warehouse but had decided not to because of the ease of employing cheap labour.

Whenever Britain’s productivity record is mentioned, discussion of infrastructure investment is never far behind. Is better infrastructure a key to improving productivity? The government certainly seems to think so. Transport is one of the main recipients of the £23 billion National Productivity Investment Fund announced by Philip Hammond in his spring Budget. Not everyone, however, is convinced whether money spent on transport is necessarily going to increase productivity – or whether it is being misspent on vanity projects such as HS2. Chris Grayling defends the high speed rail project, arguing that it is as much about capacity as speed, and will provide an extra 16,000 commuter seats at peak. He also draws attention to the money being spent on local road improvements – £345 million of schemes were announced in October. Improving access to ports, such as to Heysham in Lancashire, via a newly-completed link road from the M6, is a priority.

But infrastructure isn’t just about transport, says Adam Marshall, Director-General of the British Chambers of Commerce. One of the biggest impediments to doing business is poor mobile phone reception, both for internet and voice calls. It doesn’t work well in many parts of the country, which might require having to drive 10 miles before you can get a signal good enough to do business. The Sheffield Advanced Manufacturing Park had to wait an extra two years for superfast broadband, when it could have been connected at the same time as a nearby housing estate.

One of the problems, says Andrew Lewer, MP for Northampton South and former MEP, is that politicians often act like white goods salesmen who want always to sell you something new rather than repair what you already have. It is the big new projects which tend to suck money out of upgrading existing networks and facilities. There is also frequent criticism of poorly-linked up infrastructure planning. Crossrail, for example, will run 200 metres away from London City Airport – and yet no station is planned there, although the airport is confident that a new station could be added to the network after Crossrail opens in 2019.

There are good stories of public and good stories of private investment. Manchester Airport, for example, is owned by local authorities in the area, while London City Airport is a successful private story – and is embarking an expansion programme which will see flight movements from 80,000 to 111,000 and accommodate 6.5m passengers by 2022, according to the airports new CEO, Robert Sinclair. The project includes digital air traffic control, which will in future be carried out off-site in Swanwick, Hampshire, as well as new aircraft stands and an expanded terminal. But there are some important ways in which the government could fund increased investment in infrastructure. It could emulate Singapore and South Korea, where authorities grant themselves planning permission for land, and use the uplift in value to fund infrastructure. The government could also issue infrastructure bonds, allowing the public to invest directly in public projects.

There is a problem with the latter, though, says Chris Grayling. In order to pay the interest on infrastructure bonds you need a revenue stream. In some cases, such as airports, airlines can provide the necessary revenues. Roads, too, could be funded through tolls, but that would be a big step for British motorists who are used to being able to drive without paying tolls. As for railways, they are unlikely to pay for themselves through revenue alone.

Hanging above all infrastructure projects is the issue of planning delays. The third runway at Heathrow has been talked about for 15 years, and still not a single yard of concrete has been laid. According to Andrew Lewer, time was wasted on a beauty contest between Heathrow and Gatwick when it was obvious which should be chosen. From his time working at City Hall under Mayor Boris Johnson he learned that ‘regional airports in the UK all use Schiphol and if Gatwick expanded they would all still use Schiphol but if Heathrow expanded they would use Heathrow.’

For London City Airport to obtain planning permission for its expansion – which was for new infrastructure, not a new runway – it took four years and cost £13 million. That, however, is the cost of living in a democratic country which respects the rights of individuals. Britain is the second most densely populated country in Europe, making it politically difficult to execute any infrastructure project without upsetting large numbers of people. The planning system is not going to be weakened. It is one thing to admire the speed at which China builds its infrastructure, says Grayling, ‘but I wouldn’t want to live there.’

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