United Kingdom: Productivity

Tuesday 8th September 2015 Lords Chamber

Motion to Take Note

19:48

Moved by

[Lord O’Neill of Gatley]

To move that this House takes note of Her Majesty’s Government’s plans to boost productivity in the United Kingdom.

[The Commercial Secretary to the Treasury (Lord O’Neill of Gatley) (Con)]

My Lords, as ever, it is a pleasure to discuss a subject that is so vital to this country’s economic well-being: how we can step up our productivity an additional gear. I cannot resist the temptation also to point out that this debate will be coinciding with the time when, we hope, the one and only Wayne Rooney will break the goal-scoring record for the English national football team. I applaud my noble friends and fellow noble Lords for giving up the time to watch that fun to be with me here.

The extent of the productivity challenge is very well known and something that we have discussed recently. The OBR estimated in 2014 that a high productivity scenario would see public sector debt fall in net terms to 56.7% by the end of this decade, while in an alternative poor productivity scenario, national debt would continue to rise to a level not far shy of 90%. As we all know, the statistics show that the level of our relative productivity is considerably lower than that of many of our G7 competitors. These statistics are well known and have been discussed here often, and I do not wish to go over old ground. However, as I set out in my maiden speech, there are, have been and remain many valid questions about the accuracy of our productivity statistics. Despite that, the fact remains that the UK can do a lot better. Indeed, if we are serious about long-term economic growth, we have to do a lot better. That is no small challenge, but it is a challenge to which we are rising.

At the last Budget, we published a productivity plan setting out precisely how we will improve national productivity. The first way we will do this is by encouraging long-term investment in our economic capital, including infrastructure, skills and knowledge. That means putting in place an even more competitive tax system and sending out a clear message that Britain is open for business. But a nation truly flourishes when it uses the full skills of all its people in all parts of that nation. As I have said previously in this Chamber—notably, just before the Summer Recess—of all the factors that will contribute to delivering a step change in our productivity, perhaps education and skills are the most important.

The previous Government made huge progress in getting people back into work. We now need to think holistically about all the basic, further and higher education that individuals need to contribute more productively in the workforce. We are increasing the number of apprenticeships to 3 million starts this Parliament and, crucially—I repeat, crucially—we are also improving the quality of apprenticeships by putting employers at the heart of paying for and choosing apprenticeship training.

Professional and technical education should provide a clear route to employment and deliver the higher-level skills that employers need. To achieve this, the Government will simplify and streamline the number of qualifications, and create a network of prestigious institutes of technology. This country is home to many of the best universities in the world. We need to make sure that our universities continue to lead the world with high-quality science and innovation, and by sharpening incentives for providing outstanding teaching to university students.

Changes need to be made in the workplace, too, and the Government have been engaging all parts of industry to make sure their voices are heard. I particularly welcome the work of Sir Brendan Barber and ACAS in finding a human solution to the productivity puzzle and, in particular, to how best management practice can provide levers for boosting productivity in the workplace. I have enjoyed some conversations with Sir Brendan and his colleagues and look forward to learning more from them about these important issues.

To ensure that the UK has the right skills base to deliver and maintain world-class infrastructure, a national infrastructure plan for skills will be published shortly. We remain committed to delivering the high-quality infrastructure we need to build and sustain a more productive economy, whether that is our transport system or our digital infrastructure. We have a clear, comprehensive and cross-sector plan for delivering this—the national infrastructure plan—a new version of which is being worked up as I speak. This will build on the progress that has been made in maintaining continuity and stability. It will remain in place until the end of the Parliament, and be supplemented by annual delivery updates. It will continue to be underpinned by an infrastructure pipeline of more than £400 billion of planned public and private investment.

I have set out our plan to encourage long-term investment in economic—and, crucially, human—capital. We also have to promote a dynamic economy, one that encourages innovation and helps resources flow to their most productive use. The productivity plan also sets out how we will liberalise the housing market by reforming our planning system and making more land available for housebuilding. We also need financial services to work better to invest for growth and we have set out plans to promote competition in banking, to free up markets from unnecessary regulation and to open ourselves up even more to international investment. A dynamic workforce is key. The reforms set out in the Budget are important steps towards a higher-pay, lower-welfare society, in which more people can work and progress up the career ladder.

Perhaps the final piece of the picture is making sure that the economy prospers across the UK. I have talked here previously at some length about the importance of strong, interconnected cities beyond the capital. That is one of the major features of highly productive countries elsewhere in the world. The concept of the northern powerhouse—greater investment mixed with wide-ranging devolution—sets out a blueprint for stronger regional growth in the UK. However, devolving powers alone is not sufficient. It is about transferring powers and responsibility to those who know best what will work for them. This will likely be the most effective way to identify and deliver the measures needed to boost the supply side across the country’s regions.

I have been highly encouraged by the dynamism of many city regions and by the local leaders I have met while travelling up and down the country as they bid for greater devolution and greater responsibility. I have been particularly pleased during many such visits in recent weeks. I am sure noble Lords will hear quite a bit more about this topic in the coming days and weeks. The northern powerhouse is a key part of our plans to rebalance the UK economy, but we want to see every part of the country, not just the north, reach its full potential. As the Chancellor’s launch of a rural productivity plan makes clear, productive growth is by no means limited to urban areas. This 10-point plan will boost mobile and digital connectivity in rural areas, support a skilled workforce and create strong conditions for rural business growth.

As has been noted previously in this House, writing a productivity plan is the easy part. Now we have to put it into practice. There is some sign already that headway is being made. On city devolution, and more broadly on devolving powers, the deadline for entering proposals has now passed and we will consider submissions from a number of places, especially those that have strong, credible proposals. Areas are increasingly signing up to the concept that having a devolution deal means that they need to move towards a city region mayor as a single point of accountability to represent the greater responsibility involved in these devolved powers.

BIS has launched a consultation that will pave the way to introducing the levy on large businesses to help fund apprenticeships. The Prime Minister has created a series of implementation task forces, including on housing and exports, to deliver our productivity plan commitments. Government departments will have to report on the key commitments that will be included in their single departmental plan. At the official level, a Treasury director-general has been appointed, who will report directly to me, to oversee the implementation of the productivity plan across Whitehall.

We are also engaging industry and Sir Charlie Mayfield, chairman of the John Lewis Partnership—by coincidence, I met him earlier today—will lead a business-led review of what UK firms can do to raise their productivity. The first output from Charlie’s review is likely to be published later this year. Of course, this is just the start; much more remains to be done. I know that this House will be scrupulous in holding the Government to the implementation of this plan.

There has been some better news recently from the reported productivity statistics, showing some signs that productivity has started to improve. In the first quarter of 2015, output per hour grew by 0.3% compared with the previous quarter. In a long-term historical context, that is of course still very modest, but it puts productivity 1.3% higher than in the same quarter of 2014. That happens to be the fastest annual growth rate since the first quarter of 2012.

That said, we have to be careful in believing that these statistics are necessarily persistent or truly accurate, because, as I and many others have commented tonight and previously, the question of whether these data accurately measure productivity in the true complex, modern, service-based economy remains valid. In this regard, it is worth noting that a number of commentators suggested during the Summer Recess that our productivity data, as well as those of some other nations, perhaps underestimate the actual performance due to growing technological advances and possible overestimation of the so-called price deflators. As many noble Lords know, but to remind them, to examine this in more detail we have established an independent review of economic statistics, launched as part of the Government’s productivity plan.

More recently, other economic indicators have been generally promising, although in some cases there is evidence of modest slackening. Among them all, what is particularly encouraging for the productivity story are signs of accelerating business investment. Business investment increased by 2.9% in the second quarter of this year, up from—the then also quite encouraging, by previous recent trends—2% rise in the first quarter.

In conclusion for now, before I hear the undoubtedly stimulating thoughts of many noble Lords, it would be wrong to assume that productivity can be transformed overnight. Many advanced economies, ourselves included, have historically picked what might be called the low-hanging fruit. Many of the decisions to make a step change need further boldness, political courage and close monitoring to ensure the policies announced are actually implemented. For the biggest long-term gains to occur, we will need to mobilise more consensus and draw from expertise across the political spectrum. The contributions that noble Lords can make to this debate will be particularly welcome.

Stepping up our productivity a gear will be one of the major tasks over the coming years and remains one of the priorities of the Government. Through the publication of the plan, we have made a strong start; the challenge now is to deliver on it. That is what the Government are planning to do. I look forward to our debate and I beg to move.

20:03

[Lord Monks (Lab)]

My Lords, I share the Minister’s football allegiances. I welcome most of the things in the Government’s document, to which he has been speaking, especially the ideas of a training levy and of the northern powerhouse, for which he has particular responsibility.

