By Mark Beatson, Chief Economist, CIPD, @MarkBeatson1
The UK has a productivity problem. We don't produce as much per hour as competitors like the USA, France and Germany, which has been the case for decades, and since 2008 it has got worse. We produce 2% less per hour worked than we did at the beginning of 2008.
So how will we judge the productivity of today’s Budget speech? There are two things the Chancellor has to do in this Budget. One is to present the new Office for Budget Responsibility forecast to Parliament as there is a legal requirement that two forecasts a year are presented which goes right back to the 1975 Industry Act, stewarded through Parliament by Tony Benn. The other is to announce or confirm decisions about tax rates, allowances etc. for the coming tax year that will go into the Finance Bill (although changes to duty rates usually kick in almost immediately). The Chancellor might well change the public spending total for the financial year 2015/16 in light of the new economic forecast and any resulting changes to Departmental allocations but he doesn’t have to do it, he could stick with the current one. After all, whoever becomes Chancellor in the next government is almost certain to have an emergency Budget in the weeks after 7 May when this would be up for grabs.
Hence a fair amount of the announcements, commitments and promises made tomorrow are in one sense worthless – they can be reversed by the next government before they are implemented. When you add in the likely narrative on the successes of the last five years that’s quite a large chunk of the speech. Now you could argue this is unnecessary. A management consultant implementing ‘lean’ politics would see room for an immediate productivity improvement. What he or she would have made of Gladstone's Budget speech of 1853, delivered on sherry and beaten egg and clocking in at 4 hours 45 minutes (approximately 14 times longer than the following year’s Charge of the Light Brigade), we will never know.
But this reminds us that productivity isn’t ultimately about how long or intensely you work, it’s about the value you produce in that time. Those watching or listening to the Budget will form their own views of the entertainment and information value obtained (which could be measured accurately if it was on pay-per-minute-viewed). Political parties, though, have a different perception of value. This is a time to make promises to the electorate that will be redeemed if they put an ‘X’ in the appropriate box. It also presents opportunities to box the Opposition into a corner or to knock them off balance with a surprise announcement (history does not record how many rabbits Gladstone produced from his top hat during his marathon speech).
The OBR forecast will almost certainly predict an increase in the real value of average earnings during 2015. We already see this in the ONS monthly data. But this is mainly because inflation is so low – the Consumer Price Index measure of inflation is currently 0.3% and many commentators expect it to be even lower in the coming months. As we said at the end of last year, backed up by the results of our latest Labour Market Outlook, we do not see any signs of a general take-off in average nominal earnings. This is because most employers are still finding candidates that are good enough to fill vacant positions without making across-the-board pay rises. And it is because of low productivity – where’s the extra value that makes a pay rise affordable?
I’m sure low productivity will get a mention – although my bet is it will be mentioned less often than ‘long term economic plan’ – but it is questionable whether or not the Budget will do much to increase it, even if we add in whatever announcements are subject to a Conservative government being elected on 7 May.
That is not because government doesn’t matter. It has a vital role to play in improving our productivity performance. There are some things that only government can do – such as raise taxes and make laws – and the government in the UK, as in many countries, takes the lead role in financing and delivering public services such as defence, health and education. The government also makes important investments in education and skills, scientific research and our energy and transport infrastructure which complement private investment. But most of the vital decisions likely to have an impact on future productivity in those areas will either be made by the next Chancellor later this year (at the end of a post-election Spending Review) or made by his or her Departmental colleagues in the years ahead. Changes to tax rates or administration can have an impact on productivity if they change work incentives or encourage start-ups or business investment, but they are not the only show in town.
Improving our productivity is also a policy for the long term. Some of the decisions taken by the next government – such as whether and where to build an additional airport runway in the South East or how much to spend on early years childcare and education – will not affect productivity for one or two decades but will then affect productivity for decades to come (indeed, into the 22nd century). That’s why we emphasise in our Manifesto for Work that helping our people and businesses face the challenges of the decades ahead means the next government needs to combine a sense of urgency with long-term vision and the patience to pursue continuous improvement year in, year out – the patience of a Gladstone indeed?
You can find out more about skills and productivity in the CIPD’s Manifesto for Work and join the debate online using #CIPDManifesto
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