A Budget for productivity?

Early July saw Chancellor George Osborne deliver both his second Budget of the year and Productivity Report. Basking in the afterglow of the Conservative’s triumph at the ballot box he sought an opportunity to make political capital out of the first wholly conservative budget since 1997. One of, and perhaps the best, thing about the recovery that that UK has enjoyed recently has been the rate of job creation. However, the flipside of that equation is that productivity – basically output per worker – has stagnated.

So while the Budget had strong conservative themes at its heart – a promise of further cuts in corporation tax, toughening up the welfare system and cuts to Inheritance Tax – there were other moves too in which Osborne, a politician to his fingertips sought to pitch his tent in the centre ground or even a little to the left of that.

The headline grabbing move to uprate the National Minimum Wage for most workers to a National Living Wage plays against stereotypes and along the lines of the blue collar conservatism that the party is keen to push. The links between productivity and pay are complex but they are there and by giving the country a pay rise Osborne is hoping to get more out of the workforce.

There were plans too in the Budget to introduce a levy to fund training – shades of the old EITB for those whose memories stretch back to the 1980s. An anonymous Cabinet Minister has been quoted as saying that the measure is, to paraphrase slightly, a way of applying boot to backside of ‘lazy’ companies who don’t train. The risks must be that companies are not fully compensated for the training they do undertake or that the funding collects in a quango somewhere inaccessible to SMEs. There was little detail in the budget and not much more in the subsequent produtivity plan – so this will be one to watch through the second half of this year and into next.

One underlying cause of the productivity problem – perhaps the most important – is Britain’s historic underinvestment problem. We simply invest less than almost every comparable economy. So the MTA gave a cautious welcome to the news that the Annual Investment Allowance (AIA) is to be set at £200,000 on a permanent basis, the current, temporary, rate of £500,000 being unsustainable. It’s good news that the rate will not now fall to £25,000 at the end of the year as it had been scheduled to do. However this move is not in itself enough to fix the system and the MTA will continue to press for a set of capital allowances that are truly internationally competitive. 

Business will of course also give a warm welcome to the signalled cut in Corporation Tax, now scheduled to fall to 18%, the lowest level in the G7, and a really attractive rate for Foreign Direct Investment.