Latest news with #ProductivityInstitute
Yahoo
31-07-2025
- Business
- Yahoo
Just one more volte-face, Rachel, and it could be crisis averted
Sir Keir Starmer and Rachel Reeves gained power committed to achieving growth – but our economic problems go far deeper than improving GDP. The key to us sharing in rising prosperity can be seen by observing how other countries improved their living standards – and it lies in solving Britain's poor productivity. Britain is in the grip of a productivity crisis, and our Chancellor has made it worse by raising capital gains tax. While productivity grew at a rate of 2.5pc in the years before the financial crisis, in the years since, the annual average growth in UK GDP per hour worked has been just 0.5pc, with no sign of an improvement. A report from The Productivity Institute argues we need to solve Britain's massive shortage of capital that few politicians talk about and, if anything, make the problem worse. The report reveals UK workers benefit from 33pc less capital per hour worked than workers in high productivity peer countries (the US, Germany, France, and the Netherlands). Average UK real wages from 1970 to 2005 grew on average by 33pc per decade, but since then have flatlined. The comparison with the US is particularly stark. Since 2005, US labour productivity has grown at an annual average of 1.4pc, almost three times faster than in the UK. The result is much higher living standards in the US, with salaries some 30pc to 50pc higher than UK equivalents. If UK private investment had matched the average of France, Germany and the US since 2008 – requiring additional investment of just over 2pc of GDP annually – UK GDP today would be nearly 4pc higher, equivalent to an extra £1,250 per worker in annual wages. It is capital that finances the new machines and new technologies that enable workers to become more productive. Increased productivity leads to higher wages, demonstrating the fact that much of the benefits of capital accrue not to its owners' return on investment, but to the workers whose increased wages depend on it. Without much more capital, wages will remain depressed. It requires a major effort to turn this around. As The Productivity Institute notes: 'Marginal increases to public investment combined with minor initiatives to encourage private investment are a distraction, and do not constitute a strategic take on the issue.' In particular, dribbling bits of extra cash into Britain's inefficient and unproductive public sector and calling it 'investment' is not the solution. Moreover, the increasing share of national resources taken by the public sector – about 45pc of GDP – is a direct cause of Britain's productivity problem. Productivity across the public sector is still 4.6pc lower than in 2019, with the health service in particular an amazing 10pc less productive. The first corrective step is to stop sucking capital out of the private sector through high capital taxes. When you are in a hole, stop digging. Capital taxes don't raise much revenue, but they have a catastrophic effect on investment. When capital taxes are lowered or eliminated, the expected return to investors is raised, leading them to invest more. The reverse is also true. When capital taxes are raised, the returns on capital fall and people invest less. Rachel Reeves chose the wrong route by raising capital taxes. Secondly, lower the burden of taxation on companies. Britain has the third highest rate of taxation of corporate income in Europe, which actively discourages investment. It's vital we make it worthwhile for pension funds to invest in Britain again. Gordon Brown's removal of the pension dividend tax credit is most to blame for stopping pension fund capital investment, but today's stamp duty on British share transactions is also a major factor. Thirdly, we must slash Britain's absurdly high energy costs. The cheaper that energy is, the more goods and services can be produced per hour at competitive prices. Yet energy capacity has been reduced since its peak in 2005 – and our trend rate of productivity has slowed sharply. Fourthly, we must do more to attract wealthy investors from around the world, not drive them away. Cutting capital gains tax and corporate taxes isn't just about boosting profits for investors, it's about creating the conditions for businesses – large and small – to thrive, and for workers to share in the rewards of that success. When businesses invest in productivity-enhancing technologies and processes, it leads to higher output, greater efficiencies and better pay for workers. Improving productivity is not some desktop theory, it is what has made other countries more prosperous. If Rachel Reeves wants to achieve higher tax revenues, she must cut capital gains tax, not raise taxes even more.
