Revitalising UK Productivity: The Power of Investment

Revitalising UK Productivity: The Power of Investment

Reported by Patrick McAlary, CSaP Policy Assistant

The opening session at our Annual Conference last month focused on the role of investment in relation to UK productivity. Dame Kate Barker from the Productivity Institute, chaired a discussion between Professor Jagjit Chadha, Director of the National Institute of Economic and Social Research, and Philip Duffy, Director General for Growth and Productivity, HM Treasury.

Identifying the Problem

Professor Chadha opened the discussion with a summary of a commonly stated problem: that the UK’s productivity has been underperforming for a long time compared to countries like the US, France, and Germany. The effect has been that our incomes are falling relative to the rest of the world, and as products from overseas continue to rise in price, we are doubly disadvantaged.

Arguing that the UK economy has underperformed relative to people’s expectations, Professor Chadha said that people are worse off than they thought they would have been, with 48% of households suffering a fall in living standards. He explained that this could lead to frustration and produce political momentum that could be detrimental to the health of the UK's democracy.

Professor Chadha suggested that the UK’s ongoing supply shock, which is increasing prices faster than wages, has been amplified by previous policy errors. He pointed to structural failures worsened by Brexit that have impacted the supply side of the economy and left it more vulnerable to subsequent shocks such as the Covid-19 pandemic. Arguing that there is no quick solution to achieving higher growth in the economy, Professor Chadha said that this would need to be nurtured over generations and parliaments.

The Role of Investment

Professor Chadha continued by stating that stimulatory monetary policy has made the UK an attractive place to invest, but that the level of investment had not reached what had been expected.

“We have made the conditions very good: we have more graduates than ever, a highly skilled workforce … and yet with stimulatory monetary policy and very cheap national assets in international terms, we are not seeing a flood of investment in the country.”

He went on to say that public and business investment had stalled, which prompted lower productivity, poorer wages, and poor public infrastructure. He further pointed to a “budgetary approach” that fixates on the net debt-to-GDP ratio and argued that the imposition of such arbitrary fiscal rules had undermined the growth potential of the UK economy. According to Professor Chadha, we would need to nurture the supply-side of the economy by making it clearer that we wanted to invest in a serious way in the UK economy.

"Investment is what we need, and we need to think about institutions, policy making that goes far beyond the next parliament or the next chancellor ... and we certainly need something that will get rid of the constant uncertainty when thinking about the future."

Investment versus Political Economy

Following Professor Chadha, Philip Duffy pushed back against characterisations of the Treasury as “miserly bean counters”, pointing to an incredible expansion in spending over the previous four years. He emphasised the Covid-19 pandemic and the energy crisis and said that these crises had required a phenomenal expansion in spending after the Brexit vote. Mr Duffy then argued that failure to get public spending under control would leave the UK exposed when the next crisis comes, and less able to support those who need it most.

Emphasising that we live in a political economy, Mr Duffy stated that we can all agree that we want the economy to grow faster, but the things needed to seize that future are politically contentious, and so we need to work in the realms of political reality. He also noted that people should be wary of laying all problems at the feet of Brexit. Highlighting that the economy often does not respond to broad brush measures, Mr Duffy argued that modern economies are large complex systems and, as such, creating workable policy interventions is extremely difficult.

Mr Duffy continued by saying that academics could support policy makers by helping them to understand what decisions drive investment in businesses at a micro-economic level. He then emphasised that while investment was an important factor, it was not the whole problem and compared the UK to the US and to the OECD average.

As the speakers agreed on the need for growth, Mr Duffy warned: "We need to raise the alarm and get more people worried about growth ... if we do not fix this problem we will be by far the poorest major economy in Europe—and that is not a place we want to be."

You can listen to the session recording here: