The Government’s Productivity Plan

George Kerevan Excerpts

Tuesday 28th February 2017 Commons Chamber

[Amanda Solloway (Derby North) (Con)]

It is a great honour to follow the hon. Member for Kirkcaldy and Cowdenbeath (Roger Mullin); I always listen to him with great enthusiasm. It is also great to be here with fellow members of the Business, Energy and Industrial Strategy Committee. To add to the comments of my hon. Friend the Member for Bedford (Richard Fuller), it is a great privilege to serve under the chairmanship of the hon. Member for Hartlepool (Mr Wright).

Productivity is an essential driving force for the country’s economy, with direct implications on our long-term growth, living standards and wages. Its importance was highlighted by my right hon. Friend the Chancellor of the Exchequer in his autumn statement back in November, when he spoke about how the UK is trailing behind several countries in terms of productivity, including the US and Germany. In seeking to tackle that problem, he announced £23 billion of investments, designed to improve output, with particular emphasis on infrastructure and housing. Along with the productivity plan and industrial strategy, that illustrates the Government’s commitment and determination to making the UK the best place in the world—

[George Kerevan (East Lothian) (SNP)]

I hope the hon. Lady will forgive me for interrupting her in her stride—she is making an interesting argument—but the largest proportion of the Chancellor’s £23 billion productivity innovation plan is for house construction. How does that add to productivity?

[Amanda Solloway]

I will come to that later in my speech. I apologise, but I am having difficulty seeing today, so Members should shout loudly if they want to intervene.

I was saying that the Government’s commitment to making the UK the best place in the world to do business should be warmly welcomed by the House.

I have spent most of my life in retail and manufacturing, so I am acutely aware of the challenges faced by the sector, which are clearly not unique to the industry and can be seen throughout the business community. With the right foundations, business and industry can and will flourish; we just need to provide the right conditions, which the productivity plan rightly addresses. In doing so, it is essential for us to focus on improving the quality of our primary and secondary education to provide an adequate starting point for young people heading into further education, apprenticeships and employment. I welcome the Government’s recognition that improvements to basic skills such as numeracy and literacy play a vital role, and the fact that they are putting those skills at the heart of their reforms. It is skill provision in general that I shall touch on today.

The UK’s competitiveness in the open market is now more important than ever. Following the result of last year’s referendum, as we seek to find new avenues for investment and trade, the potential opportunities for and contribution to our nation’s productivity should not be underestimated. New capital, more competition, and new technologies will all be vital as we look to compete with the rest of the world.

From a Derby North perspective, the success of the midlands engine is incredibly important to me. The midlands engine strategy can be a vehicle to deliver policy that will not only increase productivity but support the vision for a successful United Kingdom. We have a strong offering in the midlands that can deliver growth that is not only balanced by sector, geography and trade, but sustainable, in that it creates skilled, highly productive roles backed by private sector investment. The midlands engine must focus on elements that give us competitive advantage, central to which is our expertise in key sectors, especially advanced manufacturing.

In my constituency alone we have a high density of original equipment manufacturers—such as Toyota, Rolls-Royce and Bombardier—and a well-established supply chain that serves them all. It is essential that we have the training and skills that match local employers’ needs, which is something the productivity plan looks to address.

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[Michelle Thomson (Edinburgh West) (Ind)]

It is a pleasure to take part in this debate. I commend the hon. Member for Hartlepool (Mr Wright) for his contribution and for his leadership of the Select Committee. I reiterate a point that he made: the productivity plan, “Fixing the foundations”, was published in July 2015. We should step back and think about the radical changes we have seen since then, because it is ever a moving target. We have a new Department for Business, Energy and Industrial Strategy, a new Prime Minister, a new Cabinet, an industrial strategy Green Paper and, fundamentally, a new relationship with the EU. In terms of the estimates, it is indeed a moving target. There is a real challenge in the macro relationships of how we get policy provision to guide us going forward among all that shifting.

