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Productivity Now Solving the great challenge of our time Productivity Now BUSINESS WITH CONFIDENCE 29 icaew.com Michael Izza, Chief Executive, ICAEW Foreword Boosting productivity growth is the great economic challenge of our time. It requires bold ideas from the government; ideas that are formed in partnership with business. The Chancellor’s long-term economic plan will be nothing but a hollow pipedream if productivity is not improved. It is time that the government adopts a national productivity target which brings the UK back up to speed. The UK economy has been a star performer among advanced economies over the last few years. GDP growth has been impressive and the boom in jobs and new businesses has stood in sharp contrast to our neighbours across Europe. However, there is another important measure of economic success where the UK stands out from the other major economies; that of productivity growth. Unlike GDP, employment, or business creation, we have lagged behind others when it comes to this key metric of future prosperity. Since the financial crisis, successive governments have come and gone, but the integral challenge of productivity remains. In fact, productivity has grown at a negligible 0.1% per year on average since the financial crisis. This is a steep decline from the near 3% productivity growth the UK enjoyed before 2008. In July 2015, the government published its report Fixing the Foundations. It laid out the productivity plan for the country and identified 15 key drivers of productivity growth. It is good to see that the government has recognised the challenge and the plan it has set out is a step in the right direction. However, we think it is only the first step of many which need to be taken to ensure that the UK maintains its international competitiveness in the 21st century. As a Nobel Prize-winning economist once said, productivity isn’t everything, but in the long run it is almost everything. Therefore, we need to take action now in the short term to secure future prosperity in the long term. ICAEW Chartered Accountants are at the forefront of decisions about productivity. Every day they are making multiple decisions about investment, recruitment and business strategy. Since the launch of the government’s productivity plan, we have held a series of discussions with our members across the country. They are acutely aware of the challenge of productivity, but are equally concerned about the many gaps that surround efforts to meet the challenge. When I speak to businesses of all sizes across the country, I can see their desire to get the absolute maximum value out of everything they do. As chartered accountants, we know that what gets measured gets done. 2 Productivity Now The Chancellor has high ambitions for the productivity plan – he wants it to be a blueprint for the UK to become the most prosperous major economy in the world by the 2030s. Considering that UK productivity currently trails the G7 average by 18%, this is no small ambition. But is there enough meat around the bones for this to materialise or is it just another case of politics over policy? The 2016 Budget has highlighted just how difficult the job is with declines in productivity and investment. Indeed, the most obvious criticism of government efforts to boost productivity is that there are no direct targets which will help chart a course towards growth. It is difficult to hit your target when you do not actually know what it is; or indeed if one does not even exist. Through roundtables and a dialogue with MPs, policymakers and businesses, ICAEW is putting forward the following bold ideas: 1 Adopt a national productivity target of 2–3% growth to transform the government’s productivity plan into a clear plan of action 2 Improve the UK’s international and infrastructure connectivity to boost global competitiveness 3 Close the skills gap through a national skills strategy that is underpinned by employer engagement 4 Create a proportionate and balanced regulatory environment to encourage productivity-led growth As chartered accountants advising 1.5m businesses across the UK, we have a unique vantage point on what is needed to boost UK productivity. Equipped with this insight, this report highlights what government and businesses can do to secure continued prosperity for the UK. Productivity Now 3 4 Productivity Now Summary of key recommendations 1 Adopt a national productivity target of 2–3% growth to transform the government’s productivity plan into a clear plan of action To return to relatively high levels of growth, we cannot operate in the dark. What is needed is a clear signal of the direction of travel. Government should adopt a national productivity target of 2–3% growth as part of its productivity plan. A pan-industry National Productivity Council should be set up to contribute towards and oversee the national productivity target. Frequent reviews of how the productivity plan is progressing should be done alongside each Budget to support efforts to reach the national productivity target. This should be accompanied by a serious discussion about how the changing nature of the modern economy demands a refresh on how we measure productivity. The government should look at Singapore for inspiration. The citystate is an example of an advanced service-led economy that has realised productivity growth is crucial for its continued success. 2 Improve the UK’s international and infrastructure connectivity to boost global competitiveness Productivity growth will be a critical determinant in the UK’s ability to remain internationally competitive and achieve the export targets the government has already agreed to. Strengthening international connectivity through a more dynamic export market, world-class infrastructure and cutting edge digital economy will support improved productivity. Specifically, give businesses ‘whole of life’ export support by improving SME awareness of international markets, creating a dedicated export voucher and encouraging exporters to continue expanding into new markets. Improve transport and digital infrastructure by implementing the National Infrastructure Commission’s recommendations without delay and connecting new businesses with the fast-growing digital economy. 