Why the Chancellor’s Autumn Statement won’t budge productivity growth
The Chancellor mentioned the word productivity 14 times during the Autumn Statement and for good reason. The UK lags the US and Germany by 30 %, and France by 20% resulting in lower average incomes. Three of the key drivers of productivity include the ability of workers to access education to improve human capital, the ability to access finance allowing firms to expand, and for there to be sufficient infrastructure for firms and workers including housing
So how did the chancellor do on these three key measures?
Firstly, there was almost no mention of education beyond devolving the London adult education budget and the provision of £50m capital funding to support the expansion of existing grammar schools. However, one of the most important drivers of productivity is human capital, and Britain has a gaping hole in its technical education system. It educates a far lower portion of young people to an upper secondary level, which is particularly relevant for technical skills, than most other advanced economies. Critically, technical skills are in significant demand by firms across all sectors to achieve their growth ambitions, which in turn drives productivity.
Between August 2015 and July 2016, the Centre estimates around 462,000 technical roles were difficult to fill due to skills shortages. These skills shortages are largely a function of young people enrolling in courses for which there is less demand. If the chancellor is interested in driving up productivity, resolving this local mismatch between supply and demand would be transformational. This would see a jump in the number of higher skilled workers with a 132% salary increase on the living wage. However, to achieve this will require further education colleges to not only adjust course capacity but also to boost investment as technical courses tend to be more expensive.
On access to finance, the Chancellor announced an additional £400m into venture capital funds through the British Business Bank for firms wanting to scale up. This is clearly to be welcome. However, British venture capital funds are likely to lose access to the European Investment Fund which invested around $500m per annum in the UK between 2011 and 2015. Hence, this policy appears to be more of an attempt to partially bridge the venture capital funding gap which is likely to widen as a result of Brexit.
However, there was some positive news with regards to infrastructure, which was mentioned 21 times in his speech, including the announcement of the National Productivity Investment Fund. Nearly half of this fund will be spent on housing, with the remainder shared between digital infrastructure, transportation and R&D.
The rate of infrastructure investment will increase from 1.7% of GDP to 2.0% of GDP until 2020-21, which is significantly larger than anticipated. Although this is to be welcome, this still falls well short of the OECD’s recommendation for 3.5% of GDP. Moreover, the UK has a significant shortfall from generations of underinvestment resulting in the UK only having a stock of infrastructure of 57% of GDP versus 71% in Germany.
But the fact that the government has finally recognised it is infrastructure investment that will unlock land for housing is a crucial point. Furthermore, the government also appears to better understand the scale of the market failure in land, as this fund is to be focussed on public land. If it had been a general fund, then as much as two thirds of the fund would have been spent on acquiring land at exorbitant rates rather than on capital accumulation, and thus would have had almost no benefit.
This suggests the policy focus is beginning to shift and may well open the gates to access the £9bn per year that flows to landowners as windfall profits instead of funding infrastructure – which is the case in most other advanced economies. Indeed, until the government reforms the land market it is unlikely to be able to accelerate infrastructure investment to anywhere close to the OECD benchmark.
Another critical reason why the land market needs to be reformed is that the increase in borrowing to fund infrastructure, set against deteriorating public finances, pushed up 10 year gilt yields to 1.47% a jump of around 6%. Although this is not a major increase, it does show that markets do respond to increases in general government borrowing. However, if the government used land value capture to fund infrastructure this would be far less likely to happen. This is because city region authorities would issue bonds directly to the market backed by the cash flows derived from the uplift in land values.
The Autumn statement will not do much to transform productivity growth, but it does suggest that the government is beginning to get serious about investing in infrastructure. If this is the case, reform of the land market is also now far more likely given it could add an additional 20% per year to infrastructure investment. But such a policy shift will also require a greater focus on technical skills to train a new generation of workers to deliver the infrastructure. Only then will the economy start to see the fruits of higher productivity growth.
The image is by the Foreign and Commonwealth Office, published under CC BY-SA 2.0