Obviously the most important of those changes is Brexit, and how the Government respond to it will be crucial for the future of any industrial strategy or productivity plan. Prime Ministers come and go and Departments get renamed, but leaving the EU is the sort of event that is going to take massive energy to achieve anything positive. Worryingly, the rhetoric I have heard so far does not fill me with a great deal of faith. We are undermining some of the noble intentions of the productivity plan and industrial strategy. Putting up barriers will have an impact on productivity. I am in no way convinced by some of the grandiose sentiments along the lines of, “If everything doesn’t work out, we can always revert to World Trade Organisation rules”—most people do not seem to be aware that the fundamental work of revising and agreeing schedules is a massive amount of work in itself.

It is probably not a surprise to my colleagues here that I will focus briefly on Scotland, as is my wont in every BEIS Committee as well. A good job has been done with productivity in Scotland. We are now at the point where our output per hour is much the same as the UK average, and that has happened over the past 10 years. We have managed to close the large gap, but, as has been commented on previously, we are, frankly nowhere in terms of the wider UK. I managed to dig out the statistics that I quoted last year and the research that I had done in the House of Commons Library, which showed that Norway’s productivity was 77% ahead of the UK, and that continues to shock me.

The analysis paper of the respected think-tank, the Fraser of Allander Institute, on the impact of Brexit suggests that Scottish productivity will be negatively affected by leaving the European Union. To me, that is absolutely fundamental. Ending the free movement of people and thus reducing labour mobility is a fundamental issue for us in Scotland, and it cannot be overstated. One impact could be reduced inward investment, which could affect higher productivity.

Commitment 55 in the productivity plan report calls for a continuation of

“the long term decarbonisation of the UK’s energy sector through a framework that supports cost effective low carbon investment.”

The industrial strategy Green Paper then adds to that by calling for an upgrade in infrastructure and a delivery of affordable energy and clean growth. However, from my point of view, this Government are actively undermining these laudable aims by selling off the Green Investment Bank with undue haste. I understand in principle why one might want to capital raise, but I remind the Minister that the Green Investment Bank is quite clear that it does not need to capital raise until 2018. Furthermore, in terms of the nature and the type of projects that have been selected to address market failure, I now have a concern that there will continue to be a gap. Yes, market failure has been affected, and even blocked, by the introduction of the Green Investment Bank in some areas, but it has yet to be addressed in other areas.

[George Kerevan]

Is my hon. Friend aware that Macquarie Bank wants to buy the Green Investment Bank for the brand name, so that it can exclude competitors from taking part in local authority environmental investment schemes? Selling the bank will mean less competition in environmental investment, which in turn means reduced productivity in the long run.

[Michelle Thomson]

I am aware of that, and I have had conversations with the Minister, Macquarie and the Green Investment Bank. The fundamental concern is that, potentially, Scotland risks losing an asset in terms of the headquarters in Edinburgh. Despite the assurances of the preferred bidder—let us call it Macquarie—I will be watching this matter very carefully, because there is a risk that we will lose head office functions and the board. Going back to my hon. Friend’s point, it is building an infrastructure that enables productivity and these kind of things to succeed. If we put in public capital investment and we then do not get the value from it, that seems to me to be short-sighted and misguided. Equally, without the firm commitment to maintaining jobs in Scotland, all the productivity plans and industrial strategies in the world will not address the regional disparities that we see in Scotland, especially if we promptly roll away all these things.

On carbon capture and storage, we have spent £100 million on two competitions to try to kick start this new technology. We heard yesterday on a BEIS Committee day trip to Edinburgh that that is very difficult, and I accept that. As my hon. Friend the Member for Kirkcaldy and Cowdenbeath (Roger Mullin) commented, we must be prepared to take risks to drive things forward for future gain. We accept that £100 million has been spent, but if we do not press ahead with some of these proposed projects, our country could once again lose its competitive advantage, and we cannot rule that out and forget about it.

I am most concerned by some of the narrow-minded views that have been exhibited in some of the debates around Brexit. They have a pervasive narrative that sounds isolationist and deeply disappointing when it comes to the wealth of opportunities of renewable energy. For example, a new interconnector between Scotland and Norway will soon allow the transfer of wind power and hydro power between the two nations, allowing them both to cut their emissions. This is not the time for retrenching and retreating. Construction has also started on a new 1 GW interconnector to France, further demonstrating our inter-dependence with our European neighbours.

