At a recent dinner with top executives of a leading FTSE100 company, the human resources chief almost fell off her chair at the thought of a four-day week as part of Angela Rayner’s plan to ‘make work pay’.
It had taken this leading real estate firm almost three years to cajole colleagues back to the office and on to construction sites on Mondays.
Working from home (WFH) was now so established on Fridays it was considered a dead loss even trying to bring people in again on that day.
Giving people the right to a four-day week, under a new package for workers being considered by Labour would be a calamity – particularly for younger recruits who benefit from learning and mentoring from older colleagues.
The biggest challenge for Sir Keir Starmer and Rachel Reeves as they seek to embrace a growth agenda for Britain is the nation’s poor record on productivity – the output per worker which drives economic expansion.
The biggest challenge for Labour’s Angela Rayner, Sir Keir Starmer and Rachel Reeves as they seek to embrace a growth agenda for Britain is the nation’s poor record on productivity
Efforts to bolster growth are not being helped by caution at the Bank of England.
Last week the American central bank the Federal Reserve took a meat axe to borrowing costs, cutting its key interest rate by a half a percentage point. Britain’s rate-setting Monetary Policy Committee, headed by Bank governor Andrew Bailey, chose to sit on its hands, penalising consumers, people with mortgages and businesses.
The UK’s productivity has been calamitously weak since 2019. Output per hour worked is up just 2.8 per cent on its pre-pandemic level.
That’s below competitors in France, Germany and the out-performing United States. This might not seem surprising given the extra 400,000 working-age people who have joined the regiments of the economically inactive since Covid. The work ethic in Britain, partly due to health conditions, looks in need of urgent repair.
Tracking back further to 2008-9, the end of the great financial crisis which almost brought the whole banking system tumbling down, only France has fared worse than Britain among advanced nations.
America’s productivity leap forward is easily explained by the Magnificent Seven – Google owner Alphabet, Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla.
They dominate high-tech innovation, artificial intelligence and investment in IT infrastructure such as data centres. Love or hate Amazon, it has just come to the rescue of Ms Reeves with a commitment to spend £7billion on new computer hubs in the UK.
Before we start slitting our wrists about low productivity it is worth reflecting that it could be worse. After all, France, where the economy is roughly the same size as Britain, struggles with the same issues. In spite of all the negativity, not least from Downing Street, parts of the UK are firing on all cylinders.
A big study by the rigorous National Institute for Economic and Social Research (NIESR) ahead of the July 4 election found that while overall productivity in the UK may struggle, ‘London and parts of the South-East are among the most productive parts of Europe.’
Output per labour hour in London exceeded the UK average by a chunky 33.2 per cent.
I was among those who cursed Ms Reeves’ summary axing of the long-disputed tunnel designed to bypass Stonehenge, writes Alex Brummer
The lessons are obvious and illustrate why Britain needs better regional policy.
Policy decisions made in the capital mean that it often receives the best of government and private investment. Clues to outperformance in the capital are everywhere. The Elizabeth Line, the axing of the Northern legs of HS2 rather than London to Birmingham, the presence of several world-leading hospitals and the proliferation of towers in the City and the laying of fast-fibre telecoms cables illustrate the imbalance.
Regional productivity is hugely disappointing. In the US, Germany, France et al the concentration of resources is much better distributed. In the US, investment in Austin, Texas – the nation’s fastest growing conurbation and the adopted home of Elon Musk enterprises – is far greater than the older cities of the North-East including New York.
In France, investment in Paris (Olympics excluded) is rivalled by secondary cities such as Toulouse, Marseilles and others.
If Britain’s secondary metropolitan areas such as Manchester, Birmingham and Glasgow had grown at the same rate as London in recent decades then UK economy would be £120billion richer.
Labour’s promise of driving growth by building more houses and bulldozing through planning reforms might seem attractive.
But the changes, even if they were successful, are not going to generate the higher regional productivity required for lift-off.
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Giving in to the wage demand of railwaymen with a 14.25 per cent increase (including back pay) without any productivity improvements won’t help.
The traditional HM Treasury narrative of fiscal orthodoxy – illustrated by the hit to pensioners’ winter fuel payments – shows the difficulty of making investments which could enhance economic expansion.
A whole new attitude towards public and private investment is required.
UK governments, often with the next election in mind, find it hard to think long-term. There is constant chopping and changing. Rishi Sunak’s abandonment of HS2 is a case in point.
The current government’s lukewarm approach to new nuclear at Sizewell in Suffolk and in the shape of Rolls-Royce engineered small modular reactors (based on submarine power systems) demonstrates the difficulty.
As one of the many holidaymakers heading to the West Country in the summer I was among those who cursed Ms Reeves’ summary axing of the long-disputed tunnel designed to bypass Stonehenge. The hours wasted in tailbacks for commercial and consumer traffic are a direct hit to productivity.
In the private sector, businesses are plagued by frequent changes in tax policy which make them nervous of making long-term investment decisions such as buying the very best IT and equipment. Corporation tax was cut from New Labour’s 28 per cent rate to 19 per cent by George Osborne, then raised to 25 per cent by Jeremy Hunt after the Liz Truss trauma.
Since then the Tories changed the landscape with ‘full expensing’ allowing firms to offset headline taxes with tax relief on new investment. Labour has yet to fully endorse that nor has it made any pledges on headline corporation tax. Amid such chopping and changing it is no wonder that UK-owned companies are reluctant to invest. Some foreign-owned enterprises, such as Nissan and paint maker Akzo Nobel (inheritor of ICI), are used to longer-term investment cycles in their native markets and they are the exceptions.
Business investment in the UK has averaged 9 per cent of national output since the great financial crisis of 2008. This compares with 13 per cent to 14 per cent in the much-disparaged 1960s and 1970s and 12 per cent in the 1980s. It is considerably less than in France, Germany and the US in most years since 1965 (according to the NIESR).
Structural changes are needed. Ms Reeves thinks she can drive the productivity and growth mission from inside the Treasury. That is impossible given the department’s obsession with budget discipline. The UK’s innovation quango, Nesta, recommends a growth institution modelled on the independence of the Office for Budget Responsibility.
It also wants to see more empowerment in the regions to end the London bias, the harnessing of AI, better transparency in the jobs market, regional migration policy for better routes into work and a productivity innovation fund. Arguably Labour’s National Wealth Fund – if sensibly and commercially driven – could contribute to that.
None of this is brain surgery and it has been done before. One only has to look at the brilliance of the Elizabeth Line to understand how higher productivity can be delivered (if not on time or on budget). Not only is it Britain’s most popular piece of infrastructure, it has unleashed a private investment boom along its length at almost every station.
Investment to drive productivity requires a stable and predictable political leadership and a dependable company tax regime for business with generous investment incentives. It also needs governments which don’t cancel or shelve big state investment projects at the first smell of cordite. One of the values of Thatcherism was to stick with the mission – such as Canary Wharf, Eurotunnel and other projects – through thick and thin.
Britain has wonderful artificial intelligence pioneers. The Deep Mind campus at Kings Cross in London (owned by Google but created in Britain) has much of the technology UK industry and government needs for a great productivity leap forward.
Pity, however, it is not in Doncaster, Newcastle or Wigan. The key to driving UK productivity and growth is bringing what has worked well in the South-East to the rest of the country. Then Britain could leave its European rivals in the dust.
