By Professors Bart van Ark, Diane Coyle and Jonatan Pinkse, The Productivity Institute

Productivity growth in the UK has stagnated over the past 15 years or so, affecting the resilience of the UK economy and society, making it harder for people, places, and firms to sustain themselves. A recent report from The Productivity Institute details how the public and private sector can be better equipped to translate productivity gains into improved living standards.

Productivity is how we turn our resources into better outcomes for firms, people, and places.  Increased productivity is key to driving economic growth as it leads to more successful firms, but also to more prosperous places and better living standards.

While most advanced economies have recently experienced a slowdown in productivity over the decade and a half since the financial crisis, the UK has experienced a larger slowdown that the most comparable countries.

If the current trend in productivity growth continues for the next two decades, it will not be possible to maintain current living standards, let alone deliver sustainability and improved wellbeing. In addition, relatively low levels of productivity are affecting the ability of people, firms and places to be resilient to and absorb shocks and escape from low-level equilibrium traps.

The Productivity Agenda details three key priorities to get productivity back on track:

  • Reverse the chronic underinvestment in the UK economy
  • Improve the diffusion of knowledge, innovation and best practices
  • Better connect pro-productivity policies and institutions

The Productivity Agenda also highlights key areas of focus including investment; firm-level productivity; R&D and innovation; digitalisation; skills, the green transition; public sector; and regional inequality.

Investing for the long-run

Investment lies at the root of economic growth and prosperity. It creates the building blocks for a higher level of productivity in the future, and more diffusion of ideas and innovation that underpin technological progress and higher wages. Low investment is the proximate cause of low productivity and the UK’s weak growth performance. 

In recent decades, the UK has had low investment rates in infrastructure, skills, and technologies. This has been associated with short-termism, where society has tended to choose consumption over long-term investments. It has resulted in a secular decline in the UK’s net international investment position, the fall in the government’s net financial worth, and an increase in indebtedness.

Building resilience to weather climate shocks

The transition to net zero is one example of short-term thinking. Since the 2015 Paris Agreement, the needle on corporate climate action has moved decisively. Extreme weather events such as storms, floods and heatwaves are now regularly disrupting business operations and supply chains.

The UK was the first major economy to legally bind itself to a green growth agenda but is now slipping behind – no longer meeting its own commitments set out in consecutive carbon budgets and backtracking on environmental commitments. This has put UK firms on the backfoot, as investments which are already made will take longer to pay off, and the return on future investment will get lowered.

The opportunity for public-private investment to develop a new infrastructure to deliver green energy and make the economy more resistant to climate shocks requires investment and consistency in climate policy.

Investing in a net zero economy might be a matter of essential insurance to sustain productivity levels in the long-run, even if productivity dips in the short term.

Creating a long-term stable policy approach to growth and productivity

Addressing the UK’s productivity problem also requires increased coordination of policies and strategies across multiple policy domains, including economic, education, science and technology, infrastructure, and regional policies.

The Productivity Agenda recommends the introduction of a statutory growth and productivity institution to help to fix systemic issues and ensure the effectiveness of pro-productivity policies over the long term, without falling victim to political churn.

Through conducting inquiries into key areas, monitoring and evaluating policy, and regular reporting to Parliament, combined with extensive stakeholder consultation, coordination, and communication, it would help with the politics of making difficult decisions where positive outcomes are likely to be felt over the long term.

The Productivity Institute

The Productivity Institute is a UK-wide research organisation exploring what productivity means for business, for workers and for communities – how it is measured and how it truly contributes to increased living standards and well-being. It is funded by the Economic and Social Research Council.