Britain's Productivity Problem Is a Choice
Britain has a productivity problem, and it is one of our own making. Before the financial crash of 2008, output per hour grew by roughly 2 per cent a year. Since then it has crawled along at about half that rate, sometimes less. The gap with America, France and Germany has widened year after year.
That matters more than almost anything else in economics. Productivity pays for higher wages, better public services and a comfortable retirement. A country that stops growing more productive stops growing richer. Its politics turn sour, because every gain for one group must come out of another's pocket.
The comforting story is that some deep mystery is at work, a curse visited on Britain by forces beyond anyone's control. This is nonsense. Britain made it hard to build, costly to power and unrewarding to invest. The results were entirely predictable.
The planning system is the biggest brake of all. It rations housing, so workers cannot afford to move to where they would be most productive. London, Oxford and Cambridge should be magnets for talent. Instead they are fortresses, guarded by prices that keep out the young and the ambitious.
It strangles infrastructure too. British rail lines, roads and power projects cost several times what comparable schemes cost abroad, and take decades to deliver. Applications for major projects now run to hundreds of thousands of pages. HS2 ended up spending around £100 million on a tunnel to protect bats.
Labs, data centres, reservoirs and grid connections queue for years.
Every new venture must first survive a gauntlet of objections, consultations and judicial reviews. The system rarely says no. It says not yet, not here and not like that, until investors give up and go elsewhere.
Britain invests too little. Business investment as a share of GDP has been at or near the bottom of the G7 for years. A worker with little capital behind him produces little, however hard he works. The tax system hasn't helped. Allowances for investment were changed so often that firms could not plan around them, while property has long been treated more kindly than productive assets.
Energy makes things worse. Industrial electricity prices are among the highest in the developed world. That punishes precisely the activities that lift output per worker: manufacturing, chemicals, and now the computing power that artificial intelligence devours.
For a decade after the crash, money was nearly free and labour was plentiful. Firms found it easier to hire another pair of hands than to buy a machine. Weak firms that should have died limped on as zombies, tying up capital and staff that better firms could have used. Employment held up, which was welcome. Productivity paid the price.
Then there is the long tail. Britain's best firms are world class. Behind them trails a long line of poorly managed businesses, slow to adopt the technology and methods the leaders already use. Surveys of management quality regularly put Britain behind America and Germany.
In most advanced countries, big cities are far more productive than the national average. That is what cities are for. They bring people, ideas and capital together, and the sparks fly. Outside London, Britain's cities are strangely short of sparks. Manchester, Birmingham and Leeds are big enough to be powerhouses, yet punch well below their weight. Poor transport links, restrictive planning and a centralized state that keeps them on a short leash all play their part.
Add the shocks. Finance had been a star performer before 2008 and never recovered its old pace. Then came years of wrangling over Brexit, a revolving door of prime ministers and chancellors, and industrial strategies launched, relaunched and abandoned. Investors hate uncertainty. Britain gave them a decade of it.
None of this condemns Britain to decline. The causes are policy choices, and policy choices can be reversed. There is nothing wrong with British workers, British firms or British geography.
Britain has done it before. In the 1970s it was the sick man of Europe. After the reforms of the 1980s, its productivity growth outpaced most of its rivals for a quarter of a century. The problems were different then, but the lesson holds.
Other countries show the specific fixes work. When Auckland upzoned much of the city in 2016, housebuilding surged. Japan sets zoning rules nationally, so Tokyo keeps building and stays affordable despite enormous demand. Spain builds metro lines at a fraction of British costs. None of this takes genius. It takes rules that let things happen.
The obstacle is political, and political obstacles can be moved. Homeowners oppose development because they bear its costs and see few of its benefits. So change the incentives. Let local people share directly in the gains, through lower council tax, cash payments or better amenities. Let streets vote to build upwards. Treat major infrastructure as a national interest, not a local veto. Cut energy costs. Set investment allowances and leave them alone long enough for firms to trust them.
The young, locked out of home ownership, are already on side. The pro-building movement grows every year. What is missing is a government with the nerve to act. Productivity is not a puzzle. It is a planning application, and it has been waiting since 2008.
Madsen Pirie