3 Close the skills gap through a national skills strategy that is underpinned by employer engagement The pervasive skills gap in the UK has been widely cited as a key barrier to productivity growth. There is a mismatch between the skills sought by businesses and the availability of these skills within the labour market. We need continuing professional development on the factory floor. To complement the rather blunt apprenticeship levy and the National Living Wage, the government must maintain a strategic dialogue with employers to support life-long learning for employees and also meet business needs. Good quality and wide-ranging careers advice should be a core part of the education system in schools. Careers advisers should be provided with greater training and schools and colleges should be speaking to employers about business needs. 4 Create a proportionate and balanced regulatory environment to encourage productivity-led growth Since the financial crisis, there has been an increase in regulation across a number of sectors. This has created a more intensive regulatory environment for firms and businesses working in those sectors. Studies have shown there to be a link between the level of regulation faced by a sector and its productivity. We need a more nuanced conversation about good and bad regulation. Good regulation creates a level playing field where entrepreneurs and businesses can flourish and the consumer is protected. Bad regulation drags down business productivity to a compliance and box-ticking exercise. There should be independent monitoring by the National Productivity Council of the impact of regulation on productivity growth, especially for certain hard-hit sectors. Productivity Now 5 Stephen Ibbotson, Director of Business, ICAEW Assessing the government’s productivity plan ICAEW’s Director of Business, Stephen Ibbotson, gives an assessment of the government’s plan to boost UK productivity. Based on the comments he gave to MPs at the BIS Select Committee evidence session, Stephen argues that the government’s existing productivity plan falls short of what is needed. ‘Following the General Election in 2015, the government published its report Fixing the Foundations. My initial reaction was one of disappointment. There was a lot of anticipation before the report was published and I expected it to contain real tangible steps which the country will take, both government and business together, to reverse the slowdown in productivity growth. It covered a lot of ground, but as a result was too thinly spread. I was not impressed by the repetition of previous or existing policies which seemed like they were just re-packaged and sold to us as bold new ideas. It was a view shared by ICAEW members across the country during the series of events we held after the report was published. From their positions as the finance directors of UK plc, they shared their views on how they look to strengthen the productivity and performance of their businesses, and how government efforts to do the same for the broader economy lacked detail. Following the launch of the government’s document, I was invited to speak to MPs at the BIS Select Committee which had carried out an inquiry into the productivity plan. I reiterated my concern that government efforts were too vague and the productivity plan needed continuous monitoring and updating. Otherwise it will just gather dust on a shelf in Whitehall. As it stands at the moment the government’s 15-point plan is extremely nebulous, it is difficult to measure. Closer inspection of it suggests that it is more of a cross between a political manifesto and a Chancellor’s wish-list. When asked by MPs what would help transform the ‘vague’ list of policies into a living and tangible initiative, I recommended that the government adopt a national productivity target to drive the plan forward. But it shouldn’t stop there. There should be ministerial oversight and continuous monitoring of how particular policies are performing towards reaching the target. I was pleased to see the BIS Select Committee acknowledge and refer to this in its final inquiry report.’ The 15 points contained in the government’s plan cover: 1. A competitive tax system 9. Housing and planning 2. Saving and long-term investment 10. Higher pay workforce, low welfare 3. Highly skilled workforce 11. More people working and progressing 4. World leading universities 12. Dynamic financial services sector 5. Modern transport system 13. Competitive markets and less regulation 6. Low carbon energy 14. International trade and investment 7. World class digital infrastructure 15. Northern Powerhouse 8. Science and innovation 6 Productivity Now Productivity Now 7 Mapping the puzzle UK was second only to the US on productivity growth before the financial crisis (1997–2007) Since the financial crisis, UK productivity has lagged behind all other major economies Productivity gap % between 2007 and 2013 US 70 UK 60 50 Germany 40 France 30 2.0 2.5 3.0 Source: ONS Productivity Conundrum 2012 20 10 Productivity worsened as output fell faster than employment at the height of the recession 0 -6.3% China India Large north-south divide exacerbates productivity dilemma -4.3% GVA per hour 140 130 Subsequent fall in productivity Source: IFS, 2013 Emerging economies Source: OECD, 2015 -2.1% Decline in output Spain Decline in employment US UK -10 OECD average 1.5 % growth Germany 1.0 France 0.5 Italy 0.0 120 Growth in business investment has remained flat during the recovery 110 Annual % growth 100 10 100 5 90 0 80 -5 70 -10 2011 2013 2015 Source: ONS, 2016 London Berkshire Oxfordshire UK average Liverpool Manchester Buckinghamshire 2009 Hertfordshire 2007 Source: ONS, 2016 Birmingham -20 Sheffield -15 Lancashire Cornwall 60 Productivity