UK Economy: Productivity vs Growth

Editors note: I first compiled this blog in late 2022 in the aftermath of  the ignominious fall of 'Trussonomics' and before the advent of AI. Many of the ideas are still very relevant today, so a revisit with recent developments in mind at a time when AI is really starting to affect our workplaces is probably appropriate....

Introduction

This has been a momentous couple of months all told, with more than the usual quota of economic and political U-turns, a new war in the middle east, and probably more to come that we don't yet know about. The ‘new’ Labour regime’s primary task after taking office in 2024, was to act on their manifesto promise of 'restoring some sense of stability' and preventing the economic meltdown which they claim beckoned….

Did this actually happen ? I'll let the reader answer that particular question themselves...and give their verdict on it at the ballot box in May (if called to do so this year!).

But whatever regime is in charge, what do we actually need to do in the medium- and long-term to improve our economic and social prospects as a nation, and get ourselves out the mess we're in just now ?

I’ve framed the title of this piece in terms of productivity and growth as opposing alternatives. This is no coincidence, as I believe we need to solve one before we can make useful progress with the other. Make no mistake, though, the UK is in need of improvement in both these key areas. The big question is – which should take priority, and how quickly do we need to address each one ?

As I hope you’ll see from the following paragraphs, it’s important that we answer this question correctly and implement our policies accordingly if 'UK plc' is to succeed economically in an increasingly competitive world.

Productivity

There has been much talk recently of the UK’s ‘lamentable’ record on productivity since the financial crisis of 2008. Our performance certainly seems to have been considerably worse than for our erstwhile EU partners and the USA. Why is this important, and more to the point, how have we managed to fall so far behind in the first place ?

First of all, let's take a look at what we mean by productivity.  

The term is widely used, but is less well understood. It is normally defined by economists when referring to labour as the “output per hours worked, which can be obtained by dividing the volume of goods and services produced by the country in a year (real GDP) by the number of work hours supplied by the country’s workforce during the same year”.

This rather indigestible mouthful effectively boils down to a measure of how 'smartly' we work (i.e. how much we achieve while we're working, rather than how hard we work or even how may hours we put in). It is an important concept because it defines how competitive we are likely to be as a nation. In times such as these, there is still an acute shortage of available skilled labour of the appropriate kind despite increasing unemployment. Higher productivity should ensure we have sufficient workers of the right kind to do the work needed to ‘earn our living’ as a country on the world economic stage, and provide support for our growing, but rapidly ageing, population.

Why has our productivity declined ?

There is still plenty of controversy as to the precise causes of this. In reality, it will prove to have been a basket of contributory factors, all of which have come together since 2008 and are manifesting themselves now as a ‘perfect storm’ of under-productivity, combined with sluggish or even non-existent growth, and periodic rampant inflation.

The key contributory factor that most pundits agree on seems to have been chronic under-investment in both the public and business sectors over the last 40 years. Productivity declined sharply after 1979, due largely to the loss of our heavy industries. This was due to the rising cost of UK labour induced by over-powerful unions, which effectively priced us out of world markets,  and the policy changes of successive governments (of both persuasions) thereafter, favouring increasing reliance on imports over self-sufficiency in resources as an the easiest expedient. 

A more recent factor, the persistence of relatively low business- and public-sector investment in UK compared to other EU countries, is still something of a puzzle, though. A prime suspect as a cause is uncertainty, due to a combination of Brexit, Covid,  and the structure of the UK economy itself, all of which have resulted in UK notably lagging behind other G7 economies in implementing new technologies and updating their working practices. Recent conflicts in Ukraine and now Iran, and their effect on world commodity prices and availability, also have had a disproportionate bearing on UK compared with other states, due to our self-inflicted net zero commitments which have encouraged our reliance on external imports of energy and...well, virtually everything else.

We live in an increasingly competitive world, and have the additional disadvantage of an over-large population for our small geographical size. A demographic legacy from the post-war years has meant that a substantial proportion of our population is now reaching old age, is therefore economically inactive, and needs increasing levels of support. If we are to continue to make our way in the world effectively without becoming an economic ‘basket case’ dependent on IMF handouts, we must improve our productivity and grow our economy...and do it quickly. These two changes ideally need to be done in parallel, but inevitably we're unlikely to be able to go 'full steam ahead on both. Indeed there are good reasons for not doing so...why, and which task should take priority ?

