What Should the UK Budget Do to Boost Productivity?

By Nigel Driffield, Professor of International Business & Deputy Pro Vice Chancellor for Regional Engagement at Warwick Business School and Lead of the Midlands Productivity Forum

If the UK Government is serious about raising long-term productivity, the Budget should move beyond making short-term tax changes and address the structural weaknesses highlighted by the research of Jun Du, Philip McCann and myself. Our work suggests that productivity growth depends on three interconnected priorities: attracting transformational investment, strengthening business capabilities and exports, and reducing regional economic disparities.

Attracting Transformational Investment

If the government is to deliver its industrial strategy, then one needs to realise than many of the “IS8” sectors will require foreign technology for their development. The current geopolitical environment renders this a challenge, as does Brexit. However, what we can do is align our industrial strategy with our strategy for inward investment. The first suggestion therefore is for the Budget to focus on attracting transformational foreign direct investment (FDI) and align this with skills development, and support for local clusters and supply chains.

Rather than simply maximising the number of inward investment projects, this will be a step towards the goal of “growth in every postcode”. My research has found that not all FDI generates the same productivity benefits, with the greatest gains coming from investments that bring advanced technologies, high-value activities, skilled jobs, and strong links with local firms. Policy should encourage investment that increases local productive capacity and creates spillovers into regional supply chains. This requires targeted support for research-intensive industries, expansion of investment incentives linked to innovation, and stronger partnerships between multinational firms, universities, and local businesses.

Building Regional Absorptive Capacity

Second, the Budget should invest more heavily in the absorptive capacity of regions. If local firms are to benefit from investment, they need skills, management capabilities, and technological sophistication. Productivity gains arise when workers, suppliers, and local businesses are able to learn from and collaborate with incoming firms. Therefore, increased funding for technical education, lifelong learning, apprenticeships, and business innovation support should accompany any inward investment strategy.

Strengthening Firm Performance and Export Capability

Third, drawing on the work of Jun Du, the Government should support productivity through policies that improve firm-level performance and export capability. Du’s research has repeatedly demonstrated that more productive firms are more likely to export, and that participation in international markets can drive productivity improvements through competition, innovation, and knowledge acquisition. The Budget should expand export finance, simplify trade procedures for small and medium-sized enterprises, and provide greater support for firms seeking to enter overseas markets. Policies that encourage digital adoption, management upgrading, and innovation within SMEs would also help spread productivity gains beyond a small number of frontier firms.

Tackling Regional Productivity Gaps

Fourth, the Budget should address the UK’s persistent regional productivity gaps, a central theme of Philip McCann‘s work. McCann argues that for an advanced country, the UK’s geographical economy is remarkably unbalanced. Excessive economic concentration in London and the South East has coincided with weak productivity growth across many towns, cities, and regions. Increases in national spending are unlikely to reduce that gap as long as resources continue to be allocated centrally and uniformly. The Budget should commit to genuine fiscal and economic devolution, giving regional and local institutions greater control over investment priorities, skills programmes, and infrastructure spending.

Relatedly, infrastructure investment should be targeted at improving connectivity. McCann’s analysis suggests that productivity is enhanced when firms can access larger markets for labour and customers, and diverse knowledge networks. Transport, digital infrastructure, and innovation ecosystems should therefore be prioritised in places with the greatest potential for productivity catch-up rather than concentrated in areas that are already prosperous.

Creating a Long-Term Productivity Strategy

More generally, the evidence points to a need for a more coherent industrial strategy, and a more significant role for the Industrial Strategy Advisory Council. The UK has often suffered from short funding cycles and fragmented institutional arrangements, a situation that has not been improved by recent political instability. A successful productivity strategy requires long-term commitments to innovation, skills, infrastructure, and regional development. The Budget should therefore provide multi-year funding settlements for research and development, strengthen university-industry collaboration, and create stable policy frameworks that encourage firms to undertake long-term investment.

In summary, the UK’s productivity challenge cannot be addressed simply by increasing spending. The conclusion drawn from the research discussed here is that the Budget should focus on attracting transformational investment, raising firm capabilities, supporting exporting and innovation, devolving economic decision making, and reducing regional inequalities. Such a strategy would offer the strongest prospects for sustainable productivity growth and higher living standards across the whole country.