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Mel Stride MP is PPS to John Hayes MP, founder of the Deep Blue group of centre-right 2010 Conservative MPs and MP for Central Devon.

The economy is booming, growth world-beating, unemployment plummeting, job numbers soaring, inflation falling, real wages rising, all accompanied by the rasp of the rug being yanked from beneath Messrs. Miliband and Balls. The war is not over of course. It never will be and there are still significant risks to the UK economy. These are regularly and sensibly promoted by the Chancellor, and underpin just one of the many reasons for keeping Labour’s hands well away from the UK’s economic tiller.

There are the brooding externalities (Eurozone exposure, Chinese banks, Ukraine, amongst them), just as there is the necessity of rebalancing the economy away from consumption and feel-good asset inflation and towards savings, investment and exports – an agenda that received a mighty shot in the arm from the Budget and for which encouraging news is beginning to emerge.

And there is also the rather dry yet vital matter of productivity.

This is currently still 4.3 per cent below its pre-crisis peak – or, put another way, if it had continued to grow at its pre-crisis trend then it would be a full 20 per cent higher than it is now. It is worth pointing out that there should be no joy in this predicament for the Opposition, as – like so many other economic ills – productivity stagnation began years ago (around 2006) and on their watch.

The problem with low productivity is that it leads to diminished living standards and, where the economy is growing, generates inflationary pressures that require a tightening monetary response, in turn acting as a break on growth. To grow sustainably we need productivity to rise. As Paul Krugman puts it, “productivity isn’t everything but in the long run it is almost everything.”

But what exactly are we measuring at the moment? And has UK productivity really stagnated as much as some claim? One of the key “aberrational” arguments is that there may have been a significant post-crisis increase in the shadow economy – largely people transacting business in cash to avoid tax. This phenomenon typically grows during an economic downturn, when people take on extra, often undeclared, work and do not declare cash receipts in order to compensate for squeezed real incomes. This activity tends to occur more amongst smaller enterprises (especially sole traders) and so the rapid growth in micro-business registrations over the last few years might be telling in this respect.

Of the 1.5 million companies employing people in the UK, over 1 million are micro-businesses. There were 440,000 new business registrations in the UK in 2011, growing to 484,000 in 2012, and to a massive 526,000 in 2013. If the shadow economy has grown (as a proportion of GDP), then the current productivity figures could represent a significant underestimate. In fact, it is even possible that there might not be a significant productivity problem at all.

Other arguments abound as to why productivity might be below par. Firms might be hoarding skilled labour for fear of future shortages. Or unproductive zombie companies are being propped up by QE and cheap money. Or banks are not calling in non-performing loans in order to protect lending capacity in the face of tightening asset ratios. Or employment figures are being over-estimated. Or that there is a lack of investment in capital goods – that can leverage output per head. Economic contraction itself can lower productivity for those businesses that choose to hold onto the factors of production in the face of declining output.

Overall, of course, productivity is an accumulation of the figures for the various sectors and industries across the economy as a whole. The ONS states that productivity has fallen most significantly in North Sea oil, finance and utilities, accounted for by the rising cost of extracting oil, the impact of the crisis on the financial sector, and the move to more costly technologies for energy generation. But it has recently been rising sharply in other sectors, where a rise in employment in highly skilled industries has been accompanied by a loss of lower paid, lower skilled jobs in associated areas. For example, automotive sector output per hour has risen 11 per cent in the past year and is now nearly 40 per cent higher than in early 2010. It is the interplay of what is happening at sector level that determines the overall outcome.

As the above suggests, there are many productivity drivers over which the government has limited control (technology costs and oil extraction costs, for example), but others where government action can make a significant impact. The Coalition’s promotion of catapult centres, for example, recognises that fostering R&D investment and collaboration between businesses (e.g. in high value manufacturing) can help, and this approach should be applauded. But the two big areas in which government action is pushing squarely upwards on productivity are those of skills and business investment.

The government’s record on skills is outstanding. We have helped business to create a record number of apprenticeships and increasingly these are at the advanced level – equivalent to the first year of a degree. We are also giving employers greater control of apprenticeships, cutting away bureaucracy and paying them directly for the training they undertake.

The signs are also now rapidly improving on investment. The Chancellor’s outstanding stewardship of the economy is generating ever more business confidence which is, in turn, levering out chucks of the £700 billion in cash held by UK Plc. According to Deloitte, the UK’s biggest businesses are planning to invest up to £200 billion in the next two years. And the revival in business investment is not limited to the largest firms; SMEs also plan to increase capital spending by 12 per cent over the coming year.

Along with the greater investment of corporate cash comes a better overall availability of credit for the corporate sector. According to the Bank of England Credit Condition Survey this increased in the first quarter of 2014, the sixth consecutive quarter that lenders reported an increase in availability. The expansion in availability of credit is expected to continue.

There is clearly no room for complacency, but it may be that the methodology of how productivity is calculated (to take into account changes in the size of the shadow economy) warrants a closer inspection. Regardless of exactly how many widgets each worker is truly churning out at present, there should now be a firm expectation that the government’s achievements in improving skills and sticking to a long term economic plan, thus boosting economic confidence and business investment, will now see productivity pushed firmly in an upward direction.

7 comments for: Mel Stride MP: Stagnation or growth – what is the true picture on productivity?

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