Now Productivity growth has varied greatly across different sectors whole economy Pre-crisis (1994–2008) 1.9 + Post-crisis (2008–2015) Difference % value + Source: OBR, 2016 0.1 +1.2 Productivity is expected to return to 2% growth by the end of this Parliament % Growth 2.5 2.0 -1.8 1.5 0 4.3 + 1.0 2.5 + 1.6 + 1.6 + 1.2 + Administrative and support 1.3 + -3 Information and communication Retail and wholesale trade 0.5 0.0 2015 2016 2017 2018 2019 2020 Source: OBR, March 2016 -2.9 -2.7 -3 3.5 3.6 + + 0.7 + Agriculture, forestry and fishery -2.5 2.8 -0.2 + + 1 Construction 1.7 Water supply and sewage Productivity Now -0.4 + 0.2 Government services -1.8 -5 + Financial services -5.2 Electricity and gas supply below UK productivity is 18% below the G7 average 0.1% Since the financial crisis, productivity has grown 0.1% per year on average 16% Productivity is around 16% lower than it would have been if it had followed pre-crisis trend. -3.5 -2.4 5 18 % 4 -1 -10.2 + Productivity grew by less than 1% in 2015 -0.2 0.3 Accomodation and food services + -1.8 1 -0.8 -0.4 0.4 % Arts and entertainment -0.9 0.5 Quick facts Manufacturing 0.5 + + -3.5 + Professional, scientific and technical 0.3 Transportation and storage + 0.5 + + 3.1 + -5.9 Mining and quarrying i Towards a target The government must adopt a national productivity target of 2–3% growth to transform its productivity plan into a clear plan of action What is the challenge? Boosting productivity growth is the great economic challenge of our time.1 Productivity has slumped to a dismal 0.1% growth in recent years, significantly lower than previous decades.2 According to the International Monetary Fund (IMF), increasing productivity is a priority for advanced economies if we are to maintain economic growth and improve living standards. Due to a relatively smaller workforce than other major economies such as Since the financial crisis, governments have come and gone, but the integral challenge of productivity remains. the US and Germany, it can be argued that productivity growth is more critical to the UK than it is for other nations. Productivity matters. Nearly a decade after the financial crisis, we are still feeling its impact. Nowhere is this felt more than in the UK’s productivity performance over the last few years. The numbers tell their own story. At the height of the recession, productivity had fallen by 4.3%.3 It has failed to recover since then and the gap between pre-crisis levels and current levels gets ever wider. A failure to tackle the challenge over the last few years has seen the productivity gap relative to pre-crisis levels widen to 5%.4 Since the crisis, governments have come and gone, but the integral challenge of productivity remains. If the UK economy is really facing a ‘cocktail of risks’ as the Chancellor has warned; then poor productivity growth is surely a toxin. The government’s long-term economic plan will be nothing but a hollow pipe dream if productivity is not improved. Business and government collaboration Operating at the heart of UK plc, chartered accountants understand that many of the keys to unlocking the productivity challenge lie within businesses themselves. Questions over how to integrate digital technology into business practices; training employees; more efficient production methods; investing in R&D and innovation; etc. will all need to be answered by businesses themselves. However, government can play a strategic role alongside businesses by providing support where necessary and setting up a public policy environment which is more fertile for productivity growth. The starting point for any attempt to improve productivity – as any company director would point out in relation to their own workplace – is to create a series of targets to be achieved, establish how progress towards these targets can be measured and set out a timescale by which they should be hit. Despite widespread agreement on the need to improve UK productivity, there is no hard target for productivity growth, as there is for export growth, inflation, and even apprenticeships. Without measurable targets, the government’s proposals amount to little more than a randomly-compiled wish-list of hopes and aspirations which will not be taken seriously in the boardrooms of UK plc. In its report assessing the government’s productivity plan, the BIS Select Committee also recognised that there is a lack of quantifiable metrics which can be measured for success.5 Only once the government publishes quantifiable metrics of success and a roadmap to implementation of the policies contained within the Plan, will Parliament be able to hold Ministers to account. BIS Select Committee report on the government’s productivity plan 10 Productivity Now What is the solution? The government must adopt a national productivity target of 2–3% growth to transform its productivity plan into a clear plan of action. • A pan-industry National Productivity Council should be set up to contribute towards and oversee the national productivity target. • Frequent reviews of how the productivity plan is progressing should be done alongside each Budget to support efforts to reach the national productivity target. To return to relatively high levels of productivity growth, we cannot continue to operate in the dark. So what is needed is a clear signal from government of the direction of travel, set by a national productivity target of 2–3% annual growth. This will upgrade the productivity plan from a loose document of existing initiatives to a coherent framework aimed at a specific and tangible goal. The government should look at Singapore for inspiration. The city-state is an example of an advanced service-led economy that has realised productivity growth is crucial for its continued success. The Singaporean Government launched a major national initiative in 2010 to boost productivity growth and placed a target of 2–3% per year over the decade. Although a 2–3% target may be ambitious in the immediate term, we suggest that the UK do the same and give