By Daniel Hunter
The Chancellor can help solve Britain’s productivity crisis by targeting Government spending in areas that support growth in high value manufacturing, business leaders have claimed in new analysis published today (Monday).
With the right policies in place, manufacturing is poised to deliver 40% of Britain's productivity gains over the next decade.
In a report pre-empting the government’s own report on Productivity to be published by HM Treasury, EEF, the manufacturers’ organisation, has urged the Chancellor to focus his attention on areas that will deliver the biggest wins over this parliament and prioritise tax, spending and deregulation towards the sectors of the economy that have a strong track record on productivity improvements.
In the report, manufacturing a solution to the productivity crisis, British manufacturers are shown to be more productive than other parts of the economy and, as such, hold the key to improving the UK’s poor record on productivity. In the past five years output per hour in manufacturing has grown four times faster, on average, than that across the whole economy.
Furthermore, the report also shatters the myth of an underperforming sector by showing in the years running up to the financial crisis UK manufacturers were increasing rates of productivity growth in line with the best in the world. Since 2007 the sector has remained ahead of most EU competitors, including Germany, in some cases by a significant margin.
Government and businesses must work together to close the productivity gap, if the economy is to enjoy long term growth, EEF warns. Investment in skills, science, research, and infrastructure all act as key spurs to improve productivity according to the report on Britain’s productivity conundrum.
The organisation is calling on Government to ensure all departments throw their weight behind this agenda and ensure they prioritise investment in programmes which offer the greatest growth and productivity dividends. This will be much more achievable if government avoids an across the board cut to department budgets.
EEF Director of Policy, Paul Raynes, said: “Ministers’ welcome commitment to improve productivity requires their forthcoming policy paper to focus on further investment in innovation, skills and infrastructure and avoid flat-rate across the board cuts for investment and public services indiscriminately. It will be tempting for the Chancellor to swing the axe equally across all unprotected departments, but instead he needs to cut with a surgical laser to make sure government’s real contribution to future productivity growth can be preserved.
“Ultimately, the private sector, and manufacturing in particular, will deliver the lion’s share of the UK’s productivity improvements, but the state can be a crucial partner. Manufacturers already lead investment in research and innovation and want to carry on working with universities and innovation hubs such as the catapult centres as well as their supply chain. Manufacturers must also be fully involved with developing apprenticeships and engaging with young people about industrial career opportunities.”
The report says that many of the critical contributors to stronger productivity growth are evident in manufacturing, including:
Exports: many manufacturers are exporters which exposes them to competition and can be a spur to improve management capability - manufacturers are more than twice as likely to be exporters than other sectors of the economy.
Research: manufacturing companies investment in R&D is six times larger than their share of output in the economy leading to the development of new products, processes and services and support the exploitation of new technologies.
Technology: manufacturers account for 29 per cent of investment in new machinery and ICT improving efficiency and accelerating the diffusion of technology.
Skills: higher skills levels are associated with more productive sectors and firms - between 2000 and 2013 the proportion of hours worked in manufacturing by employees with no qualifications has halved and the share worked by employees with a degree has increased by nearly 60%.
In response, EEF calls on Government to work with business to improve productivity with policies underlying 3 key principles including:
1. The levelling up of performance between the strongest and weakest performing businesses
- Permanently setting the Annual Investment Allowance at £250k
- Ensuring migration policy does not prevent companies accessing skilled employees from outside the EU
- Protecting funding for the critical Catapult network
2. A greater focus on the most productive sectors and reduction to barriers to growth
- Maintaining internationally competitive R&D tax credits and an open approach to innovation engagement with EU partners
- Ensuring funding for Apprenticeships is maintained and channelled through a voucher system to put employers in the driving seat
- Implementing the recommendations of the Competition & Markets Authority to improve competition in business banking
- Take action to remove planning delays and restrictions
3. Using proven areas of government spending which spread good practice
- Driving ahead with the road investment strategy and implementing the recommendation of the Davies Commission as soon as possible
- Committing to strategic planning for the UK’s infrastructure requirements beyond this Parliament
- Widening better regulation to include the tax and administration agenda
- Maintaining the breath and stability of UKTI funding for export support