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Liz Truss is right that Britain has a productivity crisis – here’s why

·7-min read
Liz Truss visits Twelve Oaks Farm in Newton Abbot, England - Finnbarr Webster/Getty Images
Liz Truss visits Twelve Oaks Farm in Newton Abbot, England - Finnbarr Webster/Getty Images

Liz Truss ruffled feathers this week when she declared that dire productivity rates outside in London were largely self-inflicted.

But the frontrunner to become Britain's next prime minister has a point. Workers in London are 50pc more productive than the national average, according to the Office for National Statistics (ONS). The South East is a distant second, while Wales, Northern Ireland and Yorkshire and the Humber lag far behind.

But Ms Truss’s belief that more "graft" is needed is harder to implement in theory than in practice. When it comes to solving Britain's productivity puzzle, it's not so much the graft you put in, but what you get back out that matters.

And she should know. Her own constituency of South West Norfolk is 15pc less productive than the national average, ONS figures show.

Drive a few miles north into neighbouring Broadland, and it's a different story. Productivity there is 26pc higher than the rest of the UK. Tourism plays a role, as does business. The home of Condimentum, which mills mustard flour for Colman's mustard, and the world's largest vertical farm has helped the Norfolk region punch well above its weight.

Closing the productivity gap must be the priority for whoever is crowned prime minister on September 5. That’s because getting more from less has always been the key to rising living standards. And rising productivity is at its heart.

Productivity – which measures output per hour worked – tells us how much the economy can grow without generating too much inflation.

When productivity grows, so do company profits and staff wages. This leads to stronger growth, a bigger economy, rising tax revenues and smaller borrowing bills.

The crisis in productivity has its roots in decisions taken decades ago, as the embers of the industrial revolution faded and towns and cities from Bradford to the Black Country were forced to leave their old industries behind and find a new purpose.

Many struggled to thrive in a world without looms, coal mines or steam.

For a long time, this problem was masked by the booming services industry as the City of London took off and drove productivity growth. From the 'big bang' of deregulation which liberated financial services under Margaret Thatcher until the financial crisis, the average out per worker grew by 2pc per year.

In the ten years since 2008, growth has averaged just 0.7pc as regulation and a more nervous appetite for risk put lenders under pressure.

This shift – exacerbated in part by a surge in the tax burden to the highest level in four decades – has revealed anew the fault lines left by the decline of industry.

Amber Valley – north of Derby and once home to inventor Sir Richard Arkwright, father of the modern industrial factory system – now has productivity 9pc below the national average.

The City of London may have had its wings clipped by the financial crisis, but productivity is still more than 80pc above the national average.

Tower Hamlets in London which is home to Canary Wharf had the highest productivity, almost three times greater than in rural Powys in Wales.

Some of the productivity gap between the UK and its peers is linked to the structure of the economy. Manufacturing – where new technologies and faster ways of doing things are more easily adopted – powers around 20pc of German output, double that of the UK. But there are deeper forces at work.

Bart Van Ark, managing director of the Productivity Institute, says there are three main reasons why the UK’s performance has fallen behind some of its peers.

The first is what he describes as the UK's "pyramid" of firms. Blockbuster companies like GlaxoSmithKline and Google sit at the top.

But there aren't many of them, and the majority in the bigger part of the pyramid aren't as productive. Cities and towns that lack these companies are unable to compete.

Secondly, Mr Van Ark says many companies lack the technical know-how to benefit from those blockbuster firms.

The UK has some of the best universities in the world, and an army of graduates to match. What it isn't so good at is training the technicians, engineers and other staff who take ideas from those blue-sky thinkers and get them made into products on the factory floor.

Christine Farquharson, senior research economist at the Institute for Fiscal Studies (IFS), says the problem starts even earlier.

An IFS report this week warned that an alarming number of children were leaving school without basic reading and writing skills. While more are getting five good GCSE grades, many are still far short of meeting government reading, writing and arithmetic targets. It wants 90pc of children to be able to read and write at a basic level by 2030. Last year that figure was just 59pc.

The IFS also suggested that the English school system was failing many pupils. Its analysis of 38 industrialised OECD nations showed England was the only one where young people aged between 16 and 24 years-old are on average are no smarter than their parents.

"England stands out internationally for nearly non-existent improvements in skills when making comparisons across generations," says Ms Farquharson.

"Despite huge increases in the share of people achieving higher qualifications, younger generations are no more likely to be numerate or literate than those born four decades earlier.”

This matters because when factories close down, plants are mothballed or shop floors close, people often have to retrain to get a new job.

Those with limited qualifications have limited options, with the UK offering few life-long learning options.

The IFS analysis showed that since 2010, there has been a large decline in the number of adults taking low-level qualifications, from around 2.8m to around 1.5m in 2020. Government taxes like the apprenticeship levy haven’t helped. The number of adult apprentices decreased by around 21pc over the same period, it said.

The third reason behind Britain’s productivity malaise is what Mr Van Ark describes as a lack of “joined-up-thinking” between cities and regions that has left neighbouring districts like Ms Truss’s South West Norfolk and Broadland so unequal.

This is also true between London and Manchester, the world’s first industrial city. Mr Van Ark says the gap between London and England’s so-called second tier – or core – cities like Manchester, Birmingham and Leeds is wider than between comparable cities like Paris and Marseille or Amsterdam and Rotterdam as traditional industries like cotton and wool have died out.

Another OECD study found that economic output per worker in the UK’s core cities was just 86pc of the national average in 2016, representing the biggest gap in terms of domestic productivity amid big countries.

Philip McCann at Sheffield University adds that what’s unique to the UK are inequalities across short distances.

“There are enormous local productivity variations evident within just a two-hour driving time, whereas within Spain comparable variations would only be evident across a seven-hour driving time, and in Italy and the United States across a 10-hour driving time,” he says.

"In the UK, it is the combination both of the magnitude and the proximity of the interregional inequalities that is so marked, and the productivity weakness of many regions of the UK acts as a severe drag on national productivity.”

Mr Van Ark says Whitehall’s grip on local government finances is partly to blame. This means policymakers can’t always decide what’s best for their own backyard. He says many regional policies have also been the victim of changing regimes at Westminster. This makes it less likely that policies are followed through. He says devolving powers would produce better, and faster results.

Ms Farquharson at the IFS agrees.

“There’s been so much chopping and changing with education and training policies that it makes it difficult for anyone to understand what’s on offer," she says.

"We need an education system that offers clear and consistent training opportunities.

“We can’t keep starting from scratch.”

Although the industrial revolution is a distant memory, its divisions persist.