United Kingdom: Productivity — House of Lords, 2015-09-08
Topic: Macroeconomics
Sheila Masters (Conservative, Centre-right): My Lords, I am delighted to be spending this evening debating the productivity report because I have little interest in football and even less in cricket The productivity gap is not a new issue and it is not surprising, therefore, that the Government’s Fixing the Foundations report contains no startling new insights. It is a modest but sensible approach to raising productivity levels. In particular, I commend the Government for focusing on what they can do to liberate the productive potential of our economy. With the exception of the public sector, to which I shall return later, the Government should be an enabler rather than a doer The country absolutely does not need a dirigiste industrial strategy and the Government have wisely avoided that elephant trap. With that in mind, I am wary of the proposed revised national infrastructure plan. I am particularly concerned that an obsession with major infrastructure projects such as HS2 will do more harm than good. That particular project will certainly offer no productivity enhancement—at least for the first £50 billion or so of expenditure, which will shave only a few minutes off the travelling time to Birmingham. I do not want to spend a long time on the rather dry subject of the measurement of productivity because I do not believe that it should detract from the directional need to raise UK productivity. But as my noble friend the Minister said, it is clear that there are issues about how we calculate productivity and understand the figures that emerge from the statisticians. The Bank of England’s analysis of the productivity puzzle last year highlighted some of the problems. We are a service-based economy and there are known problems with capturing service output accurately. Many have pointed to the impact of technology, which we can see with our eyes but not in the statistics. This includes measuring the change in quality of output that technology delivers, as well as trying to understand the time lags between innovation and the visibility of productivity benefits in the statistics Your Lordships would expect an accountant to say that we really must have numbers that we can rely on, and for that reason I certainly welcome the appointment of Sir Charles Bean to lead the independent review of national statistics, which my noble friend the Minister has already referred to. There are many technical challenges in productivity measurement; it is also clear that all is not well at the ONS. I certainly hope that we can see some improvements I would like to touch on three areas covered in the Fixing the Foundations report where the Government should perhaps think further. The first is taxation. The Budget announced a path to an 18% corporate tax rate, which is a fantastic environment for existing businesses and for encouraging inward investment. The new business tax road map next year will reinforce this positive environment but being a low-tax economy needs more than low corporate tax rates. The 45% rate of personal tax, or 47% if you are in employment, is too high. The UK is near the bottom of the G20 in terms of taxes paid by high earners. High tax rates act as a barrier to high savings. They disincentivise wealth creation and discourage highly mobile international talent. The Government should give this a higher priority Secondly, I applaud what the Government have been doing to facilitate the development of fracking in the UK and to call a halt to some of the most inefficient renewable subsidies. But energy costs remain a huge concern both for households and for energy-intensive industries. Even after the changes announced in July, environmental levies will still be more than £4 billion this year and will more than double by 2020-21. These levies are borne by energy consumers, including our productive industries. The Government need to look again at whether the costs imposed in the name of climate change represent value for money for our economy or another drag on the cost base and competitiveness of British industry Thirdly, the Government recognise that competitive markets with a minimum of regulation are essential for productivity, and I applaud the actions that have already been taken on deregulation. But the fact remains that there is a considerable regulatory burden on businesses in the UK and that this bears down disproportionately on small and medium-sized enterprises. Exactly how much regulation costs is extremely difficult to pin down; the most recent estimate by the Institute of Directors was £80 billion a year. The amount attributable to our membership of the EU is also tricky to establish, with some estimates of up to 80% of regulation being attributable to the EU. That EU-derived regulation applies to the whole of the business sector, even though a minority is actually involved in exporting to Europe. The Government are currently pursuing a largely invisible reform agenda within the EU, ahead of the referendum. I hope that the Minister will agree that EU reform should include a significantly lower amount of EU-mandated regulation. Can he assure noble Lords that the Government are indeed pursuing this I said earlier that I would return to the public sector, which accounts for around a fifth of our GDP and so cannot be ignored in the pursuit of a more productive UK. Here the picture is even more difficult to establish, with complex measurement issues and considerable delays in getting data. The latest ONS statistics on public sector productivity are for the 15 years to 2012. They show 13 years, broadly, of flatlining productivity but with a surprising average of 1.8% productivity gains in the final two years. More recent estimates from sources other than the ONS for the NHS, which is the largest single element of public sector output, suggest that productivity fell by 1% in each of the following two years, so this is not necessarily an encouraging background. I invite the Minister to say what productivity gains the Government expect to get from the public sector over this current Parliament, and in particular in health and education. The Fixing the Foundations report gave only the barest of outlines of the Government’s approach to productivity in the public sector. It is certainly the case that productivity in the public sector does not just happen. It has to be managed with determination and consistency of purpose, so I hope the Minister can assure the House that there are definitive plans which will deliver the Government’s aims I hope that the Government will remember two things in pursuing productivity. First, they should set the framework for business but not interfere beyond that and, secondly, since they are accountable for public sector productivity, they should be managing that with great purpose. If the Government can deliver these two things, we may be quietly confident that our future productivity performance will improve.