Productivity is one of those “dry as dust” terms, the dullness of which conceals its crucial importance. How much we produce when we turn up to work – our productivity – determines how much we can earn. Britons produce by Friday at 5pm what our best-performing peers manage by Thursday lunchtime. Match their performance and we would be much better off.
Low productivity is not a new ailment; like the Biblical poor it seems always to have been with us. Yet we know how to bridge the gap: by investing. Thus, the centrepiece of the Chancellor’s announcement was the National Productivity Investment Fund (NIPF). It will have more than £23 billion to spend over the next five years on transport, digital communications and research and development.
Most notable, however, is that the largest single commitment from the NIPF – £8bn – is for investment in infrastructure to support housing development.
High house prices have long been recognised as a pressing social problem. But they also choke off labour mobility, making it harder for people to find jobs and jobs to find people. That dampens productivity growth. Providing the infrastructure that facilitates new housing is a welcome measure.
In total, the Chancellor announced a net giveaway of £33bn. How can we afford that? The short answer is more borrowing. The longer answer is that new fiscal rules tie the government’s hands less tightly. Rather than targeting a surplus in 2020, the main target is for the cyclically-adjusted budget deficit to be less than 2 per cent of national income by 2020-21.
Britain’s economy needs even this modest boost. According to the Office for Budget Responsibility, which produces forecasts for the Treasury, growth will slow next year to 1.4 per cent, from over 2 per cent in 2016. Growth in investment and consumer spending will be weaker than previously thought because of Brexit-related uncertainty and higher inflation coming from sterling’s depreciation.
Scotland receives an extra £800 million as a result of the additional investment. When added to the Scottish Government’s post-referendum boost to investment spending that provides welcome support to infrastructure here.
On balance, this is a welcome statement given the still-weak fiscal position. If only, like Oliver Twist, we could have had more, please.
l Stephen Boyle is chief economist at Royal Bank of Scotland