Let me move away from energy and quickly dwell on some of the other issues that have been most affected by Brexit in the productivity plan. The first is the issue of international students. In the BEIS report on the productivity plan we said:

“We recommend the Government does not allow migration pressures to influence student or post-study visa decisions. It is illogical to educate foreign students to one of the highest standards in the world only for them to leave before they have had an opportunity to contribute to the UK economy.”

I have a story from my constituency of Edinburgh West. A remarkable young man, Mr Olubenga Ibikunle, won a substantial sum of money to do a PhD in civil and coastal engineering. As soon as he completed his course, he was turfed out. The level of his ground-breaking research, commitment and dedication to self-improvement means that he is exactly the sort of person that we would like to keep in Scotland.

The Prime Minister refused to consider removing students from net migration targets when she was in front of the Liaison Committee. I hope that she will reconsider her position, because international student numbers are already beginning to fall as evidenced by the latest immigration statistics. We cannot allow our position as a world leader for international students to be eroded by a dogmatic fixation on an arbitrary target of tens of thousands of migrants.

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[Amanda Milling]

I am grateful for my hon. Friend’s intervention, and some Members might hope that I do not start to talk about rail in too much detail, because I have spoken about it a lot in the House. My hon. Friend makes an incredibly important point, and one of the issues with the west coast main line is capacity in terms of not only passenger trains but freight trains. That is a key part of the transport infrastructure piece we need to look at. This is about road and rail, among other things.

One question I want to ask the Minister is: what is being done to look at the drivers of this regional disparity so that the different regions can understand what they need to do to address it?

[George Kerevan]

On that point, there is perhaps a third reason why manufacturing areas such as hers find it difficult to compete with European levels of productivity, which is that we have a very small equity market for medium-scale industrial firms. They have to rely on bank financing, which is very inefficient. In the United States and Germany, firms can get equity funding, and it is much easier for medium-sized manufacturers to expand.

[Amanda Milling]

The hon. Gentleman makes an interesting point, and it is one that the Select Committee explored in relation to access to finance. There is an over-reliance on bank lending. There is a plethora of ways in which we can finance small businesses, but people do not necessarily look at all the options available to them.

Let me go back to the point about the regions. In the context of devolution, we have combined authorities and local authorities, and in my area we have the midlands engine. I would be interested to hear what support the Government will give those different bodies to try to improve productivity in their areas.

Another point I want to pick up on is that it is very evident in the productivity plan and the industrial strategy that they require cross-Whitehall buy-in, and a number of Whitehall Departments are involved. Before I go into detail on that, let me say that the productivity plan was really led by the Treasury, while the industrial strategy is largely led by the Department for Business, Energy and Industrial Strategy. That raises a couple of questions. To what extent does the Treasury have input into the design of the industrial strategy? What is the relationship between the productivity plan and the industrial strategy? Is the industrial strategy the successor of the productivity plan? If not, how will the two work together, and who will manage them, given that they came from different Departments in the first instance? We have talked about transport, skills, and digital infrastructure. In looking to deliver the industrial strategy, we need many Departments to be fully bought into that. For instance, during this Parliament there has been a real focus on various Departments owning exports and taking a degree of responsibility for that area. It is welcome news that the Prime Minister chairs the Economy and Industrial Strategy Committee and the Secretary of State for Business, Energy and Industrial Strategy serves on a lot of Sub-Cabinet Committees. What are the Government doing to ensure that the industrial strategy is truly embedded into each of the Departments and that they take responsibility and are accountable for its delivery, thereby in turn improving our productivity?

I want to make a point about measuring success. My hon. Friend the Member for Warwick and Leamington touched on this. It goes back to my original point about the productivity plan. We had concerns as a Committee that the productivity plan was lacking in measurable metrics and delivery timeframes. During the course of our inquiry, it was really noticeable that if we asked people how they defined “industrial strategy”, we got a whole wide range of answers. We need to be very clear about what it is, but also how it is going to be measured so that we can assess whether we are succeeding or otherwise. As we all know, it takes time to see whether we are improving our productivity, so I would also be interested to understand what is being done in the short term to assess our progress on that.