These worries about British productivity are not recent. They can be dated back to the 1870s by some people, when it was recognised that we were slipping behind the United States and Germany. It has troubled successive Governments since then. The high oil revenues and financial services bonanzas of recent decades took the pressure off, but it is back with a vengeance after the crash of 2008—there are no bonanzas around. Our productivity rates are such that it takes a British worker five days to do what a French worker does in four, which is a pretty stark comparison with a country of a similar size, importance and development. Our productivity problem is caused in part by the problems addressed in the Government’s document and which have been listed by the Minister. However, I want to apply my remarks to other factors that do not get the same prominence in the document.

Take executive pay: poor productivity is to a large extent a consequence of low investment in equipment and skills, and a major cause of that low investment is the incentives governing executive pay, particularly the practice of rewarding short-term success. Since 1990, despite the recent welcome improvements to which the Minister referred, investment in the UK declined from 26% to 17% of GDP. How much a company chooses to invest is, of course, a decision for its managers. The way they approach that decision inevitably depends on how they are rewarded and what their incentives are. Bonuses encourage executives to emphasise the short term, for which they are rewarded, and as a result give less weight to the long term, often despite exhortations to the contrary. Andrew Smithers said in a recent article in the Financial Times:

“Ten years hence, shareholders might rue your decision to cut investment or raise prices”,

but you probably will not be around: you will have taken the money and gone. To raise investment levels we need to change executive pay systems, linking them more to market share and organic growth. These are common criteria in German executive pay systems and in other EU countries comparable to ourselves, all of which have enviable productivity records.

Executive pay is linked to the wider problems of British corporate governance. Our model of capitalism—a word we will perhaps use more and more in the Labour Party in the near future—provides a privileged place for shareholder and shareholder value. As I said, the resulting focus is on short-term results. Some executives I know dream of a generous takeover bid and the windfall that it would provide for them. That dimension of corporate governance being short-term oriented is very important for looking at the productivity problem. It means that there is less emphasis than should be the case on relations in the workplace between employees and management, between unions and employers and generally on ensuring that a place works as a good proper team that is well motivated, well skilled and well equipped.

An excellent recent publication—referred to, I was pleased to hear, by the Minister—by ACAS on productivity highlights some of these factors. In too many British companies, there tends to be a premium on financial engineering as the core competence. The finance function tends to rule: the accountant is king in the decision-making process. It is a bit like making the scorer the captain of the cricket team. Add to this the strengthening view that sees the firm as a contracting unit, with the employment contract no different from other contracts—a market transactional relationship. The result is a growth of non-standard contracts—zero-hours contracts have perhaps been most in the news recently. Self-employment is growing. The Uber kind of employment relationship is also developing in many areas. These are not conducive to high-skilled, high-commitment workplaces. They may work in certain service trades, but they do not work in factories doing difficult things, nor in services that need to be provided consistently to a high quality over many months and years. This is, if you like, the dark side of the much-vaunted flexible labour market.

Indeed, any attempt to rebalance the economy or develop an industrial strategy without taking the workplace centrally into account will end in failure, as too many initiatives have done before. The emerging picture is that of a UK that is too often pressing workers to work harder and longer, not one where the emphasis is on employees being encouraged to work more skilfully and to be smarter in the way that they approach things. Not enough of our firms are seeing the clear link between improved productivity and workplace-management approaches to their employees. I believe that central to any such strategy that involves improved workplace relations is dialogue. In successful examples of high-productivity workplaces, managers working closely with union representatives has often been key to improvement.

Hardly a week goes by without seeing pictures of the Chancellor in a hard hat visiting a successful factory. I hope he recognises from these visits the constructive role that unions have played in companies such as Rolls-Royce, Airbus, BAE, GKN and all the car plants, in improving productivity and performance. Instead of encouraging more of that, I am sorry to say, the Government are again attacking unions through the Trade Union Bill, soon to come to this House. Clouting unions is not the best route to high performance. Instead, the way to go is developing social dialogue arrangements to deal with issues such as skills and work organisation, as they do as a matter of course in some high-productivity countries such as Germany, the Netherlands and Sweden. It is time to bring our corporate governance arrangements more into line with those practices, even to the stage of having more diverse boards, not focused just on the short term but including other interest groups with a longer-term perspective, because they work there or they have a factory located in the relevant city or area. That seems to me very important.

Study after study has shown that consultation and involvement in workplaces bring improved job satisfaction and performance. Therefore, I ask the Minister, building on his talks with ACAS and Sir Brendan Barber, to fill in the gaps in the document and bring employment relationships much more into the debate that we are developing on this very important subject of productivity.

20:11

[Lord Stoneham of Droxford (LD)]

My Lords, I share with some sympathy the worries of the two previous speakers about missing a football game. However, those who think that our international competitiveness is even more critical in tonight’s cricket match might like to know that Australia is 140-5 after 30 overs.

We were promised a plan to raise productivity, but this is a presentational document published alongside the Budget. It is less a plan than a repeat of the Conservative manifesto objectives printed out in a government paper, and, sadly, I have to say, it hardly inspired my Summer Recess reading. One of my senior colleagues who had a spell in the coalition Government said that you can always judge the lack of specific quality in a government publication by the amount of blank pages in it. I gave this publication the test. It is an 82-page document, with 11 completely blank pages. Counting the 10.5 half blank pages, that is 16.5 blank pages in total, 20 % of the content. That does not set a very good example, given that it is a document supposedly about productivity. We know we have a productivity problem, but what we could have done with is a detailed analysis of what that problem is and a delivery plan to address it. Policy objectives are fine but, as the Minister said, they are worthless without a proper analysis, implementation plans and clear output objectives.

Aiming for productivity growth should be about how we get competitive advantage in international markets and safeguard it so that we can counter our poor balance of payments performance and improve real incomes domestically. Management leadership quality, investment and the skills of our labour force lie at the heart of what we must do. I agree with the Minister’s point that skills and labour quality are the key to this problem. I am concerned that the wide horizons of the paper—the fact that it is like a box of liquorice allsorts, in that you never know what is coming next—means that it fails to grapple with the specifics of what matters.

In the time available, I can deal with only three aspects. First, on broadband, there is one page on infrastructure. I accept that this is important, but I have always had doubts about the delivery of 95% superfast broadband by 2017. Frankly, I am worried that I will be part of the 5% that is left out, not least because I do not know where we are now on this issue and I am suspicious that Ministers do not know either or are hiding something. Perhaps the Minister will tell us what percentage of households now have the opportunity to have superfast broadband, given that we have only two and a bit years to get to the 95% target.

However, more important than the broadband infrastructure is this. Until superfast broadband is uniformly provided, I can read my newspapers on my tablet only in my London home. However, in Hampshire where I live, I am dependent on a huge logistical enterprise of printing plants, huge motorway-bound trucks and wholesale distribution centres, and then a man in a white van having to survive my dogs to deliver my paper because the internet bandwidth is pathetic and downloading my papers is impossible. Incidentally, in rural France this summer, where newspaper delivery can even involve planes to deliver English newspapers, I had the capacity to download even the full Sunday Times on my tablet.

What this illustrates is more important than infrastructure. Infrastructure is critical but, even more importantly, digital technology is re-engineering all the processes of manufacture, distribution, sales and income collection in every sector—public and private—and anyone who says that productivity opportunities are slowing down is talking out of their hat. They are going to speed up even more as the international economy picks up speed. This report should be addressing that question. Are we going to have competitive advantage in this digital world, or will we be left behind? It is fast-moving and, in my view, the Americans and even the Germans are way ahead in terms of this digital re-engineering. I support the northern powerhouse and living wage initiatives, but they will take time to have an impact on productivity; the threat from those more fleet of foot and a failure to take advantage of the digital opportunities are immediate challenges.

I worry that, despite the initiatives we are taking in our schools and universities to raise skill levels, we are still not doing enough in our colleges and adult education institutions to grapple with the challenge of the need for competitive advantage in skills. Budgets for adult education and colleges are being cut while we try to chase the politically attractive targets of 2 million and then 3 million apprenticeships—of uneven quality. In the previous generation, car plants were located in Great Britain because our labour force was regarded as more flexible. But Toyota still went to France because, although the labour practices there were seen as less flexible, the labour force’s mathematical skills were better—it was more IT literate and its precision was more reliable—and that made up for the inflexibility. That will be the required competitive advantage for the future. The plan needs to highlight our weaknesses and deliver a remedy.

