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16 July 2015

Unproductive Growth 

Britain’s Chancellor of the Exchequer, George Osborne, has published a strategic plan that seeks to improve the UK’s anemic 2% average annual productivity growth, which is lower than that of almost every other developed nation. Raising productivity growth to the level of the US, for example, could raise the country’s GDP by 31%, equivalent to £21,000 a year for every household in the UK.

There are many theories why the UK lags its peers, but no question that it does. According to the Bank of England, it is at the bottom of a group comprising Norway, France, Germany, the US, Spain and Italy. Spain heads the group, with the US second and France a clear third.

There are idiosyncratic reasons for the UK’s poor performance. A number of the country’s key sectors – manufacturing, finance, business and professional services, information and communications – experienced very strong productivity growth influenced by increasing globalization during the 1990s.

These sectors were also early beneficiaries of the internet and mobile communications revolution that began at the same time. Since then, the financial sector – a large segment of the UK economy – has seen productivity stifled by new regulation enacted in the wake of the 2008-09 crisis.

The public sector appears to be a drag on productivity, even though countries where the sector is far larger – think France – have higher productivity. Counter-intuitive evidence indicates that budget cuts designed to increase efficiency have in fact made the public sector less productive.

The UK experience shows the complexity of the productivity puzzle. In theory, higher employment and a competitive economy should improve productivity, as it has in the US, but this does not hold true in the UK. Equally, generous holiday entitlement and high unemployment suggests poor productivity, but this has not been the case in France. Whether Osborne’s Productivity Plan can solve the conundrum is another matter.