The Government’s Productivity Plan

Greg Knight Excerpts

Tuesday 28th February 2017 Commons Chamber

[Mr Wright]

I am going to talk about scale in relation to the size of firms, as opposed to the size of nations, but the hon. Lady makes an important point.

This is not a dry and dusty economic treatise. I am talking about real, unsatisfactory productivity growth across the UK that is affecting the living standards of the constituents of hon. Members on the Committee and of Members across the whole House. That is why the Committee wanted to examine the Government’s productivity plan. This is not about dragging London and the south-east back; it is about moving the regions and nations closer to the economic performance of the capital.

The distinctive structure of our economy could also be acting as a drag on our economic performance. About four-fifths of our economy is made up of services, which is higher than in any other G7 country. It is clear that the service sector has driven the economic recovery since the downturn in 2008, but in the main the sector tends to have lower productivity than manufacturing. Moreover, in the past 30 years, we have seen a shift in the nature of jobs in this country. For every 10 middle-skilled jobs that disappeared in the UK in the 1990s and the first decade of the 21st century, about 4.5 of the replacement jobs were high-skilled and 5.5 were low-skilled. In Ireland, the ratio was 8:2 in favour of high-skilled jobs; in France and Germany, it was about 7:3. The nature of our economy and our skills set means that our major economic rivals are moving away from us and going higher up the value chain than we are. That is clearly having an adverse impact on productivity and living standards.

In addition, Britain is a nation, if not of shopkeepers, then certainly of small businesses. That is a great thing. In the 21st century, the number of businesses in the UK has increased by an average of 3% per year, to reach 5.5 million, which is 2 million more businesses than in 2000. However, the proportion of firms that employ people has fallen in the same period from about a third of companies in 2000 to around a quarter today. Micro-businesses—those enterprises employing fewer than 10 people—account for 96% of all businesses in the UK. The domination of small businesses in our economy has implications for productivity levels. They are unable to take advantage of economies of scale, they are more likely to face difficulties in accessing finance for new product, for process development or for scale-up activity, and they may find it difficult to find the time not merely to fulfil existing orders but to identify opportunities and secure bigger contracts for domestic and export markets. Those companies cannot afford armies of procurement and export teams.

[Sir Greg Knight (East Yorkshire) (Con)]

Does the hon. Gentleman agree that in certain sectors of industry, such as tourism, the jobs that are needed are low-skilled jobs such as running a caravan park?

[Mr Wright]

The right hon. Gentleman makes an important point. I want to see a pound generated being a pound generated throughout the economy, but I would like the structure and model of our economy to move higher up the value chain than running a caravan park, as he suggests.

Another big factor determining productivity levels is investment in research and development. R and D spend by UK businesses hit almost £21 billion in 2015, with an average growth rate of 4.2% since 1991. On the face of it, that is impressive, although the publication “The UK R&D Landscape” has stated that

“the business enterprise component of R&D expenditure in the UK is low by international standards, even after adjusting for structural difference between countries. It is also concentrated in the hands of a few very large firms and the small number of industrial sectors in which they are based.”

Indeed, seven sectors of our economy account for over two thirds of all R and D spend. The pharmaceutical industry accounts for a fifth of all R and D in this country. The automotive sector now accounts for 13%, reflecting its growth spurt in recent years, which is testimony to the great work that the car manufacturing businesses are doing. Aerospace accounts for 8% of the total.

Investment in R and D is concentrated in the hands of foreign-owned businesses. A quarter of a century ago, 73% of business R and D spend was undertaken by British-owned firms and 27% by foreign-owned companies. Since 2011, however, more than half the investment spend has been undertaken by foreign-owned firms. This has reflected the changing ownership of UK plc, with foreign direct investment often taking over larger British firms. This has certainly resulted in a boost to productivity, but it also leaves us vulnerable. In the event of a downturn in those investors’ home countries, there is no patriotic “stickiness”, and that R and D investment could fall and jobs and production facilities here in the UK could be cut to safeguard activity overseas in their home market.