One of the most frightening figures is that Volkswagen invests €11 billion in R&D each year—more than what the whole UK Government, universities and research councils could contemplate; in fact, approaching a third of the whole R&D budget of this country. It is adapting IT systems with its excellent engineering motor products. In the future, garages maintaining cars are going to more reliant on IT skills than mechanical skills. It shows the challenge one country on its own will have going forward.

So my final point is about Europe. One of the factors behind the United States’ productivity is the scale of its domestic market. It encourages big-scale investment as well as the development of niche businesses. One of the sadnesses of the pettiness of our renegotiation saga is that we are neglecting the bigger prize we could get if energy, negotiating skill and diplomacy could go into the opening up of the European markets. Sadly, competition does not naturally happen; it needs regulation and policing to bring it about because vested interests and established individual businesses much prefer protected markets. In a digital economy, it will be even more important to protect consumers internationally. This report needed much more than the three lines given to the opening up of services, energy utilities, financial and digital markets in the EU—in all of which we have competitive advantage to exploit. With the scale of re-engineering coming from new technology developments and the international competition and opportunities it will open up, we cannot afford to operate alone as one country in a global world.

20:20

[Baroness Noakes (Con)]

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.

20:29

[Lord Flight (Con)]

My Lords, I will focus, separately, on the unusual period of 2007 to 2015 and the general long-term structural weakness in UK productivity growth. The UK economy did not get back to its 2007 level until the beginning of 2015, but with some 6% more people employed, remarkably. In a sense, this was socially good. Historically, after a financial crash, thousands of people may have been thrown out of work, but generally companies kept them employed. The companies may have reduced their hours, but there was not a massive rise in unemployment. One has to face up to one of the main reasons for that, which is that labour was cheap—labour costs could be cut—and, in turn, the reason for that was income tax credits. Former Chancellor Darling has admitted that tax credits, which were intended to boost living standards for those on low pay, have served to freeze or reduce pay, in turn causing productivity to fall: there is no need for employers to pay if the state is going to top up pay. The cost of income tax credits, originally around some £7 billion, has gone up to £34 billion.

We have been here before. In the late 18th and early 19th century there was something called the Speenhamland system, named after the village where it was invented, under which pay was subsidised. That led to massive labour hoarding, largely in the agricultural sector. When it was eventually ended in 1834, there was a huge shake-up, and agricultural employment fell by roughly one-third. Indeed, labour was released to go and work in the new industries that were coming up, causing the great economic success of the 1840s. One has to face up to the fact that if you are stuck with tax credits—and I believe we should not be—the only way to reduce their effects is to have a much higher minimum wage. This is of course why the Government are introducing the NLW. Personally, I do not like Governments interfering in pay, and I think our growing regional differences in the cost of living need to help determine pay rates locally. However, a higher minimum wage is unavoidable if government is continuing to subsidise pay.

A second big factor during the period was the growth in regulation and regulatory burdens. Many more regulators were employed in the financial services industry and many more staff were employed by companies—tens of thousands. There was also huge growth in energy and agriculture. In all these areas, output did not increase at all but the number of people involved rose dramatically.

Interestingly, productivity during the period was actually up in manufacturing but down substantially in services and in the public sector—I very much welcome what my noble friend Lady Noakes had to say about the public sector. Also, despite its strained infrastructure, London performed much better than the rest of the country in terms of productivity—29% above the UK average. However, colleagues on all sides of the House whom I have spoken to rather agree with me that the big issue causing the fall in productivity was the knock-on effect of income tax credits.

As has already been pointed out, the long-term poor productivity trend goes back more than 100 years. The average increase pre-2007 was 2.4% per annum, and of course poor productivity restricts growth. Indeed, successful recovery and continuing economic growth requires much better productivity. The only other way it can be made up is by growth in the labour force, which is one of the reasons why the UK has permitted significant immigration going back nearly 50 years. The figures show us to be poor versus the US, Germany and France: the UK is some 19% below the G7 average for productivity and 31% below the US. Interestingly, among the G7, only Japan has been worse than us.

I believe that the statistics are materially wrong. Living standards are a knock-on symptom of productivity growth and, remarkably, living standards in the UK are just as good as in much of the rest of the EU—in some cases, better. In many ways, the UK has done better over the past 35 years generally. I very much welcome the fact that Charlie Bean will be reviewing the statistics.

The main difference between the UK and the economies that have performed better is that we have had such a low savings rate for a long time. Never forget Keynes’s famous dictum that investment equals savings and savings equals investment. If you have a low savings ratio, you are likely to have less investment. The UK has got by on borrowing other people’s saving surpluses and selling the family silver to finance it. We have had a £700 billion current account deficit built up over 15 years. Now, for example, 46% of city properties are foreign-owned and 53.8% of listed UK-domiciled companies are foreign-owned. The UK always used to have a big net surplus of foreign assets; there is now a substantial deficit of international assets that we own versus UK assets that are foreign-owned. It is clear that a low savings rate generally leads to low investment, and that that leads to poor productivity growth. That has been the biggest single factor contributing to our poor productivity growth.

Today, investment is not so much about old-fashioned physical plant but about intangible knowledge-based assets. I suspect accounting may often treat such investment, important though it is, as expenditure rather than investment. In the UK, we have, over the past few years, had a major growth in entrepreneurship: 1.5 million new companies in the past two years, not just in London and the south-east, many in new, digital technology. We have been much more successful in that context than the rest of Europe. Also, the UK may have effectively rationed its investment better than others—than Japan, for example, which has been building bridges to nowhere to keep the economy afloat.

There are clearly some useful things in the Government’s plan, but I felt that it mostly cobbled together various policies already in place, such as cutting corporation tax and freeing up planning, and attaching all that to a productivity plan label. I found nothing hugely innovative or major. There are some positive things: upping the annual investment allowance to £200,000; a new compulsory apprenticeship levy; and a new 2020 road fund. UK infrastructure is clearly fundamental, particularly in the south-east, where the road network is wholly inadequate and has been neglected for a long time. The 95% target for superfast broadband is good news. The Government can contribute ingredients, and macro policy can help. Improved skill training is obviously a good idea. No one speaks up for the university technical colleges of my noble friend Lord Baker, which will be incredibly important in improving the flow of people through education into skill training and into work—the more the better.

I question the Government’s initiatives to raise exports. We have heard a lot about them for a long time but nothing much happens. The crucial thing is export finance, which needs to be more easily available and cheaper to be competitive with that in France and the US.

Above all, now that the economy is back on its feet, there is a clear need to increase the savings rate if we want higher investment and productivity. It is not happening; indeed, the savings rate is falling. We need better fiscal incentives for people to save—dare I say it, making it clear to people that if they do not save, they may not be able to rely on the state in their old age because, as the baby boom explodes, that will simply not be affordable. Above all, we need a savings rate that averages 10% per annum. That would underpin a considerably better performance in productivity.

20:39

[Lord Desai (Lab)]

My Lords, it is a great pleasure to take part in this debate, especially following the noble Lord, Lord Flight. I will not go back to the early 19th century, as he did, but we have certainly been debating the backwardness of British productivity compared to the German for at least 125 years. I have done some work for this debate, and I am very grateful to the Library for having helped me out.

There are two problems. First, as the noble Lord, Lord O’Neill, said, the level of productivity in the UK is low relative to other countries, especially the United States—it could be the size of the domestic market but I am sure that the persistence of that gap is quite an interesting phenomenon. Secondly, we have the problem of growth in productivity. However, these are two separate problems. My own views is that what the Government are proposing is quite rightly taking care of the level of productivity across the economy by dealing with transport, housing and all sorts of other things that are time-saving devices, in a sense—by improving the quality of the input, they will raise productivity generally. But whether there will be productivity growth is a separate issue.

On the level of productivity, as I have said before, the British economy is a 60:40 economy, in that 60% of the labour force is employed in areas that produce only 35% of total output, and 40% is employed in producing 65% of total output. I am not saying that the 60% are unproductive; they are engaged in activities that I have before called welfare producing or happiness producing—or whatever it is. The productivity growth is much more marked and easily measurable in sectors that produce solid, practical things.

What happened during the long recession of 2007 to 2013 made it clear that, when growth collapses, productivity collapses. There is a simultaneity. Not only does productivity help growth, but growth helps productivity. During that period, by and large people went into the 60% of the 60:40 economy, into public and professional services, which sheltered them. The wages did not grow, because people went into low-productivity sectors, but unemployment stayed low. Labour market flexibility helped to absorb people who moved into low-productivity areas, because highly profitable, high-productivity areas had suffered a huge output shock and were shedding labour, especially in financial services. So in a sense, productivity and output were low because, in a sense, the productive sector was shedding labour and the less productive sector was absorbing it. There is nothing new about that, but that is a phenomenon which we have to live with.

