Productivity in the United Kingdom and the British Economy Beyond Austerity
This Library Note provides background information on the approach set out in the Conservative Party manifesto to economic and fiscal policy and summarises recent forecasts for the economy. In addition, it provides background information on the UK’s productivity performance and summarises the main elements of, and both political and other reaction to, the Government’s productivity plan. It has been written to support the debates in the House of Lords on the subjects of the Government’s productivity plan and the ‘British economy beyond austerity’ scheduled to take place on 8 and 10 September 2015, respectively.
The Government has stressed the importance it attaches to both fiscal consolidation and improving productivity in the UK economy. It has stated that both eliminating the deficit and improving productivity is a priority for the next five years and that encouraging major change in the UK’s productivity is a primary objective of the Government’s legislative programme.
The Summer Budget 2015 noted that the UK was the fastest growing economy in the G7 in 2014 and was forecast by the OECD to be the fastest again in 2015. The Secretary-General of the OECD, Angel Gurría, has stated that although this represents significant progress for the UK economy, boosting productivity is key to making the recovery durable and ensuring that the benefits are shared widely. In recent history, UK labour productivity has grown by around 2 percent per annum. However, since the 2008–09 recession it has stagnated, and in Q1 2015 was still 0.8 percent below the pre-recession peak level of seven years earlier (in Q1 2007). The Office for National Statistics (ONS) has stated that this absence of productivity growth in the seven years since 2007 is unprecedented in the post-war period. It has been estimated that output per hour worked in the UK is now more than 15 percent below where it would have been if the pre-crisis trend in productivity growth had continued.
It has been suggested that a ‘productivity gap’ exists both within the UK and between the UK and the country’s G7 peers. Regarding the domestic gap, London has higher levels of productivity than any other nation or region in the UK; almost 29 percent higher than the UK average in 2013. Wales and Northern Ireland have the lowest levels of productivity; just over 83 and 82 percent, respectively, of the UK average in 2013. Also in that year, according to ONS data, half of the UK’s 12 regions and nations had higher levels of productivity than they did in 2007 relative to the UK as a whole, with the largest relative rise between 2007 and 2013 being in Scotland and the largest relative fall being in Yorkshire and the Humber.
(Office for National Statistics, ‘Labour Productivity, Q1 2015’, 1 July 2015)
Regarding the international gap, in the Summer Budget 2015 document the Government cited ONS data which showed that output per hour in the UK was behind that of Germany, France and the United States, and was 17 percent below the average for the major G7 advanced economies in 2013—the widest gap since 1992. The UK was ranked sixth out of the G7 countries in 2013, based on real GDP per hour worked (the US having the highest GDP per hour worked and Japan the lowest). In addition, UK output per hour was also nine percentage points lower than Spain and considerably lower than productivity in Ireland, Belgium and the Netherlands in 2013.
(Office for National Statistics, ‘International Comparisons of Productivity, 2013—Final Estimates’, 20 February 2015. Data for 2007 included for comparison)
To address this issue, the Government published its productivity plan, Fixing the Foundations: Creating a More Prosperous Nation, on 10 July 2015. The plan outlined reforms and measures in 15 ‘key areas’ built around two pillars—encouraging long-term investment and promoting a dynamic economy.