The Financing Investment report published by Labour on 20th June set out how the opposition would approach the conundrum that is the productivity puzzle in the UK. The persistence of sluggish productivity growth since the financial crisis is not going away, but is the answer in setting the Bank of England a productivity target?
Raising productivity growth is a priority of all political parties, not least because productivity is a proxy for wage-incomes and ultimately standards of living. Therefore, while a productivity growth target is admirable, it is questionable whether this should this be required of the Bank of England let alone whether it can it ever work. Moreover, in the last four decades the highly ambitious three percent annual target has never been achieved before, and is significantly above the 0.2% per year increase seen over the last decade which has left the UK c.20% below the pre-crisis productivity growth trend.
The rationale for Labour’s proposal is the perceived failure of the UK financial system that has fueled speculation in the property market at the cost of investment in other tradable technologies and sectors. This is a well-rehearsed argument. While access to capital for growth has been highlighted as a critical issue experienced by UK firms, in the aftermath of the 2008 crisis, access to low cost labour may also have contributed to the propensity for firms to prioritise employment over the propensity to invest even though the costs of borrowing have been extremely low.
The Bank of England Governor, Mark Carney, has previously expressed concern over assuming responsibility for productivity in addition to the primary target of keeping inflation at 2 per cent. The elephant in the room is whether the Bank of England, regardless of the 3% goal, is actually genuinely able to influence productivity growth in this way. Using monetary policy instruments to stimulate investment is premised on the expectation that the monetary authorities can incentivize banks to lend and firms to innovate or invest in innovations to yield productivity gains. Yet, the evidence here is mixed, to say the least, and runs the risk of confusing and conflating different sets of objectives, at least in the minds of the public and politicians.
Productivity is driven by innovation and entrepreneurship and it is not in any way clear how the monetary authorities can influence these, other than maintaining stable prices and inflation expectations so that firms, investors and entrepreneurs are able to plan effectively. Moreover, assigning a productivity growth objective to the Bank of England then largely absolves the other economy ministries dealing with regulatory issues, competition policy, research and innovation, infrastructure, land use, the coordination of different investment policy arenas etc., from their own responsibilities.
On one hand the fresh thinking in these proposals is to be welcomed, while on the other hand the proposals from Labour raise many additional questions. Given the already over-centralised and top-down system of governance in the UK, the prospect that the productivity growth is managed by the central bank is somewhat ironic – even if Labour are proposing it move to Birmingham! Given the highly regional nature of the productivity puzzle in the UK, policy needs to be more sensitive to local needs and tough institutional and governance questions need to be asked.
Despite the shortcomings of successive Governments to jumpstart productivity growth, the Industrial Strategy with its emphasis on place represents a welcome focus. However, whether or not this will provide the basis to address the structural weaknesses that are manifest in the long tail of low productivity firms and the enormous interregional productivity differences remains the subject of ongoing debate.
By Professors Tim Vorley and Philip McCann
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