The Productivity Agenda Needs to be Joined Up and Scaled Up Across Regions
By Bart van Ark and Andy Westwood
There is an urgent need for government at all levels to adopt a place-based perspective on productivity growth. Many UK regions have such low productivity levels that single interventions, even significant ones, won’t suffice. A systemic approach to pro-productivity policies requires them to be joined up and scaled up.
Boosting productivity growth is a top priority for many countries’ economic policies. Since the Global Financial Crisis, numerous OECD countries, including the UK, have faced slower productivity growth rates. The government’s focus on growth, supported by a renewed industrial strategy, aims to reverse this trend. New business opportunities, investments, technologies, and ways of working all feed into the many opportunities to revive productivity growth. However, current projections suggest little improvement in productivity growth trends in the medium term, not in the UK nor in most other OECD countries. Together with, at best, modest increases in total working hours, the growth challenge for the UK economy remains significant.
So, what needs to be done? It’s a common saying that there is no silver bullet to revive productivity growth; instead, many pieces are needed to solve the “productivity puzzle.” In November 2023, The Productivity Institute’s National Productivity Agenda highlights three main areas of focus: 1) raising public and private investment; 2) strengthening the diffusion of productivity-enhancing practices between firms and places; 3) tackling institutional fragmentation and joining up policies at national and regional levels.
Regarding the first priority, the government has acknowledged the need for drastic action to reverse the investment slump. Despite criticism, the latest Budget from October 2024 shows it is serious in addressing this. The Spending Review will reveal the extent of the government’s capability to deliver its part, but it will take time for investments to translate into sustained faster productivity growth, especially in the public sector. On the need to improve technology diffusion, there is little evidence of significant new policy initiatives as yet. We are also concerned that the government is not sufficiently geared to joining up and scaling up pro-productivity policies across regions and devolved nations in the UK.
The regional challenges are a key focus of The Productivity Institute’s second National Productivity Week from 27-31 January. The latest work by our Productivity Forums, summarised in our Regional Productivity Agenda, updates the analysis of productivity trends and drivers for the nine English regions and the three devolved nations. It shows that there has been some narrowing of regional productivity gaps in recent years, which is partly due to improved performance in regions like the South East, North West, North East, and Northern Ireland, and partly due to a decline in productivity in London, a trend exacerbated by the pandemic.
What do we mean by better joining up? Pro-productivity policies span a wide range of domains, requiring an integrated agenda. The government’s green paper on Industrial Strategy does recognise the need to join up focused investment plans by sector with broader initiatives around innovation, skills, trade, and FDI. However a robust coordination framework is urgently needed to better coordinate policies across departments. Otherwise we’ll waste efforts because of policy trade-offs and disagreements, losing the opportunities to leverage complementarities.
This coordination task should not be solely managed through the Industrial Strategy, which is overseen by the Department of Business and Trade (DBT) and currently relies heavily on the Treasury (HMT) as the main additional driver. It needs to include other departments which are key to driving the productivity agenda, including the Department for Science, Innovation and Technology (DSIT), Department for Education (DfE), and the Ministry of Housing, Communities and Local Government (MHCLG), with each needing to more effectively prioritise their own resources and efforts. Stronger leadership from No 10 and the Cabinet Office will also be critical in effectively driving and aligning the various policy domains.
By scaling up, we mean that the government needs to strengthen devolved decision-making mechanisms to effectively develop pro-productivity policies at the regional level. The UK, particularly England, faces challenges in implementing pro-productivity policies at sufficient scale across various policy domains like skills, innovation, trade, investment, competition, transport, and housing. This is partly due to a continuing lack of co-ordination between national and local levels. Despite the welcome reforms set out in MHCLG’s devolution white paper, there remain too many disconnections and disagreements including over spatial planning, infrastructure investment, human capital and innovation.
Implementing the industrial strategy and the broader growth mission also requires making strategic choices between different places and sectors. This might involve prioritising some areas over others, depending on the presence of specific clusters and their growth potential. Efforts may need to focus on Investment Zones, such as Atom Valley and the city centre in Greater Manchester as well as those in the West Midlands, West Yorkshire and Teesside; or, AI Growth Zones such as Culham near Oxford could be a point of focus. Government should also aim to align investment in housing and new towns with areas most in need of human capital, such as those in second-tier cities or places in most need of technicians and scientists such as Cambridge.
Currently, the greatest need for MCAs is to tailor policies and initiatives to better meet local needs and priorities. Relationships between key city regions and some Whitehall departments remain suboptimal, characterised by longstanding centralisation and policy churn. MCAs should be empowered to translate the national industrial strategy and growth mission into effective local investment and growth plans, with ample authority and funding to implement skills, innovation, and infrastructure agendas. MCAs should also seek to coordinate planning processes and institutionalise capacity at regional levels. Collaboration between neighbouring MCAs provides two benefits: learning from best practices and scaling up where possible. This will bring us closer to an optimal economic area perspective.
Finally, the local and regional conversation on productivity needs to be better developed to support the national narrative for better and faster productivity growth. This should involve coordinated efforts across individuals, businesses, and policymakers to address productivity challenges and improve public service provision at the place-based level. This approach will ensure that all regions and devolved nations can effectively address their unique challenges and capitalise on emerging opportunities.