the target ministerial oversight in order to make it a national priority. In fact, the OBR forecasts that productivity will reach 2% annual growth by 2018 and settle at that level for the next couple of years.6 Therefore, there is an opportunity for the Chancellor to put some commitment behind this forecast by adopting it as a national productivity target. If the UK economy is facing a cocktail of risks, then poor productivity is surely the toxin. Once a productivity target is adopted, it is important to implement and monitor measures needed to reach the stated goal. A return to high levels of productivity growth will be led by our shop floors, our factory lines and our boardrooms. If businesses are the backbone of the economy, then the answer to the productivity puzzle lies at the heart of the business community. Recognising the dynamic make-up of the UK economy and the diverse sectors it represents, a pan-industry National Productivity Council composed of business leaders and organisations should be set up to work with government to boost productivity in their respective sectors in order to meet the national target. Chaired by the Chancellor, this National Productivity Council should meet frequently to inform the government’s productivity plan and also track progress on achieving the national productivity target. Rather than become another bureaucratic body or government quango, the National Productivity Council should be fleet-of-foot, industry-led, and operate as a high-level advisory body to government. To maintain momentum on boosting productivity growth towards the targeted level, annual reviews of how the productivity plan is progressing should be carried out to coincide with the Chancellor’s Budget. This will support efforts to boost UK productivity. Productivity Now 11 Case Study: Learning from Singapore In 2010, the government of Singapore embarked on a 10-year programme to boost the productivity of the city-state’s economy. The National Productivity Council (NPC) was established to spearhead efforts with the central pillar of the 10-year programme being the adoption of a target to achieve productivity growth of 2–3% per annum over the decade.7 Chaired by the Deputy Prime Minister of Singapore, the National Productivity Council and the target it has set have support from the highest levels of government. The NPC has identified 16 priority sectors to focus on. These range from construction, retail and electronics to accountancy. Productivity roadmaps were set up for each sector: 1. Construction 9. Healthcare 2. Electronics 10. Infocomm & Media 3. Precision Engineering 11. Logistics 4. Transport Engineering 12. Administrative & Support Services 5. General Manufacturing 13. Financial Services 6. Retail 14. Accountancy 7. Food Services 15. Social Services 8. Hotels 16. Process Construction & Maintenance Although Singapore has set itself an ambitious target, and one that it may be stretched to reach, the initiative has stimulated a much larger national dialogue and understanding on what is needed to achieve it. This has pulled in voices from across the spectrum – policymakers, schools, businesses – in an impressive exercise of collaborative and inclusive governance focused on a single mutual aim: to boost productivity by 2–3%. 12 Productivity Now Productivity Now 13 ii Staying in the global race The government must improve the UK’s international and infrastructure connectivity to boost global competitiveness What is the challenge? In its influential 2015 report The Future of Productivity, the Organisation for Economic Cooperation and Development (OECD) states that productivity is the ultimate engine of growth in the global economy. The latest figures from the Office for National Statistics show that productivity in the UK is 18% below the G7 average. This is the widest productivity gap since international comparisons began in 1991. It also signals a drastic reversal in fortune; the UK was second only to the US in productivity growth among major economies before the financial crisis. Businesses should benchmark themselves against the rest of their industry sector and UK PLC should benchmark against the rest of the G7. ICAEW member, South West of England It is true that the UK is not alone in its struggle to stimulate productivity growth; many other advanced economies are also in a quagmire. However, the UK economy has found it particularly difficult and puzzling to get itself out of this trench. In the long run, productivity growth will be a critical determinant in the UK’s ability to not only remain competitive in the 21st century, but to go further and become a global leader across a number of sectors. A more dynamic export market, world-class infrastructure and cutting edge digital economy will all help UK plc in achieving this goal. The government’s productivity plan acknowledges the poor state of UK infrastructure and how this may be holding back productivity. It references that the UK is ranked 30th by the World Economic Forum for the quality of its road network. However, it does not address one of the main causes behind the lacklustre development in UK infrastructure over the last few years; the political bottlenecks in the decision-making process. The decision on additional airport capacity in the South East is a case in point. The IMF has identified infrastructure investment as one of the few remaining policy levers governments have to encourage growth.8 If it takes you an hour to drive from Birmingham to Wolverhampton to get to a meeting, that’s a productivity issue. We need better transport systems. ICAEW member, Midlands Investment and innovation should lead the way The government’s own productivity plan highlights the integral link between investment and productivity. It is a crucial component in ensuring that the UK remains at the forefront of innovation and growth around the globe. However, the Office for Budget Responsibility’s (OBR) latest projections for business investment growth are extremely concerning and the estimate for 2016 has been