Blame politicians, not managers, for productivity gap

Type: Think Pieces Written by Dr Eamonn Butler | Sunday 3 October 2004

Dr Eamonn Butler investigates the productivity report which argues the productivity in Britain is 20 % that of France of Germany. He points out what he feels the reason for this may be and looks to the poor education system and the increasing public sector as major issues.

Britain's Economic and Social Research Council (ESRC) - a tax-funded research body - has produced another of its reports on productivity, arguing that productivity in Britain is 20% behind that of France and Germany.

That has provided a convenient peg for pundits to go on the radio and slag off British industry and management. Or to assert smugly that continental Europe's more progressive social policies are obviously good for business.

What are these people on? If they believe that UK productivity is 20% behind that of France, all I can say is that their figures don't mean much. The boffins might be better employed in examining the productivity of the ESRC itself, which costs £100m (E146m, $180m) - 14% up on the previous year - to produce all this useless research. Still, it gives academics something to do.

Business managers are not to blame for low productivity. You would be better to look to the public sector, which is now comprises more than 40% of Britain's economy and is growing fast. Big, yes, but it's notoriously unproductive. As I read through pages of newspaper advertisements for public-sector jobs, I wonder what output at all we get from the legions of local-government "walking officers" or "real nappy officers", "youth and play service managers", "democratic services officers" or "five a day officers" (who are supposed to encourage us to eat more fruit and vegetables, incidentally).

At least France's public-sector hospitals have to compete alongside private ones, which must raise their efficiency. And they are locally managed, which helps. Britain by contrast tries to manage a million National Health Service (NHS) staff from the centre, on Stalinist lines. Heroic, but not exactly productive.

Education is run the same way and is another state near-monopoly. But go to Denmark, Netherlands, or Sweden, and you will see how the performance of municipal schools has soared as parents - armed with vouchers - have started to choose non-municipal schools more and more.

And Britain's rotten education system has a wider effect on productivity. If you are turning out illiterates - and after 11 years of state schooling, about 7m British adults cannot read well enough to find a plumber in the telephone book - it hardly makes for a productive workforce. One boss told me of an assistant who filed things in random order because her "progressive" school had never taught the alphabet. Not great for office efficiency.

"The UK is behind France and Germany in terms of skills," say the ESRC. Well quite, but don't blame benighted managers, blame the politicians and civil servants who run education. And I wonder, too, how many British workers are struggling to be productive while coughing and wheezing due to bad health, or nursing the bad back that the NHS will not get round to looking at until it has become untreatably worse.

Planning and regulation are more ways in which an excess of government thwarts productivity. American retailing is 40% more productive than Britain's, say the researchers. Maybe that's because all development is resisted in Britain, forcing retail rents sky high and squashing stores into impossibly small sites. Try steering your trolley round a British supermarket and you will agree: the aisles in America are eight-lane highways by comparison.

And recently, the European Union (EU) has been passing about 100 directives and 2,400 regulations each year. Bad enough for anyone, but worse for the British, who, because of their quaint legal tradition actually feel obliged to enforce them. And indeed, to specify in intricate detail what they should mean - gold-plating, as it is known in the trade. So the cost of regulation on Britain's business comes in at £20bn a year, according to the Chambers of Commerce. With overheads like that, it's surprising British business manages to produce anything at all.

If Britain's regulations are over-burdensome, so are its tax rules. Tolley's Yellow Tax Handbook, the essential guide to the tax system, comes in at 7,344 pages this year, across four volumes. How many accountants do businesses have to employ to keep on the right side of the Inland Revenue when they are up against that? And what does it do to their productivity?

Burdensome taxes also curb investment - and thus productivity. High rates of inheritance tax - Britain levies 40% on estates as small as £262,000 - hardly induce people to think over the long term. But not to worry. A short while back, Chancellor Gordon Brown introduced a Research and Development Tax Credit, designed to get companies to invest. Trouble is, as an Ernst & Young survey found earlier this year, most firms had never heard of it, most of those that did thought it was not worth the paperwork of applying, and 40% of those who did apply found the Inland Revenue coming back to them with yet more questions.

Of course, one explanation of the productivity gap between Britain and France or Germany is that the latter have more capital invested per worker. I am sure that is true. But does it mean that Britain's managers are perversely resisting mechanisation? No. What it means is that Britain's labour market is much more flexible. Try firing someone in France or Germany and you will be in for a nasty shock. So you don't employ people, you employ machines. Which is why Britain has lower productivity. And why Germany has unbearable unemployment. On balance, I think we have the better of that deal.

Dr Eamonn Butler is Director of the Adam Smith Institute.