Our problem would obviously be, as the noble Baroness, Lady Noakes, said, that we have to concentrate on what I call the less productive areas. It is very difficult to enhance the productivity of health and social workers, but 13% of the labour force is employed in health and social care, which produces 6% of output. It is very difficult to say how you can raise the productivity of a childminder or somebody who looks after the elderly for social care. Obviously, in areas like that it would be about improving the surroundings or the technology available, improving how patients are dealt with, with support services, and so on. But we have to look very carefully at those areas. We often look at the easier areas, the wealth-producing areas, where solid things are produced that can be measured—assembly lines, and so on. No doubt we should invest in that as well. However, our real problem may be that we have to raise the productivity of the areas where the bulk of the employment is, which will be a more difficult thing to deal with than raising growth in wealth-producing areas.

Coming to the latter, obviously, what the document shows is that we have had a slow-down in investment. Not only is the share of investment in terms of GDP lower in the UK than in the OECD generally, but lately during the recession we have had a drop. I know that every time anything happens the first thing businessmen say is, “Cut our taxes and we will give you growth”. I have heard it before, and for a long time. At least as far as econometrics is concerned, the connection between investment and tax cuts is, let us say, fragile—not very solid. Anyway, we have to have happy businessmen, so we can give them a tax cut.

The problem is that we have to find reliable ways of increasing investment, and not just increasing investment but doing so in the newer technologies, where tremendous scope exists for raising output and productivity. In a sense, if you look at some of the stuff which is being said—I am not a very practical person, so I only read this in newspapers—what is going on in the IT revolution will be tremendously important and will fundamentally transform production in the next 10 years or so. As the Minister said in his introductory speech, we have the universities, the young entrepreneurs and the start-ups; basically, now the Government will have to find some trick to connect up the people who are doing the start-ups and those in the universities, with more Fraunhofers—or whatever they are called in Germany—from universities, which will raise productivity.

In the next 10 years, as I said before, GDP growth will not be very high. I am sorry that this is the bad news, but I am giving it now. We are in a downward phase of a long cycle. Output growth will be low, as will inflation. However, we will have to find ways in which we can employ people in productive jobs, because as productivity grows we will have to absorb people into other sorts of jobs. I wish the Government good luck, and I hope that they will raise both productivity levels and the rate of growth of productivity.

20:47

[Lord Bilimoria (CB)]

My Lords, matching UK productivity to United States levels would raise GDP by 31%. The graph in the Government’s report clearly shows that the United States has high living standards and high productivity. In Britain we have a lot going for us: we have less than 1% of the world’s population but have the fifth largest economy in the world. However, if our GDP was 31% higher, it would allow us to leapfrog Germany as the biggest economy in Europe and the fourth largest economy in the world.

The Government’s report very clearly outlines several factors that increase productivity, and as a happy businessman—to quote the noble Lord, Lord Desai—I commend the Government’s decision to reduce corporation tax to 18% by 2020. I am proud to be chancellor of the University of Birmingham, one of the top 100 universities in the world. The UK has more universities in the top 100 in the world than any other country except the United States. We have phenomenal capabilities in a variety of sectors. We also have one of the most open economies in the world and are a true trading nation. In fact, most people do not realise that we are the second largest inward investment destination in the world. Yet when it comes to productivity, as the Minister acknowledged, we have lagged behind other economies. We are ranked 18th out of 34 OECD countries, in the bottom half of the list.

The Government’s report talks about school reforms. Again, there have been good initiatives on this front, with the Labour Government’s introduction of academies, which the coalition continued and which this Government continue to promote, and the Government’s promotion of free schools. However, I believe that the biggest mistake that this country made was to close grammar schools, of which only 164 are now left. To think that at their peak in the 1960s there were 1,300. These grammar schools gave the opportunity to a bright child, regardless of background, to get to the very top, and no one—including Margaret Thatcher, herself a grammar school product—has had the guts to reintroduce them. Why cannot the Government promote academies and free schools but also support the reintroduction of grammar schools? That would definitely provide a huge fillip and have a direct impact on our productivity.

Where our universities are concerned, Universities UK states that the higher education sector generated £73 billion of output, both directly and indirectly, for the British economy. In Britain, government expenditure on higher education is 0.88% of GDP, which is lower than that of other OECD countries. In Finland, 1.87% of GDP is spent on higher education, in Germany the figure is 1.12%, and even in the United States more public expenditure goes on higher education, at 0.94% of GDP. In fact, universities in the United States go further. They receive a significant amount of private funding. I am an alumnus of Harvard University through its executive education, and Harvard has an endowment of more than $36 billion. The philanthropy at Harvard is extraordinary. Last year one alumnus contributed $350 million for the Harvard TH Chan School of Public Health, and this year an alumnus donated $400 million for the John A Paulson School of Engineering and Applied Sciences.

Universities in the United States boost their revenues through not only private benefaction but corporate partnerships—something that we should emulate here. The University of Cambridge has made a great start, raising £1 billion for its 800th anniversary. That was excellent, with the money being raised ahead of time. And I am proud to say that the University of Birmingham has raised £160 million in its latest fundraising campaign. Looking at combined public and private expenditure on higher education, the UK spends 1.2% of GDP; the OECD average is 1.6% of GDP and in the United States it is 2.7% of GDP—more than double that of the United Kingdom.

The Minister spoke about encouraging innovation. When it comes to R&D, the Royal Society has produced some interesting figures. My noble fried Lord Rees was an eminent president of the Royal Society, and the next president, for the first time ever, is going to be an Indian. Sir Venki Ramakrishnan is a Nobel laureate and a fellow at Trinity College, Cambridge, where my noble friend Lord Rees was master. Cambridge University has produced more Nobel prize-winners—90—than any other university in the world. Within Cambridge University, Trinity College alone has produced 32 Nobel prize-winners. According to the Royal Society, 51% of productivity between 2000 and 2008 was due to innovation. The Royal Society has also noted that firms that invest consistently in R&D are 13% more productive than those that do not.

Today I had a meeting with the Secretary of State for Defra, Elizabeth Truss. I was informed that Britain’s food and drink industry is bringing 16,000 new products to markets per year. That is brilliant; it is more than the figure for France and Germany combined. This is extraordinary and very exciting, and there is a new initiative being promoted which I am delighted to be supporting.

The UK is great at research. Figures from the Royal Society show that, with less than 1% of the world’s population, we achieve 3.2% of global R&D expenditure. We have 4.1% of researchers globally and we produce almost 16% of the world’s most cited academic articles. This is in spite of the UK Government hugely underinvesting in research and development as a percentage of GDP. They invest 0.49% of GDP in R&D compared with 0.67% invested by OECD countries and 0.76% invested by the US. The figure for Germany is 0.85%. Does the Minister accept that we should increase government expenditure on both higher education and R&D and innovation? The Government talk about the science budget being ring-fenced. As it stands, it is not protected from inflation and is going to go down in real terms. Does the Minister accept that?

Our universities are also being stifled by the Home Office and, in particular, by the Home Secretary’s economically illiterate policies on immigration, removing the two-year post-study work visa for foreign students—75% of the population think that they should be allowed to stay on and work if they want to—having a target to reduce net immigration to the tens of thousands and continuing to include students in the immigration figures. Does the Minister agree that foreign students should be removed from the Government’s immigration statistics and targets? Is it any wonder that the number of students from India has declined by 50% in the last five years?

I was recently appointed as a president of the UK Council for International Student Affairs. ·Is it any wonder that 51% of foreign students feel unwelcome? Is it any wonder that, when the Home Secretary makes statements saying that foreign students should leave the day they graduate, headlines from India read: “Graduate, then get the hell out!”. Foreign students are one of our greatest forms of soft power, with the vast majority returning to their country of origin as ambassadors for Britain for years—for generations—to come. I am the third generation of my family, from both sides, to have been educated in this country. One in seven world leaders has been educated at British universities, including Greece’s current and former Finance Ministers. Dr Manmohan Singh, the former Prime Minister of India, was a graduate of Oxford and Cambridge. Foreign academics make up 30% of academics at our top universities, including Oxford, Cambridge and the University of Birmingham. These Immigration Rules and negative perceptions are damaging our universities and directly damaging our productivity. Does the Minister agree? We should be attracting foreign graduate entrepreneurs, for example by using the Sirius scheme of UKTI, which is brilliant.