The Sun
10-07-2025
- Business
- The Sun
UK Regions in ‘Junk Bond' Status Due to London's Dominance
MANCHESTER: Britain's regions outside the capital are languishing in 'junk bond' territory in terms of their attractiveness for investment, largely because local financial systems have been hollowed out by London's dominance, according to new research. The paper, published in the Fiscal Studies journal, underlined flaws in Britain's financial architecture that help to explain inequalities between London and other regions that are among the worst among similar economies. Investors in British cities other than the capital demand a big risk premium of around 250-300 basis points above projects in London and other European cities, according to the research, which analysed thousands of real estate investments. The gap is similar to that between British sovereign bond yields and those of Romania or Hungary. A bigger risk premium means investors seek higher returns, making projects less likely to happen. 'Until now we have had no understanding regarding the extent to which the UK is not perceived by investors as being a single market area,' said Philip McCann, chair of urban and regional economics at the Productivity Institute at Alliance Manchester Business School, who co-authored the paper. Prime Minister Keir Starmer plans to devolve more power to Britain's regions and boost skills training, but the authors of the report said financial system reforms were missing. Previous governments have tried to reduce Britain's regional divide, with limited success, including former Prime Minister Boris Johnson's 'levelling up' agenda. The paper showed much of Britain entered 'junk bond' territory after the global financial crisis of 2007-08. Past rounds of monetary easing by the Bank of England, including quantitative easing bond-buying, appeared to affect only London and deepened regional divides - a finding at odds with the BoE's view that its policies helped the entire country. 'We now know that this is profoundly not the case, especially with QE, which appears to have had no beneficial commercial investment effects whatsoever outside of London and its immediate hinterland,' added McCann, who has previously advised the European Commission and various governments. The BoE's mandate is to set policy for the British economy as a whole. Its officials say regional inequality is an issue for the government. A Reuters analysis last year showed London's share of the national economy has surged by more than 3 percentage points since 2000 to 24%, with no other British region increasing its share. Comparable data from the EU statistics agency Eurostat show far less polarisation between regions in Germany and France. The new research said the disappearance of local banking lay behind the increased risk premium in Britain's second- and third-tier cities - in contrast to the United States and Germany, where lenders operate with far more regional autonomy. 'The result is that UK financial markets now have little presence, finance or engagement in the regions of Britain and the commercial opportunities that might exist there,' the paper said. The authors said revived local capital markets and banking networks, led by organisations such as the British Business Bank and the UK National Wealth Fund, would encourage private investment.
The Sun
10-07-2025
- Business
- The Sun
Most of UK stranded in 'junk bond' territory as London dominates, research says
MANCHESTER: Britain's regions outside the capital are languishing in 'junk bond' territory in terms of their attractiveness for investment, largely because local financial systems have been hollowed out by London's dominance, according to new research. The paper, published in the Fiscal Studies journal, underlined flaws in Britain's financial architecture that help to explain inequalities between London and other regions that are among the worst among similar economies. Investors in British cities other than the capital demand a big risk premium of around 250-300 basis points above projects in London and other European cities, according to the research, which analysed thousands of real estate investments. The gap is similar to that between British sovereign bond yields and those of Romania or Hungary. A bigger risk premium means investors seek higher returns, making projects less likely to happen. 'Until now we have had no understanding regarding the extent to which the UK is not perceived by investors as being a single market area,' said Philip McCann, chair of urban and regional economics at the Productivity Institute at Alliance Manchester Business School, who co-authored the paper. Prime Minister Keir Starmer plans to devolve more power to Britain's regions and boost skills training, but the authors of the report said financial system reforms were missing. Previous governments have tried to reduce Britain's regional divide, with limited success, including former Prime Minister Boris Johnson's 'levelling up' agenda. The paper showed much of Britain entered 'junk bond' territory after the global financial crisis of 2007-08. Past rounds of monetary easing by the Bank of England, including quantitative easing bond-buying, appeared to affect only London and deepened regional divides - a finding at odds with the BoE's view that its policies helped the entire country. 'We now know that this is profoundly not the case, especially with QE, which appears to have had no beneficial commercial investment effects whatsoever outside of London and its immediate hinterland,' added McCann, who has previously advised the European Commission and various governments. The BoE's mandate is to set policy for the British economy as a whole. Its officials say regional inequality is an issue for the government. A Reuters analysis last year showed London's share of the national economy has surged by more than 3 percentage points since 2000 to 24%, with no other British region increasing its share. Comparable data from the EU statistics agency Eurostat show far less polarisation between regions in Germany and France. The new research said the disappearance of local banking lay behind the increased risk premium in Britain's second- and third-tier cities - in contrast to the United States and Germany, where lenders operate with far more regional autonomy. 'The result is that UK financial markets now have little presence, finance or engagement in the regions of Britain and the commercial opportunities that might exist there,' the paper said. The authors said revived local capital markets and banking networks, led by organisations such as the British Business Bank and the UK National Wealth Fund, would encourage private investment.
