The Government’s Productivity Plan

Jeremy Quin Excerpts

Tuesday 28th February 2017 Commons Chamber

[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.

[Jeremy Quin (Horsham) (Con)]

I take the hon. Gentleman’s point about the “stickiness” of that investment, but it is a tribute to this country’s universities and the skills to be found here that foreign investors choose to come to the UK and base R and D resources here.

[Mr Wright]

The hon. Gentleman is absolutely right. In terms of bang for our buck, the amount of great work that the universities sector carries out and the number of spin-out companies that higher education provides are a magnet, in contrast with the “stickiness”, for foreign direct investment. We have to make this country as attractive as possible to such investment. Just as I referred to London and the south-east pulling up our productivity, I dread to think what our productivity and investment levels might be if we did not have that foreign direct investment.

Despite the R and D spend of both Government and business, we have never spent the OECD average—far from it. In the past 35 years or so, we have spent 2% of GDP on R and D only once and that was in 1986. The long-term trend is around 1.6% or 1.7%, which is not good enough if we want living standards to be maintained or productivity to rise. Productivity weaknesses clearly need addressing, and the previous Government introduced the productivity plan. We welcomed the Government’s attention on this pressing matter, but the plan lacked focus and did not demonstrate how success would be judged. Rather than being a clear road map or strategy for how the UK would close the productivity gap, it disappointed by being a mere collection of existing policies, with nothing new, distinctive or game-changing. The plan had 15 areas covering all aspects of Government and business activity, incorporating skills, R and D, housing and transport. However, it had no meaningful metrics to evaluate its relative success or failure and no milestones to track progress.

Although the plan was a Treasury initiative, the old Department for Business, Innovation and Skills clearly had a role to play, but clear lines of communication and accountability were non-existent. BIS and Treasury Ministers told our Committee that the plan was monitored by civil servants, which seemed somewhat relaxed given that productivity was meant to be the Government’s most pressing economic challenge. They seemed to forget that they were members of a ministerial Sub-Committee. Productivity now seems so 2015.

--- Later in debate ---

[Jeremy Quin (Horsham) (Con)]

I am most grateful to you, Mr Deputy Speaker, for calling me. I was thinking long and hard about the wise words of the hon. Lady who preceded me.

This is a debate in which we are showing the way for the UK economy. Up until now, the debate has been of a very high quality, albeit with a relatively low number of Members present. It was opened by the hon. Member for Hartlepool (Mr Wright). It has been a pleasure to work under his joint chairmanship of the Select Committee investigation into BHS and Sir Philip Green. I believe there has been some news on that this afternoon.

[Mr Wright]

Take your glasses off.

[Jeremy Quin]

Indeed.

[Michelle Thomson]

I hope we can agree that it is due to the successful joint working of the BEIS Committee and the Work and Pensions Committee that this afternoon we have seen Sir Philip Green agree to pay £363 billion into the pension scheme.

[Jeremy Quin]

I also heard the figure of £363 million. I, too, hope that it may be a tribute to the work of the Committee and, in particular, the joint Chairs of the inquiry. However, having taken part in that investigation, I take nothing at face value. I hope the hon. Lady will forgive me if I do some proper research before saying how happy I am. I hope there will be grounds for happiness, particularly for the pensioners involved.

In his introduction, the hon. Member for Hartlepool quoted Paul Krugman:

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

It is rare that I concur with the éminence grise of economists on the Opposition Benches, but on this—uniquely, perhaps—I think the hon. Gentleman is right. I hasten to add that there are two clauses to that sentence. The first is, “Productivity isn’t everything”. I agreed with the interventions made, which I will dwell on for a minute, by my right hon. Friend the Member for Wokingham (John Redwood) and my hon. Friend the Member for Newark (Robert Jenrick) regarding employment. We have to start with the realisation that where we come from economically could be a lot worse.

Many of us will recall vividly the impact of the dreadful recessions of the ’80s and ’90s in which homes were repossessed, factories were laid waste and there was mass unemployment. It has been bad enough this time around. We are still facing the challenge of rebalancing our fiscal position, but coming through the 2008 financial crisis—the worse since the 1930s—we have had some stellar successes. We have grown the economy since 2010 faster than any country in the G7 other than the United States. We enjoy the highest rate of employment on record; households with no workers are at the lowest level for 30 years. Youth unemployment for those who have left education stands at less than 6%.

It seems strange that I am saying this but, yes, I greatly admire the French and French productivity. We have much to learn and do, but I would rather be here debating a plan for improving our long-term productivity than standing in the Assemblée Nationale trying to defend high rates of youth unemployment. A distinguished economist and a distinguished statistician—even if he cannot count up to 57—are both in the Chamber, and I hope they will forgive me for saying that whenever something is referred to as a “long-term problem” by an economist, it normally means that they find it hard to measure in the short term.