There is also a strong economic case for making significant progress with productivity before we forge ahead with growth. This was the point missed by the abortive Truss government, and which led to its rapid fall from grace at the hands of the money markets.

The markets, and world economic and political leaders, are by their nature cautious beasts, and have already shown us what they think of un-costed policies involving unfettered growth based largely on borrowing, in the present economic climate. To attempt to proceed regardless against this extreme ‘headwind’ would have been disastrous, and the U-turns on virtually all Kwarteng's mini-budget tax giveaways in 2022 and more recent hikes in taxes by Hunt and then Reeves do at least mean we should avoid a similar 'punishment'...for now at least. 

Many were hopeful when Labour came to power that their emphasis would be on growth, and genuine growth powered by the private sector as the only real wealth generator we have available. Instead, they proceeded to adopt a policy of overt 'public sector favouritism'....at the expense of everyone and everything else. Since the public sector is a wealth consumer (and a heavy one at that) rather than a wealth generator, this was an obvious economic 'howler' when it came to external assessment. 

Although some of their more draconian measures against other 'less favoured' groups have been reined in (largely via their all-powerful back-bench contingent - thank heaven for at least some good sense amongst Labour ranks) the ideological tendency towards a bloated state and a cosseted public sector is still there, and as long as it remains, all hope of significant improvement in our wealth creation is in abeyance. Whether things will improve after Starmer and Reeves depart this summer is open to debate, since I confidently expect a lurch to the left to counter current Green Party popularity.

The only hope of a resurgence of our productivity would be to roll-back fully the prohibitive tax hikes and the restrictive measures on employment terms introduced by Reeves in the last 2 budgets, and create a more favourable environment for our private sector to flourish.

There is also some evidence that the culture within industry in both public and private sectors is also inhibiting growth and innovation. HR departments have been singled out as culprits in becoming too prescriptive and overbearing, and this has been accompanied by a large increase in their staff numbers. This is, at least in part, due to the tightening of labour legislation since 2024. A degree of 'reining in' of this tendency may be required before our workforces have the freedom to innovate and adapt effectively to the new 'AI workplace'.

There are also good operational reasons why rapid growth across the board at this stage, in the absence of any productivity improvement,  would be a poor strategy. To grow an economy like ours without the important structural modifications it needs, would have required not only significant outside investment, but also – a lot more workers. We already have an acute shortage of available and suitably-trained workers for our existing jobs, and this is reflected in the million or so vacant positions still waiting to be filled, despite the number of working age people without jobs (5.2% and rising at the last count). Witness the lamentable (from a government point of view at least!) performance of the building industry in 2025 against Labour's manifesto 1.5M house target by 2029, which is now even less likely to materilise due to competition from new AI data centre projects. The increased restrictions on immigrant visas brought in by Mahmood recently will administer the 'coup de grace' on any attempts to 'bus in' external labour to compensate for our lack of 'home talent' (despite the dispensation for sheep shearers!).

To stand any chance of success, we therefore need to address productivity in all sectors of our economy via structural change before we can grow the economy efficiently.  By doing this as a priority, we will achieve two things:

1) Reduce the number of workers we actually need to do the work and

2) Enable employers to improve their workers' conditions and pay, and by doing so increase the attractiveness of the jobs and the ease with which we can fill them. The improved prospects should in turn improve retention of skilled workers and reduce turnover.

This will, in turn, have a beneficial side-effect on our current immigration problem. Our existing worker ‘shortage’ is partly due to the reluctance of able-bodied UK residents of working age to do these jobs, which are often physically demanding and usually poorly-paid. The structure of our benefits system, which encourages dependency by being over-restrictive on supplementary earnings, also makes taking up these jobs unattractive to claimants, and the benefits system needs to be redesigned in order to promote job uptake more actively. This will benefit claimants themselves by improving their lives and prospects. We also need to improve the health of our working age population - far too many of them have been signed off as permanently sick because we haven't provided the necessary support for them to return to work.

The ‘new’ improved job roles would  be likely to attract a lot more of those ‘not currently seeking work’, thereby reducing our benefits bill, increasing the tax take from earnings and reducing the need for us to 'import' unskilled migrants. A 'smarter' tax system for pensioners would also attract some of the over 65s back into the jobs market, allowing us all to benefit from their long years of experience of the world of work. Employers such as Halfords have recently recognised the value of long experience and have actively targeted recruitment in this age group. See the recent blog on this subject for more info. 