Bloomberg
09-07-2025
- Business
- Bloomberg
Reeves Should Brave Markets and Swap UK Fiscal Rules, Study Says
UK Chancellor of the Exchequer Rachel Reeves should revamp her fiscal rules to revive productivity, according to a new report that argues the existing design is damaging the investment needed to generate long-term economic growth and tax revenue. The current framework, which requires debt to be falling as a share of the economy by the end of the decade, encourages the Treasury to sacrifice investment projects to keep its finances in check, the analysis by the Productivity Institute and the National Institute of Economic and Social Research concluded.
The Herald Scotland
10-06-2025
- Business
- The Herald Scotland
Can Scotland regain its status as an innovation nation?
About a third of the slowdown in growth is coming from the aforementioned lack of investment, but the rest is linked to something called "total factor productivity". Read more: On that first point, Scotland has for decades had very low levels of private investment, as has the UK which on this measure has been at the bottom of the G7 league table for many years. According to the Productivity Institute in Manchester, UK workers are operating with a third less capital - less software, fewer machines, a lack of R&D and organisational capacity, and so forth - than their counterparts in the US, Germany, France and the Netherlands. Give people fewer tools, and they'll produce less. Those figures were highlighted last week by economist Daniel Turner, head of research and analysis at the Centre for Progressive Policy, who noted that the difference is "particularly stark" in the case of France. "A worker has about half of the stuff with which to produce their outputs if they are based in the UK than if based in France," he said at the Creating the Jobs of Tomorrow conference in Glasgow. "But just fixing that problem of low investment will be nowhere near enough to reverse Scotland's slowdown in productivity because two-thirds of that gap comes from something called total factor productivity. Usually this is what economists attribute to ideas [and] innovation, bot the basic ideas from universities and also how we can make more effective use of production processes, how we design, and how we market our goods." Read more: So, Mr Turner asserted, there is no path for Scotland to return to a high productivity growth economy, and the higher incomes that come with that, without raising the level and quality of innovation across all industries. "This is as near as we get, if you can productivity, as near as we get to a panacea in economic policy because it makes all of the other economic trade-offs that we have to grapple with harder. If we don't fix this is will be harder to raise standards of living, to fund public services, and to create good jobs everywhere." Fortunately, it's not all doom and gloom. Scotland is among the best places in the UK to establish an innovation business, with the university spin-out rate per head of population the highest of any nation or region in the UK. In addition, half of the UK's most active angel investor networks are based north of the border. But each £1 spent on innovation in Scotland via the public sector and higher education generates just £1.46 in private sector research and development, which is about half the rate of the UK as a whole, roughly a third of that of the 38 countries that are members of the Organisation for Economic Co-operation and Development (OECD), and less than a fifth of returns in the US. The first step towards solving this, according to the conclusions from Mr Turner's latest research, is to set out a single Scottish industrial strategy backed by both the UK and Scottish governments. This should focus on a handful of globally significant clusters in sectors such as life sciences, green manufacturing and digital exports. Read more: "The absence of co-ordination, the absence of a shared set of goals over the past few decades has led to this proliferation in Scotland of different agencies, different strategies, different documents, which is not necessarily wrong in and of itself, but in practice what we hear from the business community in Scotland is it's created a bit of a spaghetti junction that people struggle to navigate and negotiate when it comes to accessing public support," Mr Turner said. He added: "As a result Scotland is smaller than the sum of its parts, I think, so there is an opportunity to consolidate, to coordinate, and to start to deliver some of that value for money that is lacking." These consolidated funds should then be directed into "growth zones", a physical campus for innovation investment in Scotland's main urban areas. These zones should be governed by new Scottish combined authorities that would be "clearly attached and to leading that process". "This is based on something like that successful Manchester model that you will be familiar with, and it's not a substitute to cooperation with Holyrood and Westminster - all of that needs to go hand-in-hand, and that's why you need the shared strategy - but it provides a single locus of someone who can go out and champion the growth zone in greater Glasgow, broker deals with multinational companies alongside the trade minister at UK level and in the Scottish Government, in order to bring in that flagship investment," Mr Turner explained. And finally, there should be no complacency in protecting the advantages Scotland already has with its strength in university spin-outs and early-stage angel investment. "At a moment of striated public finances, now is not the time to reduce funding for universities or especially the funding for applied research and innovation and spin-outs that universities have been developing over the past decade," Mr Turner said.
