Gordon Brown’s prudent image is about to be tested to the
limit with tomorrow’s Budget. But his focus on productivity is right – as long
as UK industry starts to think long-term and looks at the bigger picture
The chancellor of the exchequer Gordon Brown’s Budget options, always
narrow, have closed down completely with the war in Iraq. The £3bn he has
earmarked for the war already looks too low; if the UK is spending at the same
rate as the US then the allocation should be close to £10bn.
With government borrowing set to rise significantly above £30bn in the next
financial year and the year afterwards, Brown has no room for manoeuvre to
raise spending further or cut taxes. He therefore risks breaking his own-self
imposed rules for spending and borrowing.
Only if he can present the Iraq war and reconstruction as a one-off
additional spending increase with the wider global downturn undermining his
receipts, will he escape being tagged as fiscally imprudent. He may rob Peter
to pay Paul, lifting taxes stealthily to pay for worthy spending increases so
leaving the overall economic impact broadly neutral, but even that strategy is
unappealing.
You can write the headlines about stealth taxes yourself. Rather this
promises to be a sober budget in keeping with the times – with the main
preoccupation being delivering on productivity.
The trouble is that while the chancellor vowed to improve the UK’s
productivity performance six years ago, which he has attempted to do through a
range of macro- and micro-economic tinkering, productivity stubbornly refuses
to rise.
Rather than catching up with productivity levels in other major economies,
the UK has fallen further behind. This is partly about mismanaged expectations
– having presented himself as having the cure for UK productivity malaise,
Brown was always going to fall short of the hype. The UK also has a long-term
problem of under investment in physical and human capital that cannot be
reversed overnight.
But even if he succeeds in redressing some of that under investment, the
open question is whether there is anything the Government can do to influence
such a long-standing problem.
Brown’s focus on ‘bottom-up productivity’ – which looks set to be a theme of
the Budget – has been a real step forward in focusing attention on the long
tail of under-achieving firms and individuals at the bottom of the labour
market. According to the Treasury, the UK’s best firms in every sector are up
to five and a half times more productive than the weakest.
Equipping universities to network in local economies, new targets for
workforce skill levels, measures to address deprivation as well as to stimulate
enterprise, and new ideas to eradicate joblessness in particular neighbourhoods
have all been features of a regional, bottom-up approach to productivity that
looks set to reap longer-term productivity rewards.
But there are two vital weaknesses. The first is that the policies need to
connect in a way that makes sense on the ground, so the various initiatives are
part of a coherent bigger picture and not seen as another standalone
initiative. The problem here is that, historically, the educational,
technological, commercial and employment agendas – all productivity focused –
have run in parallel, almost oblivious of each other. Instead there needs to be
a far better micro-economic strategy that really joins up the drive to improve
skills and innovation.
But that means addressing the second deficiency: the UK lacks a
business-building culture, so we have too few businesses that want to grow
organically through being great high-performance organisations. Too many are
driven by short-term financial priorities – what matters is not long-term
productivity growth, but the next half-year’s numbers. Brown has tried to do
something about this with his Myners Review on pension fund management and
incentives to hold shares for a longer term with tapered capital gains tax, but
he has abstained from substantial reform of corporate governance and financial
structures.
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If he’s to leave any worthwhile legacy, Brown needs to address both
deficiencies and inject some humanity into productivity. He won’t be chancellor
forever, and time is running out. Maybe he will surprise us.
By Will Hutton, Chief executive, The Work Foundation
