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.
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.