Budget 2021: Productivity growth the key to creating sustained growth

After the March 2021 budget announcement, Managing Director of the Productivity Institute Professor Bart Van Ark addresses how productivity can support the recovery and what the budget should really have focused on.

“The recovery from COVID-19 and the challenges posed by Brexit require a National Growth and Recovery Plan, to be implemented over the long run, for a more robust and resilient economy”

The UK government’s March Budget statement by the Chancellor of the Exchequer aims to set out a fiscal roadmap towards economic recovery. Understandably the budget plan is dominated by the need to protect and support businesses, jobs and livelihoods as we emerge from the COVID-19 crisis.
As much as the rescue of jobs and businesses across the nation is the first order of business, broad-based productivity growth is ultimately the key to creating the foundations for a sustained growth path ahead.

What does the UK economy need?

While helpful in the short-term, the proposed measures in the Budget lack the scale of ambition required to address the UK’s long-term shortfall in productivity growth and the call for strengthening the foundations for a more robust and resilient economy. We need to scale up efforts to address the decades-long underinvestment in human, organization and knowledge capital, tackle some of the largest disparities in growth potential across regions, and strengthen the institutions and policies that safeguard a long-term commitment to improving productivity and well-being.

We need a broad and long-term National Growth and Recovery Plan to create more productive and rewarding jobs. This plan needs to address the funding, policies and institutions needed to make and implement the investments. Regions and devolved nations should provide input in developing those plans and help them come to fruition within the context of the needs in different places.

A National Growth and Recovery Plan with productive jobs at the centre should be able to pay for itself. If the rise in output per hour over the next five years could be boosted by 1 percent point from 0.5 to 1.5 percent per year, it would create an additional £22 billion in terms of GDP or about £7,500 per household annually. It’s the best and most straightforward way to get the economy back on track and create a virtuous cycle of growth and inclusion that be sustained over time.

Can new policies provide new opportunities for businesses?

While lacking ambition, the Budget plan does provide various positive openings that could be supportive of a productivity-driven recovery:

An extension of the Coronavirus Job Support Scheme to the end of September will not only protect jobs and incomes, but also help business to get over the significant productivity challenges in the year ahead. Any short-term productivity increase from the return of demand coming out of lockdown is likely to be short-lived.

The usual cleansing effect of less productive companies exiting and providing room to new and more productive companies may not materialise. Companies that go under because of liquidity or solvency issues are not necessarily the ones who are the least productive. Therefore it is important to unwind COVID-19 support schemes for workers and firms gradually to avoid volatile and mostly negative productivity effects.

The extension of the Apprenticeship hiring incentive in England to September 2021 and the increase of grants to £3,000, £7 million for new flexi-job apprenticeships that will enable apprentices to work for a number of different employers in the same sector, and an additional £126 million for 40,000 more traineeships across all sectors. Its success will critically depend on linking these initiatives to regional and local collaborations between business, schools and colleges, and government.

A “Help to Grow” plan to provide small businesses with MBA-style management training programmes can help tackle deficiencies in management practices which have been identified as a major cause of productivity shortfalls at the lower end of the productivity distribution. The programme also comes with facilities for discounted digital software and expert technology advice. This programme needs to be rolled out in close partnership with educational institutions at regional level.

The funding of a National Infrastructure Bank by an initial £12 billion in capital investment is a good start of a longer-term commitment to resolving critical bottlenecks. But this will not by itself eliminate the capital gaps we face. More clarity is needed on the design of this new institution, in particular the balancing of private and public investments, and the choice between grand projects and smaller shovel-ready projects. The latter are more likely to quickly resolve existing regional bottlenecks in infrastructure and unlock potential productivity gains.

The introduction of green savings bonds, while mostly focused on investment in offshore wind (£20 million) and low storage carbon (£68 million), also makes available a modest £4 million to boost production of green energy crops. This could be the beginning of a bigger programme facilitating the greening of products and services across the economy.