United Kingdom: Productivity

Baroness Noakes Excerpts

Tuesday 8th September 2015 Lords Chamber

[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.

--- Later in debate ---

[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.