Great trends in productivity are easy to spot, especially after the event. Instantaneous judgments are still worse, and forecasting is less easy. Before tackling what we should be doing better, we should keep an eye on where we are currently. This recession was very different from its predecessors. Although it was not always adhered to—there are some ghastly, scandalous examples, some of which have been highlighted by the hon. Member for East Lothian (George Kerevan—there was, by and large, a policy at the top levels of banks to practise forbearance, and by Her Majesty’s Revenue and Customs on troubled businesses. This, combined with base rates at low levels, provided the lifeline through the recession for many firms.

This also went with the grain of how businesses wanted to operate. Businesses could remember how frustrating it was in the ’80s and ’90s to fire highly trained, experienced and loyal employees, only desperately to try to re-recruit the same individuals two or three years later. They wanted to avoid those problems this time. It is a tribute to employees and unions that there was a recognition that constrained wage growth would enable more people to stay employed through the recession. The legacy is clear. We have not had the increase in unemployment that has helped to flatter the productivity growth of many of our competitors. I am glad of it because a labour force that has retained its skills and its practices is a vital asset.

High rates of employment are a boost to the UK while being negative for our productivity. We are not, of course, alone in having high rates of employment. The hon. Member for Hartlepool referred to the German economy, which is some 20% more productive than ours, despite similar rates of employment. My only note of caution about Germany’s incredibly impressive productivity performance is that we are talking about two very different economies.

Germany’s economy has an unrivalled capacity to produce capital goods that are hugely in demand from emerging markets going through a strong growth period, underpinning already firm foundations in that economy. But there is a caveat. My hon. Friend the Member for Warwick and Leamington (Chris White) also mentioned the German economy. I spoke regularly in my prior employment to German businesses and opinion formers, who were acutely aware that, although they were producing hugely sought after assets of huge value at the current phase of economic expansion, they looked to our economy and our ability to deliver on services and tech, as potentially the drivers of the next phase of economic development.

I do not for one second suggest that we should rest on our laurels, especially as the two most productive sectors in the UK—financial services and, looking at the hon. Member for Aberdeen North (Kirsty Blackman), North sea oil—have suffered most in the past decade. It goes without saying that we need to broaden and drive the overall success of the economy, but we should not dismiss too readily the strength of the platform from which we start.

The Government’s productivity plan is a solid document that has been made even more solid by the 10 pillars of wisdom in the industrial strategy that was published earlier this year. I will pick up three broad themes within it: infrastructure, people and finance. As the House will be aware, we have one of the most congested road networks of anywhere in the G7. I welcome the targeted investment announced by the Government in the autumn statement. Infrastructure spend has two benefits. The practical one is shifting goods from A to B, but there is also a psychological benefit on people’s ability and interest in spending and investing in the private sector. In both contexts, I welcome the decision on the third runway at Heathrow, and the ongoing delivery of Crossrail, which each have a psychological benefit way ahead of the immense direct practical benefit.

It may sound strange that, as a Member of Parliament proud to represent a Sussex seat, I also endorse what the Government are doing on the northern powerhouse. Anyone who has taken more than a slight look at the extraordinary extra housing numbers required in Mid Sussex and focused on their implications, and anyone who has endured the congestion on Southern rail—when it is running—or tried the M23, would know why support for a balanced growth in the economy is a general point right the way across the UK.

Our people are our country’s most important asset, just as they are any company’s. A fair point that was picked up in the Business, Energy and Industrial Strategy Committee report is the importance of parity of esteem between university students and those who choose more vocational routes. I am delighted that the institute for apprenticeships will be up and running in a few weeks, providing vigour and scrutiny to the courses being rolled out as part of the apprenticeship levy. Alongside that, I welcome the Government’s continuing commitment to the Catapults, and their boost to research and development—both new ventures. Assisting in the key phase between product development and launch is to be welcomed. It is the biggest boost to R and D at any stage since 1979—a good year. This is the right point in the cycle to be making that investment. However, in the long term, Government investment to support economic growth, proportionate and appropriate though it is, should not be seen as an end in itself. It can be dwarfed by the available capital in corporate coffers looking for a home. Government investment can oil the wheels and improve tax efficiency, as it is doing, on R and D.

Patient capital, which is incredibly important—I look forward to the report—must be encouraged, but it is to the private sector that we must really look to take up the challenge and invest. The sector knows that it will be doing so with a Government who are on a path to long-term fiscal sustainability, who are driving up education and training standards and, as they have shown with Heathrow, are prepared to take difficult decisions to boost our infrastructure.

Now is the time to invest in the UK economy. Nissan, Facebook, SoftBank and Google are all showing the way. UK companies should continue to take up the gauntlet. We have a good economic platform. Now is the time to invest; it will not only be our productivity growth rates that benefit.