nearly halved to just 2.6%.9 Business investment growth has been weak for the last few years. Investment in R&D and innovation needs to pick up if we want to see investmentled and innovation-led economic growth. Otherwise, we will continue to tick over with shortterm and to a large part debt-fuelled consumption-led growth. The OECD lists the fostering of innovation as the number one policy priority for governments looking to boost productivity.10 The central importance of innovation to productivity can be seen in the figures. In the years leading up to the financial crisis in 2008, when the UK was second only to the US in productivity growth among major economies, innovation accounted for around 50% of all productivity growth in the UK.11 However, this prominence has waned. The Enterprise Research Centre has found that only 28% of UK businesses innovate, placing the UK 24th out of 34 European countries. In fact, the UK’s innovation rate is comparable to Serbia – and significantly behind Germany.12 This is even more concerning when you consider that businesses which frequently invest in innovation and R&D have on average 13% higher productivity than those businesses which do not.13 14 Productivity Now What is the solution? The government must improve the UK’s international and infrastructure connectivity to boost global competitiveness. • Give businesses ‘whole of life’ export support by improving SME awareness of international markets, creating a dedicated export voucher and encouraging exports to continue expanding into new markets. • Improve transport and digital infrastructure by implementing the National Infrastructure Commission’s recommendations without delay and connecting new businesses with the fastgrowing digital economy. It would be wrong to think that the UK is alone in facing a productivity problem. Data coming out of most major economies show that it is a global concern. According to the World Economic Forum’s Global Competitiveness Report, a failure by countries to embrace long-term structural reforms that boost productivity and free up entrepreneurial talent is harming the global economy’s ability to improve living standards, solve persistently high unemployment and generate adequate resilience for future economic shocks.14 However, despite it being an international concern, there are many domestic solutions which can be implemented by national governments, including in the UK. Getting more SMEs to export will require a step change in how export strategy is delivered by government. ICAEW submission to BIS Select Committee inquiry A dynamic export market The government’s export strategy should include a framework in which businesses receive ‘whole of life’ support, from a small company seeing an export opportunity, to that small business becoming a world leader. Businesses which export are more productive. However, exporting remains beyond the reach or even awareness of many businesses, especially those at the small and micro end of the scale. Getting more of these businesses to export for the first time will require a step change in how export strategy is delivered by government. Most of them are not aware of the opportunities of exporting and do not consider it an essential part of their business plan. ICAEW research shows the majority of ‘non–exporters’ (76%) are unlikely to start selling overseas in the next 12 months as they claim to be focused on the UK only. Raising awareness of export opportunities is half the battle. Once a business becomes an exporter, it is crucial that government encourages them to expand into new markets. The government acknowledges that some businesses cease their exporting operations after a while; so there is a continuing uphill task to keep the show on the road. Access to broadband and the internet in general in more deprived areas needs urgent addressing. ICAEW member, Wales World-class infrastructure In its influential report Investing for Prosperity published in 2013, the London School of Economics Growth Commission found that the provision of infrastructure, or lack thereof, has been a persistent and major UK ‘policy failure’ and one which successive governments have failed to address. The National Infrastructure Commission was set up by the Chancellor in 2015 to try and de-politicise infrastructure by providing independent recommendations to government. The government must now commit to implementing the Commission’s suggestions and do it without any further delay. It is time to get diggers in the ground. Alongside transport infrastructure, the UK also needs world-class digital infrastructure to boost productivity growth across all regions of the UK. Without easy access to faster broadband and online marketplaces, businesses will remain excluded from the growth potential which stimulates business investment. The digital economy is one of the fastest growing parts of the UK economy and greater investment and innovation is needed to leverage that into productivity growth. For a start, the government should extend the Broadband Connection Voucher Scheme to at least 2020 to make sure UK businesses are not left behind in the ‘digital race’. Poor infrastructure, including broadband and transport, results in loss of productive time. ICAEW member, East of England Productivity Now 15 Boosting productivity is the economic challenge of our age Sajid Javid MP, Business Secretary 16 Productivity Now Productivity Now 17 iii Skills for the 21st century The government must close the skills gap through a national skills strategy that is underpinned by employer engagement What is the challenge? Human capital should be the UK’s greatest productive resource. There is a strong link between a highly-skilled labour force and strong productivity. However, despite this crucial link, weak productivity has been a defining feature of the labour market over the last few years. Surveys and research, including ICAEW’s own quarterly business report, have flagged up one culprit time and time again: the widening skills gap in the UK. Human