We should of course invest more in infrastructure. As regards the airports report that has just come out, we should expand both Heathrow and Gatwick. The noble Lord, Lord Desai, spoke about investment. I am proud to say that private industry is doing its job. My joint venture partner Molson-Coors has invested £80 million in the biggest brewery in the country, in Burton-on-Trent, where we brew Cobra beer, by upgrading our bottling and packaging to make it world class, and improve our quality and productivity. I recently chaired an event in Parliament for entrepreneur-to-entrepreneur exchange, at which Sherry Coutu spoke about her scale-up report. If we close the scale-up gap, the estimate is that it will be worth an extra £225 billion and 150,000 jobs in the next 20 years. Does the Minister agree that we should have a Minister responsible for reversing the UK’s scale-up gap?

In conclusion, we have a lot going for us in this country. We have world-class capabilities and institutions —whether they are the Royal Society, institutes of engineering, livery companies, high-end aerospace, lawyers, accountants, beer, cars, JLR or Tata. They are shining examples. Just imagine how much better we would be if we invested more in higher education, better schooling, R&D and innovation, and had a sensible policy on immigration. We are great; but in the words of Saint Jerome:

“Good, better, best. Never let it rest. ‘Til your good is better and your better is best”.

20:57

[Baroness Harding of Winscombe (Con)]

My Lords, it is a great pleasure and honour to speak in this debate. I must declare an interest not in either football or cricket but as the chief executive of TalkTalk, the ISP, and as a non-executive director on the Court of the Bank of England.

I welcome not only this debate but the renewed focus across the Government on productivity. I take a moment to remind ourselves why raising productivity is such a good thing. History is littered with examples of nations that have sought to resist it. Many of the technologies and innovations that have spread the greatest prosperity were initially resisted by those who thought defending the status quo was the best way of guaranteeing living standards and protecting their political power.

For example, I should like to take noble Lords back to 1445, when the first printing press was invented in Germany. In 1473, the next one appeared in Budapest. In 1476, a printing press arrived in London. In 1485, the Ottoman Sultan issued an edict banning printing in Arabic. It took 300 years before the first printing press began work in Ottoman lands. As a consequence, the adult literacy rate in the Ottoman Empire in 1800 was 3%. The adult literacy rate of males in the UK at the same time was 60%, and 40% among females. With that came the associated difference in skills, productivity and wealth. There are thousands of other examples, including Elizabeth I, who refused a patent for a knitting machine for fear of the political unrest that the loss of jobs from hand knitting would create, and boatmen in Germany who sank the first rudimentary steam engine as early as 1705 for fear of what it would do to their industry. The lesson from history is clear: the societies and economies most open to innovation are the ones that benefit most from the growth it brings, while closed societies lose out.

Britain led the Industrial Revolution, not by chance but because we as a nation embraced the technology of the age with more vigour and skill than our rivals and our politicians refused to kow-tow to the elites of the day who had most to lose from the emergence of those new technologies. As many noble Lords have said in this fascinating debate, today’s challenge is to replicate that with the technology that will define the next century. That means, as the noble Lord, Lord Stoneham, said, fulfilling Britain’s potential to be the world’s most advanced digital nation. Much like the invention of printing, steam power or factory automation that underpinned the Industrial Revolution, the digital revolution is a classic example of the sort of change that might be resisted because of a fear that it threatens the jobs that we have today. In doing so, we risk turning our back on the high-skilled, high-paid jobs of tomorrow. We might succeed in resisting change for a couple of years—probably not for as long as the Ottoman Empire did—but the only long-term beneficiaries of that will be our rivals, who will grow more prosperous at our expense.

We need to be much more confident in embracing and explaining the benefits of technology-based innovation. Contrary to the notion that somehow it will threaten jobs, European Commission research shows that 75% of the value created by the internet is in traditional industries. It helps small businesses trade with new markets, allows them to source cheaper suppliers and reduces running costs, which can be reinvested in traditional growth. To put that into context, according to the Copenhagen Business School, if the UK automated to the extent that Germany has, productivity would rise by 22%. That is growth we can ill afford to lose.

Britain can be rightly proud of London’s status as one of the world’s leading technology hubs. Since 2010, London’s digital sector has grown by 46%, now employing 200,000 people. Research by EY shows that London is now the most attractive place in Europe for international technology companies to invest. That is a success story truly to be proud of, but the challenge is to ensure that it is a national success story, not just a London success story. I do not believe that there are any magic bullets to achieve that, but I would like to highlight two small but essential components.

First, there must be a relentless focus on the digital skills that will define tomorrow’s economy. The noble Lord, Lord Bilimoria, spoke very eloquently and passionately about the importance of further education. I would like to talk about skills and education at a much more fundamental level. Across the UK today, 10 million adults lack basic digital skills, by which I mean the ability to send an email, do a web search or fill in an online job application. Contrary to popular perception, they are not all beyond retirement age—50%, some 5 million people, are adults of working age. That is a huge drain on our national productivity.

I am proud to serve on the board of Go ON, the national digital skills charity, which is doing a lot of work across the country with different businesses, local government and charities. But charities alone will not close the gap. There is a very significant political focus on all sides of this House on digital infrastructure, and with significant public funding going into it, but almost none and no discussion about the skills that people across the country will need to use that infrastructure. Just as basic literacy was needed several hundred years ago, driving basic digital skills across the country requires leadership from government. As my noble friend the Minister pulls together the detailed action plan behind the Government’s productivity plan, I urge him to consider how building universal basic digital skills into that agenda can happen.

Secondly, we have to address the physical and cultural barriers that contribute to the productivity gaps that we see in different regions across the country. ONS data show that London has higher levels of productivity than any nation or region in the UK—almost 29% higher than the UK average in 2013. Left unchecked, that gap will undoubtedly entrench economic inequality and poorer living standards in the worst-affected regions.

I feel that very personally, as the chief executive of a business that has quite a large number of people based in London but more people based in the north-west. TalkTalk has two sites in London, one in Farringdon and one in Shepherd’s Bush, and two sites in the north-west, one in Warrington and one in Irlam. Coincidentally, both are seven miles apart from each other, in the north and in London. It is considerably easier for my people to travel between Farringdon and Shepherd’s Bush than between Warrington and Irlam. It is also culturally easier to do that. We find fantastic talents in the north-west as well as in London, but persuading people to move from a job in Warrington to a job in Irlam is considerably harder than it is to persuade people to move to take a job in Farringdon versus a job in Shepherd’s Bush. So as a CEO of a business whose heart and soul is there, I am delighted to see the focus on building a northern powerhouse. It is clear that it is intrinsically linked to better infrastructure, but the political and social leadership to create a broader cultural entity is just as important. That does not mean turning the northern powerhouse into one amorphous entity—Greater London is not that at all. It is totally different whether you live in Bexleyheath, Clerkenwell or Highgate—just to mention three—but everyone in the Greater London catchment is part of that world-class talent base. There is just as brilliant talent in the north. We need to invest in it and create the political and social infrastructure that will drive it. It is fantastic to see this Government bringing that to bear.

As a chief executive who passionately believes that Britain can be a real leader in the digital economy, I welcome the focus on growing productivity. It has been hugely heartening to hear the number of contributions this evening focused on the digital economy, because it is undoubtedly our future.

21:06

[Lord Rees of Ludlow (CB)]

My Lords, the maxim “if we don’t get smarter, we’ll get poorer” becomes increasingly germane to the UK as our economy and public services become more dependent on the high-tech sector and high-skill individuals. There are three interlinked prerequisites for higher productivity: better education and training at all levels, from school to PhD; excellent R&D, exploited here; and success in attracting and retaining mobile talent.

As regards the first of these, there is real concern. The UK is a laggard in educational attainment levels at the secondary school stage. This aggravates the life-chances for the cohorts whose job prospects are already blighted by current austerity. That is why we should welcome greater emphasis on apprenticeships and on a more appropriate curriculum for the 50% of 16 to 18 year-olds who are not aiming for higher education.

There are currently too few schoolteachers with specialist subject knowledge. More than 20% of mathematics and chemistry teachers, a third of physics teachers and more than half of computing teachers in state-funded schools in England have no relevant post-A-level qualifications in the subject that they teach, and language teaching is equally dire. There have been many initiatives here. The best hope lies in expanding the number of well-qualified people who transfer into teaching mid-career.

My own experience is of university teaching and research, so I will now focus on this and declare an interest as a member of Cambridge University. We are mindful of the need to transition academic expertise into the wider economy. I think our Cambridge network exemplifies how this can happen if the environment and sociology are right.

The country’s R&D effort depends on both public and private investment. An impressive recent study by Jonathan Haskel and colleagues at Imperial College revealed that there were symbiotic links between public and private investment. There is a “crowding in” effect whereby publicly funded R&D enhances the amount that is privately funded and incentivises the attractiveness of this country to foreign companies and investment. But, as we all know, both private and public levels of investment are low by international standards, and industrial research is concentrated in rather few sectors. According to 2012 data, the percentages of GDP spent on private and public R&D were 3.32% and 1.04% respectively in South Korea, which is top of the league, and 1.23% and 0.5% respectively here. And we are far below the US and Germany.

