Lord Flight was Shadow Chief Secretary to the Treasury from 2001-2004.  He is now chairman of Flight & Partners Recovery Fund.

The UK economy has now recovered to its 2007, pre-financial crisis, GDP and there has been a 1.7 million increase in employment in the private sector; but there looks to have been a significant decrease in overall productivity/output per person employed.  Much greater analysis is needed of what has been going on as regards productivity.  It looks to have increased in the manufacturing sector, but to have declined in the private service sectors and in the public sector.

At its simplest, while GDP is back to its 2007 level, there are six per cent more people employed – i.e: we are requiring 106 per cent of the number of people in employment to produce the same output.

It is clear that one important cause has been the “contrarian” impact of tax credits.  As Alistair Darling has acknowledged, while tax credits were intended to boost the living standards of people on low pay, they have, in practice, served to freeze, or even reduce pay.  Why should employers increase pay, when the State is topping up incomes with tax credits?  This, in turn, means that employers can employ cheaply more people than they necessarily need, or would employ if wage costs were higher.

This is what I call the “Speenhamland factor”.  England subsidised people in work under what was called the Speenhamland system in the first three decades of the nineteenth century, financed out of what were then the Poor Rates.  This led to major over-employment, particularly in agriculture, at low, subsidised wages.  When the system was ended in 1834, there was a major reduction in those employed in agriculture and a movement of individuals released to the new coal mining and industrial sectors – boosting both GDP and productivity very substantially.

Another major ingredient, most observable in the financial services industry, has been the massive increase in those employed both by regulators and the regulatory, compliance departments in the private financial sector.  Together, these have added hundreds of thousands of jobs, without adding any output and thus reducing substantially productivity in the financial services industry.

Additional regulatory requirements have also been a cause of lower productivity in the energy and agricultural sectors and to, differing extents, across the whole economy.  Since the last General Election, additional regulatory costs are over four times the regulatory costs that have been saved.

Many of the extra regulatory requirements have come from the EU.  As with the old USSR and its Eastern Europe Empire, the real problem with command economies is that they require massive bureaucracies for implementation.  This was the essential cause of the collapse of the communist economies.  It is interesting to note the pathetic economic performance across the EU over the last few years.  While much of this has been caused by the Euro, effectively placing the less competitive economies under a “Gold Standard” regime, it would be interesting to analyse by how much regulatory costs, adding nothing to the services and goods produced, have risen in the EU.

The sector in which regulation and non-productive, regulatory costs have increased the most is the financial services industry.  This has, of course, been in response to the 2007-09 financial crises.  What is clear is that this has now gone much too far, and has hit areas other than banking – such as investment management, which weathered the banking crisis perfectly well.

The main reason why the UK economy has recovered and grown so well has been the large increase in the employed population through immigration, particularly, from Eastern Europe.  This has served to hide the fact that output per person employed has actually fallen.

I suggest we will not be able to return to sustained growth with growing productivity and output per person employed without a major reappraisal of and cut back of regulatory costs and requirements.  The problem is that we have turned into a command economy via regulation.  Each week, more and more directives and regulations come through to the UK from the EU.  I wish David Cameron good luck in getting this reversed but, regrettably, I feel there is little chance of achieving anything much, given the nature of the EU.

I am reminded by a book on the history of China that I read a couple of years ago, which commented that – I recollect in the 9th Century AD – the Chinese economy collapsed under the weight of its own bureaucracy!

54 comments for: Lord Flight: What has happened to productivity?

Leave a Reply

You must be logged in to post a comment.