Economy: Productivity

Lord O'Neill of Gatley Excerpts

Monday 5th September 2016 Lords Chamber

[Lord Harrison]

To ask Her Majesty’s Government what plans they have to improve the United Kingdom’s productivity.

[The Commercial Secretary to the Treasury (Lord O'Neill of Gatley) (Con)]

My Lords, UK productivity performance remains a fundamental challenge. The Government set out their approach to tackling the issue in their productivity plan, Fixing the Foundations. The Government have since introduced further measures that will help productivity growth—for example, the apprenticeship levy, proceeding with investments in UK infrastructure such as High Speed 2 and the biggest investment in road and rail for a generation.

[Lord Harrison (Lab)]

My Lords, given the Prime Minister’s welcome focus on our poor and parlous situation in regard to productivity in this country—we stand some 18 percentage points below the average of our rivals in the G7—what is the purpose of, and how will competitiveness and productivity be generated by, our leaving the single market within the context of Brexit?

[Lord O'Neill of Gatley]

My Lords, the decision to leave the EU was the result of a democratic question put to the people of this country—it was the result of that choice. What that means for the future of UK productivity remains to be determined. As I am sure many Members of the House are aware, in the past couple of weeks in particular there has been a somewhat surprising upbeat tone to some of our economic data. Among other things, this raises the possibility that productivity has not slipped any further or as much as many people may have thought.

[Baroness Burt of Solihull (LD)]

My Lords, one of the key drivers of productivity is the need for businesses to feel confident in the long-term prospects for their business and the economy. I am sure the whole House will welcome the news from the purchasing managers index today that the service sector is bouncing back from the disastrous post-Brexit figures. However, as the noble Lord has already mentioned, many businesses remain nervous about what Brexit will mean for them in the longer term. Does the Minister agree that, if companies are to invest in the capital infrastructure, training and recruitment needed to tackle the productivity challenge, they need to see a real strategy for Brexit beyond the Prime Minister’s platitude that “Brexit means Brexit”?

[Lord O'Neill of Gatley]

My Lords, private business needs to feel confident about many things in order to undertake further investment decisions, of which the latter part of what the noble Baroness asked may be one. However, a number of other factors are important. In that regard, it is interesting that the latest evidence on investment is not only slightly more encouraging than was the case last year but perhaps ahead of some expectations.

[Lord Hamilton of Epsom (Con)]

My Lords, can my noble friend confirm that one of the reasons for low productivity in the United Kingdom is the seemingly unlimited supply of immigrant labour which is keeping down wage rates? Does he agree that if we manage to limit immigration as a result of Brexit, our productivity might go up?

[Lord O'Neill of Gatley]

My Lords, I am not sure that I would agree with my noble friend’s assertion. However, I agree with the inference that many things lie behind our apparently low and disappointing productivity performance, which I spend far too many hours trying to wade into. If you look at this in the kind of detail that I do, it is interesting to note that, if you take away the negative contributions made in those areas such as finance about which people are usually the most critical, our productivity performance since the recession of nine years ago is not any worse than that of any other member of the G7. There are many reasons behind our apparent—and probably realistic—disappointing productivity performance.

[Lord Watts (Lab)]

My Lords, the Government have cut business taxes when at the same time many companies are now cash rich. However, they are failing to invest in plant or in their staff. Why is that?

[Lord O'Neill of Gatley]

My Lords, the noble Lord has raised an important and interesting question. It is something that I spend quite a lot of time trying to explore. It is a feature throughout the western world that levels of cash held by corporations, including in economies that might be perceived as being more successful than ours, are very high, but despite low interest rates and favourable tax rates, the reported amount of investment being undertaken by corporations in many parts of the developed world remains disappointing. We need to understand this further and when we know why, we must try to do more about it.

[Lord Davies of Stamford (Lab)]

My Lords, is it not the case that devaluation is the enemy of productivity because, for a time at least, it keeps in being inefficient firms whose factors of production would be better deployed elsewhere? Is it not also the case that one of the great drivers of productivity is competition, and therefore if we are serious about improving productivity in this country it would be crazy to leave the single market, whether or not we have to leave the European Union?

[Lord O'Neill of Gatley]

My Lords, most of the independent measures of competitiveness would actually rank the UK among the highest in the world. On the first part of the noble Lord’s question, there has not been any official devaluation of our currency. It was a consequence of what happened, and in the context of what I said earlier, it is interesting to note that in recent days the pound has recovered somewhat.

[Lord Davies of Oldham (Lab)]

My Lords, the Minister is an honest man and he will recognise that we have had a chronic position with regards to balance of payments throughout the whole time that we have had a Conservative-led Government since 2010. He will also know that in this country the average Briton still takes five days to produce what the average Frenchman can produce in four days. In a period of increasing competition—as we are bound to find as we leave the European Community—how can we possibly make progress or expect to meet this competition with such appallingly low levels of productivity?

[Lord O'Neill of Gatley]

My Lords, I think I heard two questions from the noble Lord. I cannot resist saying that I seem to remember that the era of chronic balance of payments problems as described goes back to the 1960s, which precedes not only Conservative Governments; those of different colours were in town over that time. On the latter question, an important part of understanding the productivity issue in greater detail is that there is some evidence, which I have mentioned in the House before, that you have to be careful about bemoaning everything about our apparently low productivity performance because some of it is almost definitely the flip side of a very strong rate of employment. That is particularly the case in the context of making direct comparisons with France. It is an important point.

[Lord West of Spithead (Lab)]

My Lords, would the Minister agree that our complex warship-building capacity in this country cannot increase productivity unless it has a steady drum beat of orders? I have to say that, afloat on the Solent during the summer, I hardly saw a grey-funnel ship. How will we increase productivity unless we get a steady drum beat of orders so we can make investment?

[Lord O'Neill of Gatley]

Of all the aspects of the productivity challenge I have focused on, this is not one I have given that much attention to. I hope it is not necessary for us to go to war to do something about boosting our productivity performance.