Just today, there is a letter in the FT from senior figures in the pharmaceutical industry urging the need for enhanced public R&D if we are to sustain competitiveness. Of course, we are lucky that medical charities donate £1.3 billion annually—one-third of all publicly funded medical research.

Incidentally, R&D levels within all government departments have undergone sustained long-term decline. They are down by a factor of more than three since 1980 and by a factor of more than two since 1994. This signals a worrying loss of expertise in parts of Whitehall where policy and procurement choices should be based on high-quality strategic advice. We need to adopt the right priorities in infrastructure and energy decisions. Let us learn from the dismal tragedy of nuclear R&D. Our national labs were once world leaders. Now, if we have any nuclear power, it will be state-owned—but by the French or Chinese state.

I will focus now on university research. Recent steps towards restoring pre-austerity levels of capital investment are welcome. But the flat cash settlement over the past five years means that the cumulative erosion of the ring-fenced science budget since the 2010 spending review amounts to more than £1.1 billion. The research community has made large savings through equipment sharing and multi-institutional alliances, but this cannot continue indefinitely. That is why the new spending review is crucial for science and why we need to close the gap between us and other major countries to which the noble Lord, Lord Bilimoria, referred.

Cuts to research and innovation in the 1980s drove many leading UK scientists to the USA. Today, generous investment in research by Governments across the world, coupled with austerity at home, risk creating a similar exodus. Perception is important, too. If we are perceived to be on a steeper upward gradient than other nations, we will get more than our share of the best talent. Our cost-effectiveness will rise. Conversely, if perceptions are pessimistic, as I fear they are, we will not merely end up with less research effort, but what we are left with will be less cost-effective. We should welcome brain circulation but not a brain drain.

A recent RAND Europe study of the worldwide correlation between research funding and output revealed, importantly, that it takes at least three years for a decline in real-terms funding to manifest itself in publications and other indicators. This is ominous because it means that we may not have seen the full downside of recent stringency, and it makes it even more urgent that we reverse the trend.

Current visa restrictions and Home Office rhetoric are real own goals. I will cite my own experience. I am based in a small Cambridge department that is world-class academically. Our last five faculty vacancies were filled by outstanding foreigners, three from outside the EU. Just last week, one of them told me that he thought it would be harder to attract people such as him now than it was when he joined us because of these perceptions.

Along with their status as research powerhouses, the most important output of universities is their graduates—both undergraduates and postgraduates—who will follow careers in all walks of life. If universities cannot attract or keep the best faculty, it will impact negatively on the quality of output of the students. Here, the UK has an opportunity to enhance teaching through the world-leading Open University and its FutureLearn platform. Online courses may have been overhyped in the US, but they have a genuine edge, especially at the level of taught master’s degrees, where they enable mature and motivated part-time learners to acquire specialist qualifications. Surely other universities should help by augmenting the OU’s content so that it can expand and enhance the range of such courses, which will have great value not only in the UK but worldwide.

Finally, we should surely all hope that the UK will achieve its proclaimed aim of being the best place to do science and ensure that it thereby helps to enhance national wealth. We need to incentivise international companies to establish research bases in the UK and to encourage enterprise and start-ups. That will require changes to visa rules and public investment in the next five years that narrows the gap with other nations.

21:14

[Lord Leigh of Hurley (Con)]

My Lords, it is always a privilege to speak in your Lordships’ House, and in particular on a subject so vital to the future of the UK economy as our nation’s productivity. A Financial Times columnist—not Smithers, as it happens—wrote recently that:

“Leadership is to politics what productivity is to economics: not quite the only thing that matters but almost”.

It is therefore perhaps apt throughout this debate tonight and the continued tribulations of the leadership elections elsewhere that we can explore the validity of both facets of that claim in a single week.

In the previous Parliament, thanks to the Government’s long-term economic plan, 2 million new private sector jobs were created, and at a time when all across Europe—and indeed the world—unemployment had reached levels without recent precedent. The party opposite said that this was the wrong approach. Indeed, many economists said that it was wrong. They wrote letters in the national press saying that reductions in public sector jobs would not be counterbalanced by private sector job creation. They were wrong. They said that reductions in public spending would lead to recession. They were wrong. Beware of economists making predictions, and I speak as someone with an economics degree who learned of JK Galbraith’s famous comment that:

“Economics is extremely useful as a form of employment for economists”.

Many of those same critics and commentators are now, in the face of these consistent growth and employment figures, being tempted to move the goalposts and say that it has all been the wrong kind of growth or that high employment has come at the expense of productivity growth. That is a claim worth examining, and we should always look for ways to increase productivity. But first we should state clearly, as we have done, that we make no apology for keeping people in work, and helping those without to find work. At a time of financial crisis and recession, there is a moral imperative to look beyond the economics to the human cost of unemployment. The Government can be proud that they have done so.

We should also be careful as to how much weight we give to recent productivity data. The only consensus emerging on Britain’s so-called productivity puzzle, as the Minister said, is that the way we collect the data needs updating. Furthermore, we should question whether today’s modern knowledge economy is measurable using the techniques of yesterday. The creative and service industries are being continually overlooked in favour of heavy industry. That is why I welcome, as does my noble friend Lord Flight, the review of how we collect economic statistics that is being undertaken by Sir Charlie Bean, who as part of his mandate will,

“assess the UK’s future statistics needs in particular relating to the challenges of measuring the modern economy”.

Before examining ways to improve productivity, on the broader economic debate, it is worth reflecting on what we do know. The latest GDP figures suggest that the UK economy grew by 0.8% in Q2, and on what is perhaps the most unambiguous measure—the tax take—the numbers are in rude health, with July showing record income tax receipts leading to £1.3 billion surplus for the month. I am confident that in January 2016, with the second payment of this last tax year, they will be equally positive and surprisingly healthy, all of which will reduce public borrowing requirements and help speed the path towards an overall surplus as set out in the summer Budget.

However, neither the strength of the economy today nor ambiguities in the statistics should mean that we do not continue to look for ways to improve our productivity. As the Minister mentioned, it is good to see that the Government are not showing any complacency and I was pleased to see that Sir Charlie Mayfield’s taskforce had been set up by the extremely industrious Secretary of State for BIS, Sajid Javid. It comprises a business-led action group for productivity—not full of politicians.

As part of the summer Budget, the Government published Fixing the Foundations, a comprehensive strategy to boost productivity. It sets out not just the challenges of boosting our productivity to reach a leading position, but also the rewards for doing so. Increasing annual trend growth by just 0.1%, a much more modest figure than the noble Lord, Lord Bilimoria, would seek, means that the UK economy would be £35 billion larger by 2030, which equates to £1,100 for every household. The strategy sets out numerous ways to achieve this important goal based on increasing long-term investment and economic dynamism. It is clear from the early stages that we have to focus on the benefits of flexibility. Traditional attitudes towards the workplace are changing. As of January 2015, the number of freelancers in the UK was growing and they were earning a median income of £42,857, which compares with the national average of around £24,000, and they work an average of 38.2 hours a week. Labour’s approach is simply to criticise zero-hours contracts, which are in themselves an important step forwards to helping productivity, but admittedly on its own not enough to change the way we work and how we measure work.

Others have spoken eloquently about the digital aspects of the economy and ways of improving productivity, on the importance of savings and indeed on education, so I would like to focus on the two areas that are of particular interest to me, productive finance and trade. We can analyse skills, innovation and infrastructure but, if capital is not allocated efficiently across the economy, it will be an uphill struggle for every sector. Recent travails should not distract from the fact that the financial services sector remains a huge contributor to the UK economy, and of course I declare an interest as being part of that sector. Financial services contribute £58 billion in net exports, thus contributing 8.4% of gross value added in 2014. But if the crisis has taught us anything, it should be that finance is good for the economy only if it does what it is supposed to do: channel capital to the most productive areas of the economy, creating wealth not destroying it, and fostering growth not hampering it.

Currently, 80% of all finance in Europe comes from banks, and this has to change. With the big banks engaging in much-needed restructuring of their balance sheets, we need a new model of business finance. This means lowering barriers to entry to increase competition from challenger banks, which the Government have correctly identified as an issue. We also need greater diversity of funding sources for businesses looking to grow. In the last Parliament there were many start-ups. This one, I hope, will be where they grow. The Government’s paper is candid about this. Somewhat amazingly, only 3% of start-ups with one to nine employees grow to have more than 10 employees within three years. That is astonishing, and we are well down the OECD’s league table. Having created a whole new generation of small companies, we need to work hard to help them flourish.