I think we all welcome the focus on productivity. A number of Members have talked about the balance between productivity and employment rates. We need to try to tackle this ongoing issue that we have faced for decades. As a west midlands MP, I think we really do need to look at how we can rebalance and improve our productivity in the regions. I do not want to see the west midlands at the bottom of the English areas in this regard. I welcome the industrial strategy because it looks to have productivity at its heart, but we need to have a commitment to it across Government. We need to look at how it works at a regional level, and to have clear metrics.

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[Robert Jenrick]

I apologise if I chose my words poorly, but the point that I was trying to make is that we need to exercise great caution, because two things have had an effect. The first is that high levels of immigration have meant that wages have been supressed, but as we leave the European Union we also need to ensure that people continue to do those jobs, whether they be in the care sector or, indeed, in the food production industry in my constituency. There is a challenge ahead for the Government not only to maintain employment levels, but to ensure that there is a better-paid workforce.

Secondly, as has already been said, a major contributor to our loss of, or stagnating, productivity in recent years has been the decline in the financial services sector since the financial crash of 2008. That has happened not just in London, but across the country, including Edinburgh in Scotland, Manchester and my own city of Nottingham, where the related company Experian is based. There are fewer jobs and less productivity. Nobody is a friend of investment bankers, but they are highly productive members of the economy and we need to be careful about how we accommodate the financial services sector post-Brexit. Personally, I am fairly optimistic about the future, given that those investment bankers and lawyers to whom I have spoken will not follow the entreaties of Mr Macron and move to France, with its sclerotic, socialist economy, any time soon.

We need to be careful, however, about how we proceed in tackling the productivity gap. I am particularly cautious about spending more money and getting the country into further debt. The national debt, of course, is £1.8 trillion and it is increasing at a rate of £5,000 per second. Levels of austerity have been grossly overstated: public spending has fallen by only 5% or 6% in real terms since 2010. Although it has fallen as a percentage of GDP, it remains a major problem, and I am particularly concerned that fewer and fewer right hon. and hon. Members even mention the debt and the deficit as part of our national dialogue. That needs to change, because the greatest threat to our economy and productivity is the debt we are leaving to future generations.

[George Kerevan]

I presume that the hon. Gentleman is aware that when Harold Macmillan was Chancellor of the Exchequer, the national debt was double what it is now. Even though it has doubled in the past 10 years, it was double the current figure as a proportion of GDP, and the economy was growing even faster and productivity was even higher.

[Robert Jenrick]

The problem with higher levels of debt lies not just in passing it on to future generations, but in the consequences of that for them. It will mean higher taxes, a less competitive economy and poorer productivity for generations to come. Just because many of our competitors around the world, including the United States under President Trump, have chosen to go down that path, that does not mean that we should follow them. I for one want a Government who in the years to come tackle the debt and deficit as aggressively as they have done in the past.

I am cautious of trying to tackle the productivity gap by spending money on high-expenditure infrastructure projects that have over-optimistic claims—a result, I am afraid, of politicians being both their promoter and their scrutineer. I suspect that HS2 falls into that category.

I welcome the National Infrastructure Commission. I hope that it has teeth and that it will provide balance and ensure that we start investing in those infrastructure projects that actually improve productivity and take long-term decisions for the future of the country. Given the current scale of the national debt, borrowing for rushed, so-called shovel-ready projects will have a limited multiplier effect and will only add to the debt burden, thereby necessitating future tax increases and a less competitive economy in the years to come.

I am in favour of us investing in those infrastructure projects that promote long-term growth which do not necessarily cost the earth and have the highest productivity potential. I am also interested in supply-side reforms that cost either little or nothing at all, such as deregulation and tax simplification, or that are likely easily to pay for themselves, including the creation of a lower-tax economy that will benefit us for years to come. Let me take each of those points in turn.