capital is the stock of expertise accumulated by workers. As is the case with physical capital, greater and continued investment in human capital increases its value and productivity. To remain internationally competitive, UK businesses must be able to both draw on, and invest in, a highly-skilled workforce. A workforce equipped with the tools needed to succeed in the 21st century world of work. The malaise in productivity arises from a reluctance to invest in training people. A highly skilled and trained workforce is needed. The UK cannot compete at the lower end. ICAEW member, Thames Valley Skills to meet business needs Research by OECD shows that one quarter of workers report a mismatch between their skills and those required to do their jobs. At around 10%, the UK has the second highest percentage of under-skilled workers among OECD countries, just behind Italy.15 The skills gap is hurting labour productivity and business needs. The pervasive skills gap in the UK has been widely cited as a key barrier to productivity growth in the UK. There is a mismatch between the skills sought by businesses and the availability of these skills within the labour market. ICAEW research shows most businesses struggle to find school leavers with the skills and work ethic needed for the workplace. Given that schools are incentivised through their accountability measures to prioritise academic attainment and exam performance, this can limit the opportunities that students get to develop their work-readiness skills. In 2012, the obligation on schools to provide work experience was removed – OECD meaning a generation of pupils will leave school with no experience in the workplace. Skills and productivity are the real sources of strong, inclusive and sustainable growth. At the most recent Davos meeting, the World Economic Forum explored the future of jobs over the coming decades. Under the theme of the Fourth Industrial Revolution, business leaders and policymakers discussed how most industries and jobs are undergoing a fundamental transformation and that many existing jobs are going through a change in the skill sets required to do them.16 Skills development is the most important requirement and a return to developing basic trade skills is essential. There is a general misuse of the term ‘apprentice’ and not enough of this form of training support is given for these manual and practical skills. ICAEW member, Wales 18 Productivity Now What is the solution? The government must close the skills gap through a national skills strategy that is underpinned by employer engagement. • Continuing skills development throughout a person’s career should be prioritised by employers in all sectors and supported by government. • Good quality and wide-ranging careers advice should be a core part of the education system in schools. Careers advisers should be provided with greater training and schools and colleges should be speaking to employers about business needs. The government has rightly acknowledged that a large part of the responsibility of training tomorrow’s workforce will be down to businesses and employers. They are operating at the coalface and have a real-time understanding of how the labour market and demand for skills is changing. To complement the rather blunt apprenticeship levy and the National Living Wage, the government must maintain a strategic dialogue with employers to support life-long learning for employees and also meet business needs. This starts by creating a national skills strategy that is underpinned by close employer engagement. Continuing skills development is key As more and more people change jobs and careers more frequently during their lifetimes, the need for continuing skills development is paramount. As the nature of economic activity in the UK continues to evolve, there will be an increase in demand for the skills needed to survive in this new frontier. We need continuing professional development on the factory floor. This should start right at the beginning of an individual’s career path. We need continuing professional development on the factory floor. The persistence of the UK’s skills gap is showing that our education system is not as responsive to employers’ needs as it could be. It must be able to shift in line with market changes and be responsive to job market changes to minimise any ‘learning lag’. It is vital that open channels of communication exist between the education system and the business community so schools deliver what business needs. The Careers and Enterprise Company has a pivotal role to play here. The challenge will be ensuring all schools/colleges gain this insight, not just the select few. The government must equip careers advisers with the tools they need to give quality, relevant and balanced careers advice to students. This includes evolving the breadth of the training for careers advisers. Automation is at odds with high employment but that can be alleviated by upskilling, enabling people to do work involving the exercise of judgement that machines can’t do. ICAEW member, East of England Making the most of all the UK’s talent It is crucial that all parts of society are represented and included in a highly-productive labour market. Increasing female and BME participation across all sectors of the economy and in executive leadership positions will help the government and businesses to make the most out of the UK’s human capital and talent. This is especially true for those living in deprived areas. Businesses need to reflect in their workforce the communities they seek to serve. Resources and skills are becoming the big issue. We will be more automated and mechanised and lose skills. We need to train people to step up to the next level. This needs ongoing training. ICAEW member, South West of England Productivity Now 19 iv Regulation which enables growth The government must create a proportionate and balanced regulatory environment to encourage productivity-led growth What is the challenge? Research by the Bank of England shows that