The Government’s Productivity Plan

Michelle Thomson Excerpts

Tuesday 28th February 2017 Commons Chamber

[Mr Wright]

I will respond to the right hon. Gentleman in a moment when I talk about the structure of our employment market and how I do not think it deals with living standards, helps our constituents, or improves the long-term competitiveness of our nation.

It is little wonder, given the intimate link between productivity and pay, that Paul Krugman said:

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

Reflecting this, wage growth has been anaemic. In the period between 2007 and 2015, British workers suffered a bigger fall in wages than those in any other advanced country with the exception of Greece. Average pay fell in real terms by more than 10%. In the same period, real wages grew in France by 11% and in Germany by 14%. Median pay for workers in this country is still around 5% below its pre-crisis peak. There has been a lost decade of wage growth for our constituents, the British workers.

However, the headline nationwide figures for productivity, worrying though they are, mask the stark differences in regional productivity. Gross value added per hour in London is 32% above the UK average. The only other region with productivity above the UK average is the south-east of England, which is 9% above the average. The regions of the north and the midlands—including my own region of the north-east, and those of my fellow Select Committee members, the hon. Members for Cannock Chase, for Derby North and for Warwick and Leamington—have productivity levels between 10% and 15% below the UK average. In the nations of the United Kingdom, productivity in Scotland, which includes the constituency of the hon. Member for Edinburgh West, is 2% below the national average, while in Wales it is 19% below the average. Were it not for the performance of London and the south-east, the gap between ourselves and our major economic rivals, with whom we are competing for orders, trade and market share, would be even more dire.

[Michelle Thomson (Edinburgh West) (Ind)]

In this place, we habitually compare our productivity with that of the G7, but I recall a debate on this matter around this time last year for which I did some research into medium-sized countries such as Norway, where productivity levels are significantly higher than in any of the G7 countries. Is the hon. Gentleman going to explore how the scale of those medium-sized countries could be a factor affecting productivity?

[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.

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[Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)]

I congratulate the hon. Member for Hartlepool (Mr Wright) and his Committee on their sterling work in this area. I was particularly intrigued by his opening remarks about the nature of these estimates debates and their weakness. I was reminded of my experience when I was faced with the House for the first time after being elected back in May 2015. I walked around and found all these peculiar signs, such as for the Vote Office, where the one thing we cannot do is vote. The one thing we are unable to do in estimates debates is scrutinise the estimates properly. That certainly needs to be addressed in the longer run.

I was also taken by what the hon. Member for Warwick and Leamington (Chris White) said about the importance of innovation for productivity. It reminded me of an old teacher of mine, Professor Tom Burns, who, in 1960, wrote a book along with Graham Stalker called “The Management of Innovation”. How many years ago is that? It is a long, long time ago—57 years. The lessons of back then, when Professor Burns was talking about the growth of Marconi in Scotland, are just as relevant today in respect of what is involved in innovation. He argued that two main types of skills or knowledge needed to be deployed, and therefore developed in society. The first was the ability to have what he called “analytical skills”, which we might relate to STEM subjects and other quantitative skills. We need the ability to analyse problems and weaknesses, be it in technology, social fields or whatever, but that is not enough—we all know that we can analyse problems. Everyone in this House might agree what the level of unemployment is, but we would have different recipes to deal with it. So as well as having analytical skills, he said society had to be good at developing creative skills. That might be through “simple creative thinking”, as we could call it today, but I believe he was thinking more widely about how we bring decision-making and judgment skills to enhance the capacity to meet new types of challenges.

The other thing that Professor Burns mentioned drew on what happened in Scotland in the 18th century, at the time of the Enlightenment, and the ideas produced there. His argument was that not only did we have some uniquely brilliant individuals but, for the first time, we had the effective networking of people and of ideas. We were not building false barriers between people, be it by subject or geography. We should reflect on that today as people too often get stuck in professional silos, with ideas not being shared and networked enough. The possibilities therefore do not come to fruition in the way that they might.

The final thing that Professor Burns said in this book of 57 years ago was that we needed circumstances in which people valued and encouraged the “application of novelty”—in other words, experimentation. We all know that if that is done well, it will inevitably lead to a failure rate, so risk taking, as we would call it today, has to be part of the recipe. One thing that Governments of all hues are very bad at doing is putting in place policies that recognise that although we are going to generate some things that might fail, that is worth it, because we will generate other things that are a great success.

[Michelle Thomson (Edinburgh West) (Ind)]

My hon. Friend is making an excellent speech. I concur with what he is suggesting about entrepreneurs—our wealth creators—being given both the framework to succeed and the framework to fail. Does he agree that this is about looking at not just our innovation structures, but at more systemic issues such as banking? When a small business does fail, it is often hauled over the coals and loses absolutely everything, so we fundamentally need to change some of the ways in which we do business in this country.

[Roger Mullin]

I quite agree with my hon. Friend. Today I asked a question of the Chancellor of the Exchequer, which once again attracted the typical non-answer. I asked whether, given what has happened to businesses over the past few years, with things such as the RBS “dash for cash” and the like, there was not a case for having banks accept their duty of care towards the business community, and small and medium-sized enterprises. We need to look more widely at how we create a context that will really support innovation and risk taking.

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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.

[Kirsty Blackman]

Obviously, Scotland’s higher education sector is a huge success story and does fabulous work. The Smith Commission explicitly mentioned that we should be looking at the possibility of a post-study work visa in future for Scotland. The UK Government have announced that they might consider that for some universities in the south of England, but that does not help universities in my constituency, or in the constituency of my hon. Friend.

[Michelle Thomson]

I absolutely agree with my hon. Friend. Part of the problem could be solved by devolving those powers to Scotland so that we can protect our own higher education sector.

We have also heard this month from the chief executive of Innovate Finance, Lawrence Wintermeyer, who told the BBC that

“Brexit has had a chilling impact on investment.”

Investment is vital to industrial strategy and productivity. Wintermeyer backed up his statement with figures that show venture capital investment in FinTech firms, which is vital for my city of Edinburgh, has dropped in the UK from £970 million in 2015 to £632 million in 2016. In objective 12 of the productivity plan, the Government used Innovate Finance’s investment figures as a measure of success.

Finally, the productivity plan wanted to

“help deliver a Europe that is more dynamic and outward focused...by accelerating the integration of the single market, completing trade agreements, and improving the quality of regulation.”

[Roger Mullin]

That is a good idea.

[Michelle Thomson]

Yes, indeed. It was a sensible aim at the time and it is one that Scotland still supports. I hope that the Prime Minister takes serious note of the Scottish Government’s proposals to keep Scotland in the EU. She could then come back to us having had substantive discussions of what is contained in the paper. Obviously, we would formulate a considered response, but Scotland regards the proposals as vital. We are committed and dedicated to growing our economy, creating wealth, and increasing our productivity, but we cannot do it on our own and we need help. We are ambitious and we want Scotland to grow, and we say to the Government: do not hold us back.

[Several hon. Members rose—]

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[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.