In relation to creating a longer-term, higher-growth investment plan that will tackle low levels of productivity, I have some sympathy with some of the areas that have already been discussed. The congestion on our roads is a major issue. As hon. Members have mentioned, our roads are among the most congested of any country in the G7. This does not necessarily require the most expensive road investment strategies, but it does require investment in bypasses, junctions and mending potholes. My own town of Newark is one of the most congested towns in the midlands, and freeing it up would give a major boost to the economic prospects of the whole of the east midlands.

We should take some long-term decisions even though they are expensive, such as investing in Heathrow. No Government who actually believe in tackling the productivity gap or in putting us in the right position to be a global trading nation can afford to let such a decision be pushed further into the future. Less sexy decisions to do with long-term infrastructure are also important. We heard my hon. Friend the Member for Central Suffolk and North Ipswich (Dr Poulter) talk about trying to sort out the problems of freight on our road and rail. I am sure that my friend Sir John Peace, the head of the Government’s midlands engine, will make that a priority in his forthcoming report.

Lastly, it is very important to take seriously the need to reduce energy costs for manufacturing and other parts of our economy. It is of course important to produce a sustainable energy economy and ecosystem, but we are pricing out many of our most important manufacturing businesses with expensive energy projects. I am particularly concerned about some of the Government’s decisions in recent years that have produced extremely expensive projects, for which we will have to pay for years to come. It was imprudent of us to have closed some of our power stations, such as Cottam in my constituency, which were operating perfectly well and helping to keep energy costs down for consumers and businesses.

On supply-side reforms, I think tax simplification is extremely important. Frankly, no Government since the chancellorship of Nigel Lawson have taken tax simplification seriously in this country. The former Chancellor, my right hon. Friend the Member for Tatton (Mr Osborne), took an interest in this matter—he created the Office of Tax Simplification—but, in fact, relatively little happened, and the tax code only increased in length. Tax simplification need not cost the taxpayer anything at all, but it would make a huge difference by making it easier, not harder, to employ people, to grow the economy and to get investment into this country.

On our tax competitiveness, it is extremely important that we continue the pattern created by the previous Chancellor of reducing our corporation tax to levels that are among the most competitive in the world. Clearly, there may be new challenges ahead with the United States, if indeed they materialise, but it is extremely important for us to persist. I thought the former Chancellor was right, despite some rather opportunistic criticism from the Labour party, to reduce capital gains tax. Even with the changes, capital gains tax will remain higher under the Conservative Government than it was at the end of the Gordon Brown era, so that intervention by Labour was really baffling. We need an economy that is the most tax competitive we can possibly make it.

We have already spoken about research and development. Incentives for research and development, such as the reliefs created by the coalition Government, have been extremely effective, as I know from speaking to large and small companies in my constituency, and I would like them to continue.

As we approach Brexit, it is extremely important that the Department starts to look, industry by industry, at what low-cost deregulation could be achieved that does not sacrifice workers’ rights or infringe sensible environmental protections, but may be a game changer in those industries. In the two or three industries I have worked in—the legal sector, and running an auction house —there are European regulations the repeal of which would not be offensive to most people in this country, and that would give us a small but none the less significant competitive advantage over our major competitors in other countries. I will not bore the House with the details of such regulations, but the Government, in preparation for our departure from the European Union, should now work on a sectoral or industry-by-industry basis to work out which they are.

The penultimate point I want to make is that we should give greater thought to the long-term sustainability of the British economy. I am concerned not only about the deficit, but about welfare, and the Government should look at our state retirement age. It is inevitable that with an ageing population all of us will need to work longer. This produces a number of major challenges, particularly for those who work in sectors, such as on the shop floor or in heavy industry, where the work is extremely tiring. There is no doubt that people will need to retire or change career at a later stage. It is inevitable that the Government will have to look at this and act quickly if we want to signal to the markets our continued careful stewardship of the economy.

It is extremely important now, particularly as we are leaving the European Union and setting our sights on the world beyond, that we invest more of our time and effort in creating the kind of entrepreneurial culture found in the United States that this country has never quite managed to replicate. This will mean more allowances for entrepreneurs. I would like to see entrepreneurs’ allowances preserved, if not increased. I would be interested in them being focused on longer-term investments. At the moment, most reliefs are available after, I think, only a year of holding assets. They could be focused on investments further in the future.