Three simple answers to the UK’s productivity puzzle
With political and policy attention focused almost entirely on one complex puzzle, it is easy to forget that there are others requiring urgent attention.
Today's Business, Energy and Industrial Strategy (Beis) select committee report is a timely reminder that government action on the productivity puzzle is long overdue.
Britain’s growth in productivity lags behind our competitors and impacts small businesses disproportionately.
The evidence is striking. The top one per cent of UK firms grew on average by eight per cent each year between 2004 and 2014, while the lower 99 per cent experienced annual productivity growth of less than one per cent over the same period.
Economists label this the “long tail” of business. However the explanation for it lies in a mix of interconnected issues relating to a lack of access to finance, restricted opportunity to access public and corporate contracts, and unfocused business support and advice.
The proposals in today's Beis committee report offer some clear and simple steps the government can take to help small businesses to improve their productivity. Small businesses have been calling for a range of measures for a long time, and today’s report captures a number of these.
It is clear that the government should adopt a laser focus on the causes rather than symptoms. This means bold and concerted measures in three key areas.
First, access to finance must be expanded for small businesses.
The British Business Bank reported that banks refused 100,000 business loan applications from SMEs in 2016, creating a funding gap of £4bn.
Expanding responsible finance, which seeks to advance funding for small businesses refused by the traditional sector, would be one way to bridge this gap.
Responsible finance loans, provided by organisations such as Newable, include business mentoring. This is crucial in ensuring that companies put the finance to the most productive use.
The second area is access to opportunity.
There is little incentive to innovate and become more productive when small businesses find themselves shut out from the supply chains of large corporates and struggle to navigate the extensive, confusing and costly public sector procurement processes.
As an immediate step, the government should adopt simpler tendering processes and incentivise big business to open up opportunities to the smaller players in town.
Perhaps the quickest win for the government is to beef up the Beis department’s business advice offer.
At present, it is too fragmented and inconsistent, but a solution lies across Whitehall at the Department for International Trade – where a “single front door” service exists to support small businesses.
In London and the South East, around 15,000 companies benefited from the programmes with their exports growing by an additional £2bn. Successful ideas need to flow through government, and so collaboration between the respective secretary of states, Greg Clark and Liam Fox, is called for.
The prize for UK business should not be understated. According to the Bank of England’s chief economist Andy Haldane, reducing the gap between the weakest and strongest firms could alone boost UK productivity by 13 per cent – and raise around £270bn in GDP.
There are positive signs that the government is in listening mode on the issue, but the solution will not be found by tinkering at the edges.
We need a focus on the causes of productivity problems, bold policies to overcome these, and a plan for implementation.
Doing so will enable the government to send a clear message to business: we are working with enterprise to maximise productivity across the country – supercharging the UK economy, regardless of Brexit.