If we don’t address this problem, we will eventually need to seek ever farther afield for unskilled immigrant workers. As our economy stagnates and our immigration policy tightens in response to Brexit promises and the current widespread dissatisfaction over small boat crossings, these foreign workers may also become increasingly reluctant to move to UK on increasingly tightly-controlled short-term visas as the cost of living here spirals and the value of our currency continues to fall against the dollar. This has already happened with many of our original eastern european workers as a result of the Brexit changes.

The all-important question, of course is: How can we start to improve our productivity ?

There is no easy solution to this, and it will take time – and money.

One of the key tools for reform will need to be automation. Many of the low paid ‘jobs’ that abound in our so-called ‘gig’ economy are boring, repetitive, stressful and insecure, and many could readily lend themselves to automation. One of our advantages as a nation is our inventiveness. Our robotics industry is growing apace, and I believe is more than capable of taking us into a new age of automation. The upcoming revolution in artificial intelligence (AI) application will soon catapult our industry firmly into this arena, and will no doubt 'drag both employers and unions kicking and screaming into the 21st Century' by mandating new working practices in the name of successful competition. 

Al this will, however, meet much resistance, not the least from workers who risk losing their existing jobs as a result - we must find ways of re-skilling them to take on other roles and ensure that they don't lose out. Ultimately, we will also need to consider a Universal Basic Income (UBI) for those unable to re-skill, or are just unwilling to adapt. We will also need to find useful things for those not in 'conventional' jobs to do with their time, and give them the opportunity to develop their skills...and benefit financially from the process. The 'urge to strive' is built into our psyche and must be satisfied to maintain our long-term mental health. This is why condemning a whole generation to permanent unemployment, as we seem intent in doing now, is so dangerous.

The rapid implementation of AI we are already seeing in many sectors can only hasten this process, and is likely to provide an even more irresistable stimulus to change in the workplace

That said, you can’t automate everything.... 

There will still be a need for some human input in most job roles, but automation and procedural re-design can, and should, be used to make the jobs more interesting – and productive for the human operative. As mentioned already, the improvements in performance and output per worker will enable improved remuneration, and lead to a higher-skilled and more motivated workforce. This move away from the 'gig economy' towards higher-skilled and better rewarded jobs will be a key element in attracting motivated and skilled workers in future - without it our productivity will continue to languish at the bottom of the G7 'table', and growth will remain elusive. On the other hand we must make sure the AI we do introduce is carefully regulated and remains benign, and is not solely designed to profit 'Big Tech'...more about that imperative in a recent blog article on the subject.

If this revolution in working practices promises to be so beneficial, why hasn’t it already happened, given that the technology needed is already here ?

For two principal reasons – cost, and resistance to change amongst the workforce and their 'representatives'.

Industrialists the world over know how difficult it is to get any sort of change in working practices past the unions. The ‘threat’ perceived by the unions to their membership of job cuts resulting from virtually any type of modification, however necessary for economic survival, leads to strong resistance and the threat of strikes. We’re seeing the results of this now as the main stumbling block to the current round of pay settlements, notably in the rail disputes, but also in a number of other industries. Another ‘winter of discontent’ similar to 1978 looks increasingly likely in '26-'27 as positions become more entrenched. (hopefully without the particularly hard winter weather we also experienced that year !).

This ingrained and blinkered view of life on both sides of the industrial ‘fence’is a direct result of our industrial relations heritage dating back to the start of the industrial revolution in the 1800s, and is virtually impossible to shift. The deadlock will only be broken if and when the unions realise that the only hope to keep their ageing and uncompetitive industries ‘alive’ and avoid massive job cuts is to work with employers and embrace the necessary changes. 

A portent of things to come emerged in 2024 with the announcement by Royal Mail of ca 16,000 planned job cuts as a direct result of loss of business to competitor carriers through recent industrial action. Many more such 'worker culls' are expected in the next few years. The miners’ strike of 1984 effectively killed-off an already doomed coal industry – let other work-forces beware, lest the same thing happens to them between now and 2029…

This ingrained ‘them and us’ philosophy which drives resistance to change, and the high investment cost associated with automation has led to a marked reluctance on the part of employer management to innovate. Employers have instead up to now plumped for increasing the number of poorly paid, often ‘zero-hours contract’ jobs, leading to insecurity and job-dissatisfaction – the ‘hallmarks’ of our gig economy. Undoubtedly the easy and cheap way out, and more likely to generate quick profits in the short-term, but highly detrimental to our national productivity as a whole. AI however will force employers to slim down their workforces to remain competitive, and will therefore need to improve the job offerings for their highly skilled operatives, both in terms of remuneration and working conditions. Hopefully AI and the automation 'revolution' will help drive this, and generate the increase in profits to fund the changes, provided they are not so heavily taxed that their profits are gobbled up by a greedy exchequer...

