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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.
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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.
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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.
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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
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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
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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
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-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
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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
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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.
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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%.
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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
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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
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Boosting productivity is the
economic challenge of our age
Sajid Javid MP, Business Secretary
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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
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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
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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;
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• meeting tax and regulatory requirements;
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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. Sharing Economy in the UK (2016)
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Productivity Now
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