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A Prospectus for Boosting Productivity

    It is uncontroversial that the UK has been burdened with low productivity growth. In fact, productivity only returned to its pre-2008 level in the second quarter of 2016, meaning productivity growth has been 17% below the pre-2008 trend. This has important repercussions, because productivity is a vital part of the four metrics underlying economic growth.

    These four metrics are annual hours worked per capita, the skill level of the workforce, the capital investment per worker and the output per unit of labour and capital: the latter three are all part of productivity. Without substantial increases in hours worked per capita, low productivity leads to low growth, low growth leads to stagnant incomes and stagnant incomes lead to social tensions. How to remedy this?

    Improvements in the skill level of the labour force are unlikely to be dramatic, as drivers such as universal education and the dramatic increase in university attendance by men and then women, are not going to be repeated. In 2015 UCAS showed that 42% of English young people are in higher education by 19, and universities’ UK has shown that the growth of student numbers has slowed dramatically, despite substantially more youths from poorer backgrounds attending university.

    Between 2011 and 2013 total student numbers actually fell; as many students already take degrees with low or negative returns, those numbers may well have reached a steady state. The growth of technical colleges and apprenticeships does improve the labour force that doesn’t attend university, but they can only affect so much. A rapid improvement of the skill level of our workforce, therefore, seems unlikely.

    Output per unit of labour or capital, meanwhile, is increased by innovation. Waiting for innovations to happen is all good and well, but it is not a viable policy to boost growth. R&D spending can help, but as Jaffe and Le’s 2015 paper for the NBER found, R&D grants are linked with patenting and new product releases, but have a much weaker link with process innovation and any product innovation. As such we cannot rely on R&D subsidies to solve our productivity puzzle.

    That leaves capital investment. As far as investments by the government go, infrastructure tends to yield the best return and the government is making substantial, but in some cases, financially questionable, investments in infrastructure (funds for yet more were unveiled in the Autumn Statement), as the CPS has gone over in a recent report, infrastructure can be a bad investment. The greatest difference than can be made, then, is in improving private investment.

    To boost private sector investment I would suggest replacing the Corporation Tax, a tax on net profits almost universally agreed to be exceptionally economically damaging tax, and one in which workers bear 40% of the burden, with a Dividend Tax. This would mean that when a corporation makes a profit, money would be taxed if it is sent in dividends to shareholders but, not if it is invested, naturally boosting investment in a spectacularly diverse range of areas. It is true that the dividend tax is unlikely to raise as much money for the treasury, but this would be partly balanced by the increased income tax revenues as corporations invest in new jobs and/or higher pay. More important are said new jobs, higher pay, and greater investment that would come of it.

    I would suggest further reducing the costs of investment. This would be done first by slashing tariffs, therefore reducing the cost of goods businesses and people invest in thus, allowing them to invest more. As we will soon be able to forge our own trade policy, it is now possible to pursue this option. A few protected groups would complain, but the small benefits tariffs provide to them are far more than negated by the costs borne by the rest of the country, as prices rise for goods that at any point involve the tariffed item.

    Such a policy would also be achieved by lowering energy prices. The Carbon Price Floor of £18 per tonne acts to shunt up energy prices markedly, as highlighted by Tony Lodge in ‘The Great Green Hangover’, artificially raising operating costs for companies and living costs for people. It should be either cut back to a more reasonable level or done away with completely.

    A combination of these reforms would immensely increase the capital available for investment, and allow that capital to go further. The substantial increase in investment would in turn boost productivity, alleviating our malaise, and boost growth. It would be a great leap towards a more productive, better off Britain.

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    Comments

    Julian Hawksworth - About 400 days ago

    A very good article, being both interesting and informative. In particular, I appreciated the writer's acknowledgment; of our flawed educational system seems to be a factor in stifling the UK's economic growth. I also liked the writer's suggestions, of cutting away at tariffs; and abolishing Corporation Tax (to be replaced with a Dividend Tax - in such a way which would actually help to incentivise investment in a wide range of areas). Crucially, as the writer made clear; Dividend Tax would still be payable upon money - where dividends are sent to shareholders. Indeed, this alternative to Corporation Tax; might also help to reduce the incentive for tax avoidance? Significantly, it is also highlighted, that "workers bear 40% of the burden"; under the current system of Corporation Tax. In recognition, of the UK's problem of the "working poor"; further research into the ramifications of that 40% figure could be worthwhile? This article, even includes some commentary on the UK's; "The Great Green Hangover" (in reference to work by Tony Lodge). When governments are deciding upon economic policies, which impact upon millions of lives; it's crucial not to look at the relevant economic topics in isolation. And, clearly; that seems to be appreciated by the writer? As seems to be the norm, another fine article from The Centre For Policy Studies.

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