Can the current government lead us out of this impasse and drive forward the necessary revolution in working practices ?

I suspect not – however many ministerial (and PM !) iterations it may go through before 2029, its divisive ideology and the consequent inevitable party split is still baked-in and likely to mitigate against the all-party cooperation we need to achieve real change. It is also a ‘highly-stressed’ government, having presided over repeated internal and external traumas already, and is ruled with a 'rod of votive iron' by its powerful back-bench contingent, rendering it effectively 'lame duck' on anything that might occasion 'email angst' for its constituency MPs.

This is not to say it shouldn’t start the ball rolling while it’s waiting for our 2029 ‘verdict’– a reversal of tax and NI hikes would free up some cash for the private sector, which could then be directed towards implementing automation and other projects designed to enable ‘smarter’ working (it might even stop the rest of our pubs closing before then!).

As a matter of unrgency, it does also need to take a more pragmatic view of its 'net zero compulsion' and rein in Millband sufficently to ensure we don't lose our North Sea resource at a time when we most need it. Having lost our cheap Russian gas supplies via the Nordstream closure in 2022, and liable to lose our middle eastern sources shortly, our reliance on gas for both electricity generation and heating could land us in serious trouble next winter if the situation isn't remedied and our one remaining partner, Norway, drops out.

We Brits are an ingenious bunch, and should be applying our talents to the full in devising new ways of doing things, rather than giving up all hope of economic success. UKGov needs to step up to the plate now and support this inventiveness by reversing some of the tax and net zero hikes, rather than bankrupting us all and pouring the proceeds down the usual ring-fenced public sector 'black holes'.

Growth

If we're prioritising productivity improvement, how then should we tackle the pressing need for longer-term growth ?

The main effort on this can, and should, wait until there have been major improvements in productivity, for a variety of reasons which I’ve already alluded to. But we can start the growth process in parallel in a limited way, by focusing on acquiring and training new workers from within UK to take up the increasing numbers of positions that are still unfilled. We have a major ‘skills gap’ in UK, and this will need addressing, however we choose to tackle our current economic crisis. It will also take time.

This process will need to involve ‘importing’ some appropriately-skilled workers from abroad, but the main thrust should be in recruiting and training our indigenous workforce. We should remember that enticing skilled professionals from 3rd world countries to work in UK will leave a gap in their own economies, which may well be damaging to their way of life, and could in turn encourage further unwanted immigration to Europe.

I have already put together some ideas as to how we could boost 'indigenous' employment  in a recent blog. The key is to make the jobs more attractive and better paid. An important part of this process will also be to alter our tax structure to reflect the need to allow workers to keep more of their earnings – a first step in that would be to unfreeze the tax thresholds. This would be far more effective than any across the board cuts in the basic rates and would cost the exchequer significantly less overall. It would also increase the tax take, 'unstifle incentive'...and reduce the benefits bill. Sadly, the prospects of this happening, at least while the current regime remains in power, now look decidedly bleak.

Achieving the desired level of productivity increase will take time, but is an essential investment that we must make. In the time it takes to achieve it, our return to economic ‘prudence’ should have built up sufficient confidence in the markets to justify their support for economic expansion without penalty. 

We also need to provide products and services that people from other nations want in a changing world. This will require innovation and R&D - we have shedloads of talent in UK but are not always good at deploying it commercially, and we'll need to up our game in this area to remain competitive.

Only then can we hope to grow the economy as necessary to reach our full potential as an independent and successful G7 nation.

Do we as a nation have the capacity to achieve any of this ? Undoubtedly...

Will we achieve it ? Only if government, employers and workers and their representatives are prepared to be pragmatic and collaborate towards a common goal - and therein lies our main problem. 

Will they overcome their ideological differences and prejudices ? Only time will tell...

First published  24.11.22; Revised 19.8.23, 13.3.26