Another key plank to rebuilding our productivity is to burnish our reputation as a trading nation, pulling in foreign direct investment and exporting goods the world over. I will not go into the same history lesson as my noble friend Lady Harding, but it is true to say that I am a member of a party that was torn asunder by trade in the 19th century with the repeal of the Corn Laws, which was taken through this House by the Duke of Wellington. Then it was benefits to ordinary consumers that won the day, and that is the lesson.

I have spoken before in this House about our trading legacy and the need to rediscover it: the need to stand up for free trade in the form of trade agreements such as TTIP and others with emerging markets, and the need to lead the EU towards completing the single market in services and capital markets; as the leading exponent of both, it would be hugely to our benefit. I know that my noble friend the Minister is leading a trade mission to China next week, and I am sure that he takes with him our best wishes for every success in that important export drive. Trade drives competition and innovation, brings in investment and creates new markets for our businesses to sell to. This in turn creates better-paying jobs and increases living standards. This is not an argument for either staying in or leaving the EU; we can be equally successful either way.

There are many facets to this debate, but I will finish where I started. We are all agreed that productivity is an important issue. It is therefore ironic that the areas I have focused on, trade and finance, attract such ire from critics who purport to be sticking up for working families. But difficult though the arguments may be to make that competitive trade policy and efficient financial services are the best way to help these families, as Conservatives I am sure that the Government will continue to make them.

21:24

[Lord Davies of Oldham (Lab)]

My Lords, this has been a most fascinating debate, although I think that I detected a common theme running through many of the contributions, which I guess will probably distinguish it from the debate to take place on Thursday on a Labour Motion. I shall dwell on the relationship between education, training and skills enhancement and the significance of that for improved productivity in a moment. Of course, noble Lords covered a wide range of issues in addition to that theme. I know the Minister will delight in responding to those contributions, including the questions posed by my noble friend Lord Monks. He spoke about the short-term nature of so much British investment and decisions by boards, which cost us dearly in comparison with those countries where it is clear that investment runs over much longer patterns and they therefore are able to reap the rewards more effectively. I am sure my noble friend is right that part of that is related to the short-term, massive rewards which go to senior people in British companies.

Should the noble Lord, Lord O’Neill, give an answer to the noble Baroness, Lady Noakes, about the virtues of HS2, I hope he can refute the suggestion that the first payback will be only after £50 billion has been spent. As regards her contribution, I think the criterion is not the travelling time from London to Birmingham, but increasing the capacity of rail to help the economies of northern England as well as the Midlands and their connection with London. I hope that the Minister is well versed in his history because he has heard elements from economic history which would be quite challenging —whether it is a question of the Speenhamland system, which thankfully gave way to the workhouse but was not always regarded as the most effective and efficient system of organisation of labour in this country, or whether the digital revolution is critical to our future, as there is no doubt that it is.

I want to dispute what has been put forward so much in this debate. Of course, I recognise the value of higher education in skilling our nation. Higher education would never have been able to expand at the rate it did if it had been able to concentrate only on a small number of grammar schools, at which only a small percentage of children qualified at that time, and their product. Subsequently, we have had aspirations to greatly expand higher education, from which we deserved, and have derived, the benefits that we have had.

Even in this period of crisis, higher education can largely sustain itself. After all, the Government have given it the freedom to enrol as many people as it wishes to enrol. They have guaranteed that the fee income can go up with inflation. As the noble Lord, Lord Bilimoria, noted, universities have access to other resources as well. I am the first to recognise that that may not be quite on the scale of Yale and Harvard, and there will never be a time when we match the endowment resources of American universities, but that has not held our universities back from achieving similar levels of excellence and being regarded so highly in the world.

With regard to skills, the issue is not the failure of universities or even their impending doom, because neither is accurate. The problem is the one that the noble Baroness, Lady Harding, and the noble Lord, Lord Stoneham, referred to, of how we enskill the vast majority of our people who are still not going to go to university. The noble Lord, Lord Rees, also recognised that point. We are so far behind. The Government have to recognise this fact. In productivity, we are 17% below the average in the G7, 27% behind France, 28% behind Germany and 31% behind the US. Those are government figures. We have a lot to do. Since we are so behind it is quite clear that we cannot tolerate the very low level of skills in our nation, the skills that are beyond and different from university-level skills. I do not want to say this, but from what I know, American students tend to be waiters while at university in their time away from college. In Britain, graduates become waiters because they cannot find appropriate jobs.

We should think about graduates, but I do not want to concentrate on whether we have sufficient graduates, because I certainly think we have. Nor is the issue resolvable through this wild chase for 3 million apprenticeships, because I do not think that the apprenticeships are anything other than a misnomer. If people are not getting training, if there is no base for the enhancement of their skills and if they are on these contracts that we all recognise are so very limited, the concept of apprenticeships does not serve a useful purpose. We need to concentrate on the skills that Polish plumbers show we are deficient in. We are pleased to see that so many of those who arrive in this country have skills that we have not got in sufficient number in our working population. That is key to the enhancement of our productivity. It means that all of us, including all of us in this House—even those in the Department for Business, Innovation and Skills—must recognise that education goes beyond universities. It is also where further and adult education keep the capacity to enhance the skills that we lack so much in our nation. It also keeps people in touch with the possibility of improving their skills throughout their lives and of being adaptable in a fast-changing economy.

If the Minister says that he agrees with that—I think that he might, because he paid lip service to it in his opening remarks—I have to say this to him: if the universities can sustain their resources, that is not true of further education, which has taken a dreadful hammering under this Government. Some 16% has been cut over the last four years and another 6% was cut in July. We are chewing up the seed corn of our education system. The Government must get beyond the idea that there are only schools and higher education. They have to tackle the points that the noble Baroness, Lady Harding, indicated—namely, that we cannot afford for people to be illiterate, in either a literal or a digital sense, in this modern world. That is where the Government have to show that they appreciate the problem and are prepared to back it with the necessary resources. Thus far, there is precious little indication of that.

If we are to meet the point that my noble friend Lord Desai indicated of how we increase productivity in the caring professions and areas of public service, I say this: the best chance we have of making people better at their jobs, more skilled in the services that they deploy using scarcer resources to better effect, is to ensure that they get the necessary skills and training often provided outside the education system mentioned so often in this House. Therefore, I want this debate to open up for the Government a big challenge on further and adult education. If the Minister cannot respond to that in full this evening, I hope that he will go back to the department and give it a little education on the need for change in this respect.

21:35

[Lord O’Neill of Gatley]

My Lords, as always, even in my relatively short time in this place, we have yet again had an incredibly high standard of debate. I am grateful to noble Lords for a considerable number of thoughtful remarks.

I began my opening remarks with a reference to the football match taking place at Wembley. I happened to notice that there is exactly the same number of speakers in this debate as there are who generally participate in one team in a football match—that is, 11. Whatever the outcome of that game and irrespective of whether Mr Rooney has achieved his lifetime ambition of becoming the highest scorer, I suspect that the collective contribution of the 11 noble Lords participating in this debate will be greater.

[Baroness Noakes]

My noble friend the Minister might like to be aware that England were leading 2-0, and that Mr Wayne Rooney has indeed achieved his lifetime goal.

[Lord O’Neill of Gatley]

I am very grateful to my noble friend for enhancing the quality of our proceedings, making it even better than it was previously.

Before I focus on a number, if not all, of the comments that were made, it is important to comment specifically on the environment and the circumstances in which we are trying to meet this challenge. A number of noble Lords recommended higher levels of spending, notably on education but also in other areas. However, it is important to put this in the context that, despite the rather successful stance on economic policy adopted by the previous Government, the level of net debt as a share of GDP in the UK last year reached its highest level since 1967 of more than 80% of GDP. A central focus of any rational Government, based on plenty of evidence from the recent and more distant past, should be to try to reduce our level of debt significantly below that level. By definition, that will constrain aspects of how the Government prioritise their spending. This has influenced some of the things on which we have chosen to focus our spending priorities, as I outlined in the very interesting debate on the Budget that we had just before the Summer Recess.

I will go a little off-script in trying to respond to all the valuable comments that noble Lords have made. I shall do it in the same team order, sticking with the spirit of this evening. First, the noble Lord, Lord Monks, may be surprised to hear me say that I welcome many of the ideas that he mentioned. As we stated in the productivity plan, we are in the process of exploring the whole interplay between long-term incentives to invest and the long-term management behaviour of all participants in the economy, including that of CO leadership. It is one of the reasons why it is particularly helpful, as was pointed out by a number of noble Lords, including my noble friend Lord Leigh, to have Charlie Mayfield and his colleagues leading the separate approach to what business itself can do for productivity. That is very important in the context of what the noble Lord, Lord Monks, said. There are a number of aspects on which I would like to expand. I do not have enough time to concentrate on them now but I am sure they will come up in future discussions.

