National Productivity

Chris Evans Excerpts

Wednesday 22nd January 2020 Westminster Hall

[Chris Evans (Islwyn) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship, Mr Paisley. I congratulate my hon. Friend the Member for Barnsley Central (Dan Jarvis) on an intelligent, measured and thoughtful speech that went to the nub of the issue. We have a new Parliament and there has been a lot of change, but some things never change. The hon. Member for Strangford (Jim Shannon) set himself up in Westminster Hall in 2010 and is now claiming squatters’ rights because he speaks here so often. [Laughter.]

Before I begin my comments on productivity, I have to express my disappointment in the attendance on the Tory Benches today. A couple of weeks ago, a large number of Tories were elected in the north. In this debate, my hon. Friend the Member for Barnsley Central focused his remarks on the north. I am disappointed to see that many of those representing northern constituencies are not here today to speak up for their constituents. This debate is important.

The prize-winning global economist, Paul Krugman, wrote in 1994:

“Productivity isn’t everything, but in the long run it is almost everything.”

The words Krugman wrote 26 years ago are as important today as they were then. Productivity is the key driver of economic growth in the UK. As the Bank of England chief economist, Andy Haldane, said in a speech in June 2018:

“It is a terrible word, as it leaves most people dazed and confused. Few are those who can define it and fewer still those who can measure it. Yet it has entered the popular lexicon and with good reason: the one thing we do know is that productivity is crucial to our pay and living standards over the longer run. Productivity is what pays for pay rises. And productivity is what puts the life into living standards.”

Productivity is no higher now than it was just before the 2008 financial crash. Annual growth of 2.1% was recorded during the decade before the crash; had the pre-crisis trend persisted, productivity would now be 20% higher—a stark statistic. With the Office for National Statistics releasing figures in November showing labour productivity—a measure of economic output per hour of work—slumping by 0.5% in the three months to June compared with the same period a year ago, it is the worst performance since mid-2014. We now face a situation whereby low productivity is no longer a mere blip but endemic to our economy.

Productivity stagnation since the crisis has been concentrated in a small number of industries: finance, telecoms, energy and management consulting. Over the past 18 months, the issue has been heightened by higher employment in less productive service sectors. In the past decade, we have arrived at a productivity puzzle that can be put down to three things. First, the UK is less productive than similar countries, most importantly, France and Germany. It is a long-standing feature of the British economy. In about 1960, France and Germany overtook us in terms of output per hour. To put it more colloquially, the people living in France will have been more productive by Thursday lunchtime than will the people living in Britain by Friday teatime. Secondly, productivity growth has slowed since the 2008 financial crash. Before 2008, output per hour worked was increasing by 1%. Since the crisis, it has grown by 2% in just one decade. Lastly, we have a third element. The slowdown in productivity growth has been more rapid and steeper in the UK than in any other developed economy. Before the crash, Britain was near the top of the G7; since then, it has been near the bottom.

To add some context, across the board companies’ capital spending is only 5% above its pre-crisis peak compared with a 60% increase over the decade after the 1980s recession, and 30% following the 1990s slowdown. In the immediate aftermath of the 2008 crisis, business investment was constrained by some companies’ inability to borrow money as banks shored up their balance sheets. That is less of a problem now because most banks have recapitalised. Other factors, such as a lack of worthwhile investment or uncertainty about the economic outlook must now be playing a greater role in deterring companies from more capital spending.

The financial crash saw the election of a coalition Government. For all the talk of paying down the deficit or paying the national debt off—they are mixed up—the simple fact is that it was the Bank of England that used monetary policy to see off another recession. Fiscal policy, unfortunately, was largely ignored. Quantitative easing and low interest rates kept unemployment low, but had a huge effect on productivity. It is argued that low interest rates have sustained zombie companies. Record low interest rates have cut companies’ borrowing costs, allowing some highly unproductive companies—so-called zombies—to avoid going bust. That appears to be borne out by how the rise in the number of companies going into administration was much less dramatic in the past recession.

Monetary policy was very different in the most recent big economic slowdowns compared with the previous ones. The Bank of England cut interest rates to 0.5 per cent, making it easier for companies to finance their loans. By contrast, interest rates were held above 10% during the recession of the early ‘90s. However, it is not only unproductive companies that have high levels of debt relative to their profits—leverage that puts them at risk of becoming insolvent when monetary policy inevitably tightens.

Both high-productivity and low-productivity companies have high debt ratios.

“Higher interest rates hit both types of company,”

said Andy Haldane, the chief economist at the Bank of England in March 2018. Interest rates explain part but not all of the productivity stagnation. An increase in the number of people looking for work, which has helped to hold down wage demands, and uncertainty about the economic outlook since the Brexit vote might have encouraged companies to hire more staff rather than invest in technology. The question should be asked: in the wake of a lost decade of low productivity, can the country solve its own productivity puzzle? Many of the problems that have come down to productivity come from a skills shortage. Getting the right workers with the right skills to work efficiently and effectively is a simplistic and obvious way to boost performance, but it is easier said than done.

I was interested in what the hon. Member for Strangford (Jim Shannon) said about Northern Ireland. I could not help but think that Northern Ireland, the north-east and Wales have the same problem: we are heavily reliant on the public sector to provide jobs. We have a smaller private sector than other regions. It is very difficult to increase entrepreneurship and encourage people to set up their businesses. The vast majority of businesses set up in Northern Ireland, the north-east and Wales are microbusinesses, which provide employment for one person. The fact is that we do not have a history of entrepreneurship. It is vital that as part of careers advice in schools we talk to children about setting up their own business and employing people. I talk to so many people who have the ambition of setting up a business, inspired by “Dragons’ Den” and “The Apprentice”, but when they go to do it, even though they have a fantastic idea, they find it extremely difficult. The Government need to educate people on self-employment and give them the confidence to be self-employed.

We talk about skills shortages. In my constituency, we have General Dynamics, a defence contractor from the States, where the average wage is £40,000—high-skill, high-tech jobs. We also have Axiom, another high-level engineering plant, and Unilever. They are all household names and big blue-chip companies. They will not have a problem upskilling their workers. On the other side of the coin, a small engineering outfit will need its workers to work and will not have time to upskill them. It is a truism of society today that people will not have a job for life; everybody needs to upskill continuously. That is why it is important that the Government introduce a skills levy, to allow companies to upskill their workers. In the short term, that will cost money, but in the long term it will work because we will have a more highly skilled workforce. If we ask businesses to invest in technology, a small business with fewer than five employees will have to decide between machinery or skills. That is where the Government need to step up to the plate.

The second area that we need to look at is even more obvious than upskilling. Technology has driven every change in society. From the first industrial revolution to the fourth revolution now, technology is at the forefront and the cutting edge. The biggest changes in society have come about because of technology. Even today, the most productive companies in this country are those that have invested in cutting-edge technology. The figures bear that out: on average, those that have cutting-edge technology are up to 6% more productive than other companies. Again, the Government could step in. Yes, we could have high levels of connectivity and faster broadband, particularly in rural areas, and such areas as Northern Ireland, the north-east and Wales, which I have talked about. However, there also has to be an effort from companies themselves. They need to utilise that technology, which feeds into my earlier point that they need to have the skills to do so.

Low productivity is the biggest problem facing our economy. We have high employment, but people feel unhappy because they are not feeling it through their wages. We can say that low productivity is a fact of our economy, but if we have the political will and we harness the skills and energy of the British people, the next decade can be this country’s most productive.