productivity performance has varied across different sectors, with some sectors experiencing significantly worse declines in productivity growth than others.17 Whereas some industries have been relatively untouched, others have been severely afflicted by it. One of those relatively untouched areas is the transportmanufacturing industry which has been a success story. The 345,000 people working in the industry and making everything from cars, planes and trains are now producing 56% more per hour than they did in 2009.18 However, in other key sectors the story is bleaker. Although there is no single cause to the UK’s productivity puzzle, the increase in regulation since the financial crisis has been flagged as an important contributing factor. This has created a more intensive regulatory environment for firms and businesses working in those sectors. Studies have shown that there is a link between the level of regulation faced by a business and the business’ productivity. This is especially true for the financial services industry where productivity has declined from 4% growth per annum before 2008 to 1% decline per annum post-2008.19 It can be rightly argued that some of the regulation we have seen since the financial crisis has been necessary and provides the protection and reassurance that markets and the public need. But as the figures show, this has come at the cost of productivity, in the short run at least. Too much red tape and additional work are causing a reduction in productivity. Our insurance-claim culture means more complexity to training processes in terms of recording everything. People have to be trained not to trip over a puddle: put a whole workforce through a course, record it all. This all reduces productivity. Compliance for compliance’s sake. ICAEW member, South West of England A complex tax system adds to the uncertainties faced by businesses that are looking to invest. The UK has one of the longest and most complex tax systems in the world. Two of the three longest Finance Acts in history were enacted in the last Parliament. The complexity of our current tax code undermines confidence, acts as a burden on business, suppresses entrepreneurs and inhibits economic and productivity growth. Furthermore, poor HMRC service standards and long call waiting times have been consistent concerns for businesses. Recent announcements by government such as mandatory quarterly tax filing for businesses as part of its Making Tax Digital roadmap will add to this burden. ICAEW research has found that sole traders will be hardest hit by the move to digital record keeping, with 82% of such businesses needing to make the mandatory move. I can spend 90 minutes on the phone to HMRC and that’s after waiting 80 minutes to get through using the employers helpline. There was a technology problem yesterday at HMRC. Problem is there are fewer staff. They can’t get it right. ICAEW member, South East of England 20 Productivity Now What is the solution? The government must create a proportionate and balanced regulatory environment to encourage productivity-led growth. • There should be independent monitoring by the National Productivity Council of the impact of regulation on productivity growth, especially for certain hard-hit sectors. • Government initiatives which will result in an initial burden on businesses such as Making Tax Digital should not be mandatory. The adverse impact of regulation on productivity is clear. However, the adverse impact of minimal or insufficient regulation is also clear. The question is how to square the two by encouraging productivity-enhancing activities by businesses in an environment which is more regulation and compliance heavy than before. The solution lies in a regulatory framework which is conducive to growth; a framework which is designed in collaboration and conversation with businesses, rather than one which is designed to be against them. A close dialogue by the government and a National Productivity Council on the regulatory impacts of productivity should lie at the heart of this framework. The regulatory environment in high-productivity sectors such as transport-manufacturing should be studied and emulated. The National Productivity Council should also be tasked with independent monitoring on the impact of regulation or the lack of regulation on productivity. We have set complex systems for ourselves such as auto-enrolment which takes focus away from outputs. ICAEW member, East of England Concerns over the excessive time commitment required by a growing compliance list, or confusion caused by the sheer churn in new regulation, exacerbate an environment which does not incentivise the kinds of productivity-enhancing activities the government wants businesses to carry out. Time spent on the phone waiting for HMRC means less time spent on innovation or output. An ever complex tax system dis-incentivises the kind of business investment we need to see. Give businesses time to get ready for digital tax From April 2018, small, non-VAT registered businesses will be the first UK businesses to have to comply with the government’s new proposals for Making Tax Digital, first announced by the Chancellor in the 2015 Budget. The change will make digital record keeping compulsory in addition to a new requirement to make four returns of information to HMRC each year. By 2020 this will apply to all businesses. However, ICAEW believes that these changes should be a matter of choice for business owners and should not be made mandatory. Businesses should be able to move to the new system over time when they are ready, especially the smallest businesses. In its latest annual report the Administrative Burdens Advisory Board (ABAB), the independent body that provides a business perspective to HMRC, concurred with this and said it was disappointed with the government’s decision to make it mandatory.20 Productivity Now 21 Measuring productivity in the 21st century As many commentators have alluded to, the nature of our economy is changing. In this rapidly