On executive pay, it is of course the case that more policies have been introduced to give the boards of publicly quoted companies direct influence on executive pay. Even more importantly in terms of the broad productivity argument, the data show that levels of executive pay in the United States are, and have been for a long time, considerably higher than ours and yet its level of productivity is considerably higher. While there are aspects of long-term incentives that deserve considerable investigation and thought, I am not entirely sure that that much of the blame should be laid just on executive pay.

I was somewhat disappointed to hear the disparaging remarks of the noble Lord, Lord Stoneham, about the quality of the productivity plan. I cannot resist mentioning that the typical practice of my previous life concerning a number of empty pages was partly to encourage those who study these things in great detail to use those spaces to make notes to inform their subsequent comments. Moving on to the noble Lord’s more substantive comments, there was a brief reference to the balance of payments, which I will come back to. My noble friend Lord Flight touched on it as well. There are intriguing ongoing aspects of our balance of payments performance that also deserve further detail, which I do not have time to go into, but I will come back to those in a short while.

On the noble Lord’s challenge about the data on superfast broadband, I think I am right in saying, despite his observations on the productivity plan report, that we cited a goal of achieving the capabilities of what appears to be the best in the world: Singapore. In that regard, despite the fact that we have yet to reach the 95% goal, according to the data that I have seen we are significantly ahead of similar developed countries across Europe today. But that is not good enough and we should aim to have the best in the world.

My noble friend Lady Noakes touched on a variety of very interesting topics, including infrastructure projects. It was interesting to hear her particular angle because from many others there was implicit reference to the fact that we are not spending enough on important infrastructure projects, yet she drew attention to one for which a particularly large cost has been discussed. The noble Lord, Lord Davies, also referred to it. It is well known that, in my previous life, I stated a number of views about the relative priority of various train infrastructure projects in the UK. I am pleased to say that despite what appears to be a misunderstanding in the media, we are committed to expanding other forms of train infrastructure, including making further progress in the setting up of Transport for the North, which will be a critical part of the delivery of the northern powerhouse.

Turning to the interesting comments of my noble friend Lord Flight, I found that much of what he suggested or discussed gave an extremely good rationale of the Government’s strategy in this five-year term, and in particular on policies to try to induce stronger, sustainable economic growth, and with it efforts to boost savings. My noble friend made a couple of references to the linkage between savings and investments, and during one of them raised the indirect linkage to the balance of payments. Somewhat intriguingly, as another angle on why the analysis of our economic data’s accuracy that Charlie Bean is undertaking is so vital, it is less well known that in the past couple of years there have been notable improvements in our trade balance, at least in the reported data. The deterioration in the current account is actually coming from the so-called invisibles account. It is probably something to do with the valuation effects relating to the considerable inflows and outflows on the capital accounts, which are an inevitable consequence of our crucial role in global finance.

In so far as some of that savings and investment balance would traditionally be associated more with the trade balance, there are, as I say, reasonably interesting signs of some improvement, at least as reported by the data. However, it is inevitably the case that we need to do more to boost the structural performance of our savings rates because, as my noble friend Lord Flight points out, if you look around the world recently, and especially historically, countries with higher savings rates typically have higher investment performance—and, with that, better productivity performance.

The noble Lord, Lord Desai, gave us some interesting statistics from his active time, by the sounds of it, in using our wonderful Library facilities. He made some particularly interesting comments on the reality of how our workforce is split between those employed to produce what are typically regarded as the more highly productive parts of our output and those who are not. I want to touch on a couple of anecdotes relating to my own observations and to comments that came up from other noble Lords, particularly one from my noble friend Lord Leigh. This is related to my focus on the northern powerhouse. It was widely feared in recent years that, as a result of the fiscal strategy and its reduction in public spending, with the loss of public sector jobs, due to the dependency of some regions of the north on public spending those economic regions would be particularly vulnerable. According to the data as produced, however, among the rather encouraging signs in recent developments is that some of these areas, notably the north-east, are showing considerable improvement in their job creation and overall employment performance. Virtually all this is being led by the private sector, which, if sustained, is a very encouraging development.

The other thing I would suggest, linked to the interesting suggestions of the noble Lord, Lord Desai, is that investing in high-producing areas that relate to future and current technologies is getting considerable attention, particularly given the role which the British Business Bank may play in supporting such developments. That is something I have had a number of conversations about.

Quickly moving on, I think that the noble Lord, Lord Bilimoria, devoted most of his interesting comments to the topic of education. He knows, from my own past, that I have spent a considerable time in that area, including as a non-executive at the Department for Education before I took on this role, as well as in a number of areas of education philanthropy. I will just pick up on a couple of comments that the noble Lord, Lord Bilimoria, made, not least because they relate to comments made by other noble Lords and focus on very important issues.

Although the absolute level of spending of this and previous Governments on higher education may appear low relative to other countries, I go back to my opening comments: at this particular moment in time, we are constrained by the high level of debt in so many other areas where one would naturally think about wanting to spend more. That is a reality that we cannot lose sight of. However, as the noble Lord, Lord Bilimoria, pointed out, it is remarkably encouraging how well our higher education stands in a global context. If we could achieve the same success with primary and secondary education, on those few measures of international comparison that are available, I suspect that we would have a lot more satisfactory views collectively about our productivity challenge.

If you look in detail at the bits we have discussed in the productivity plan—of course it could have been 162 pages if we had put everything in that we wanted to—there is indeed quite a lot of focus on dealing with educational challenges at primary and secondary level. It also relates to the important points that the noble Lord, Lord Davies, touched on before his request for us to focus much more on higher education. In that regard, I would highlight that the Government are now trying to focus on what you might call coasting schools and, importantly, schools in coastal towns and cities. These are at the core, in the evidence we have available today, of some of these particularly grave education and skills challenges.

Noble Lords made a couple of comments about the success of London. I would link again to my own experiences, which I have mentioned before in this place: the success of London in primary and secondary education in the past 10 to 15 years is, I believe, a particularly interesting case study. We should explore using that example around other parts of the country to achieve improved outcomes, which are very important. It is influencing the thinking of Governments in a number of related areas.

My noble friend Lady Harding gave a very brief but interesting history of the development of literacy, which for me was very educational and which touched again on a number of the areas that I have just referred to in respect of London and skills. One point that my noble friend touched on, which a number of other noble Lords did too, was about the supposed success of Germany. I cannot miss the chance to touch on that. Although it is true that productivity in Germany, like in the rest of our G7 neighbours, is considerably higher than ours, what seems to be less well known is that in recent years Germany has not been so successful with productivity or investment. We have requested the data analysis because there may be something going on in common in a number of countries which is leading to doubts about how some of these data are being collected.

A number of comments made by other noble Lords touched on the importance of both secondary and higher education. Given the short time I have left, I just reiterate what I think I said at the outset and in previous comments: in my judgment, all the different areas of education and skills are probably the most important things that we need to have some success with if we are to deal with the long-term challenge of productivity; albeit less so with respect to the cyclical challenge.

Given his remarkable history, the noble Lord, Lord Rees, made several comments that are well worth focusing on and thinking about in some detail. In that regard, I shall take them away from this evening’s interesting debate.

My noble friend Lord Leigh, to a couple of whose valuable comments I have already referred, also focused on the important areas of finance and trade. I would put those in the “relatively easy” pot compared to the complexity and depth of the challenge that we need to deal with in education and skills. However, as he noted, they are areas on which we are focused. Trying to increase the number of challenger banks and the competitiveness of the financial sector to provide finance for the economy, and trying to boost our trade with important rising powers around the world—I am actively at the centre of that—is a crucial part of our economic policy.

In summary, this has yet again been an interesting debate with some important and powerful contributions on which I want to ponder, reflect and incorporate to frame some of my thinking about the right policy to help in this long-term challenge for the country. I said that increasing our productivity has been the chosen next step by this Government on the path started by the previous one towards a strong and secure economic recovery. Implementing that step and achieving that goal will require action and input from across the whole spectrum, whether it be from industry, academia or policymakers—not least from the Members of this House. I welcome the contributions that have been made by your Lordships this evening and will welcome contributions from all of them and others going forward. I look forward to updating this House on progress on an ongoing basis.

Motion agreed.

House adjourned at 9.57 pm.