evolving environment, we must also question the metrics and measurements underpinning our understanding of productivity. In a world which is becoming more interconnected and with the rise of the digital economy and sharing economy, it is important that the tools we use to measure our progress are relevant and accurate for the 21st century. Indeed, the more the question of productivity is investigated the more difficult it is to be sure the right things are being measured in the right way. An element of skepticism therefore surrounds the whole subject. Policymakers are beginning to understand this. In 2015, the Chancellor tasked Sir Charles Bean to conduct an independent review examining the health of economic statistics in the UK. The review was aimed at assessing the future requirements of national statistics including productivity and in particular relating to the challenges of measuring the modern economy.21 The recently published report from Sharing Economy UK shows how traditional economic statistics such as GDP and productivity measurements need to be updated to reflect efficiencies and benefits which are currently not accounted for.22 Furthermore, there is the larger question about how we measure economic success and whether broader measures other than GDP and profit should be used to capture national and firm-level economic success. ICAEW’s report So what is economic success? explores this idea further. In ICAEW’s Tomorrow’s Enterprise report, we also highlight the huge rise in entrepreneurship across the country. Over the last few years we have witnessed a boom in self-employment as more and more people embrace entrepreneurship. This must be reflected in how we measure productivity and more importantly, how government designs and implements policies aimed at increasing productivity. We see the review carried out by Sir Charles Bean as an extremely critical initiative, and one that requires close attention and dialogue between the government, statistics bodies and the business community. 22 Productivity Now Productivity Now 23 Related ICAEW publications So what is economic success? Going beyond GDP and profit GDP and profit currently dominate society’s discussions of economic performance. They shape the way people think about the economy and business, affecting their behavior and the actual outcomes of economic activity. ICAEW’s thought leadership project ‘So what is economic success? Going beyond GDP and profit’ explores what we mean by economic success, the role that GDP and profit play in this, and the potential for broader measures of economic success to help us balance our economic priorities, our social goals, and the constraints imposed on us by the natural environment. Skills and productivity In this report, we are not seeking to provide the sole answer to what has become known as the productivity puzzle, but we provide our readers with the background to a range of productivity-related issues – and offer practical advice for businesses and individuals to improve corporate efficiency and personal skills. Tomorrow’s Enterprise Tomorrow’s Enterprise is an ICAEW public policy report exploring the changing nature of enterprise in the UK and how government policy needs to be updated to reflect this change. By taking a more serious and longer-term view on these areas, and by working in partnership with the private sector, ICAEW believes that the government will be able to cement the UK’s position as the ‘capital of enterprise’ for the foreseeable future. Tomorrow’s Enterprise Building a public policy environment that reflects the changing state of enterprise Tomorrow’s Enterprise BUSINESS WITH CONFIDENCE 25 icaew.com All ICAEW publications can be accessed via the website. 24 Productivity Now Get support ICAEW’s Business Advice Service offers help to businesses in England, Scotland and Wales to overcome the challenges they face, including: • how to grow a business; • securing loans, capital and finance; • keeping staff and creating new jobs; • meeting tax and regulatory requirements; • export planning; • planning for long-term sustainable growth; • debt management; and • legal issues. Businesses are offered a free advice session with an ICAEW Chartered Accountant. Visit businessadviceservice.com to find the nearest office participating in the scheme. Productivity Now 25 Footnotes 1 Unless otherwise stated, productivity refers to labour productivity as measured by the Office for National Statistics (ONS) 2 Office for Budget Responsibility (OBR), Economic and Fiscal Outlook, March 2016 3 Institute for Fiscal Studies (IFS), Green Budget, 2013 4 Bank of England, The UK Productivity Puzzle, 2014 5 Business, Innovation and Skills (BIS) Select Committee, report on the government’s productivity plan, Jan 2016 6 Office for Budget Responsibility (OBR), Economic and Fiscal Outlook, March 2016 7 Ministry of Manpower, Government of Singapore 8 International Monetary Fund (IMF), World Economic Outlook, 2015 9 Office for Budget Responsibility (OBR), Economic and Fiscal Outlook, March 2016 10 Organisation for Economic Cooperation and Development (OECD), The Future of Productivity, 2015 11 Department for Business, Innovation and Skills (BIS), Innovation Report, 2014 12 Enterprise Research Centre, Unlocking UK Productivity, 2015 13 Department for Business, Innovation and Skills (BIS), Innovation Report, 2014 14 World Economic Forum, Global Competitiveness Report, 2015 15 Organisation for Economic Cooperation and Development (OECD), The Future of Productivity, 2015 16 World Economic Forum, Fourth Industrial Revolution, 2016 17 Bank of England, The UK Productivity Puzzle, 2014 18 ‘Under the Bonnet’, The Economist, 30 May 2015 19 Office for Budget Responsibility (OBR), Economic and Fiscal Outlook, March 2016 20 Administrative Burdens Advisory Board, 2016 Annual Report, April 2016 21 Sir Charles Bean, Independent Review of UK Economic Statistics, launched in 2015 with final Review presented in March 2016 22 Coyle, Prof D. 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