To ask Her Majesty’s Government what assessment they have made of the conclusion reached by the Economic Statistics Centre of Excellence in their paper Below the Aggregate: A Sectoral Account of the UK Productivity Puzzle, published in May, that some of the UK’s largest and most internationally competitive companies account for the biggest reduction in UK productivity growth.
My Lords, the Economic Statistics Centre of Excellence paper is an important addition to the evidence base, highlighting sectors where recent productivity slow-down has occurred. However, it remains unclear why this slow-down has occurred, why other sectors did not make stronger contributions to productivity growth before the crisis or to what extent this explains our long-standing productivity weakness.
Does the Minister agree that this report, plus the further research from the Bank of England, indicates that our slow productivity growth is less due to the long tail of zombie companies but reflects the weaknesses of the business model applied by some of our biggest and best known companies—a model that incorporates share buybacks, high short-term bonus culture, and lower corporation tax and tax allowances that do not encourage investment. Will the Minister dust off the industrial strategy and review it so that these lessons can be learned?
I assure the noble Lord that there is no dust on the Government’s industrial strategy. In fact, we have invested some £31 billion in a productivity investment fund for exactly that type of challenge. Moreover, we are conducting a further business productivity review, which is open to submissions along the lines that the noble Lord has referenced until 6 July. He will be aware, as a keen student of this area and indeed very experienced in it, that there has long been a UK productivity puzzle—that is why the centre titled the paper in that way—and it has existed since the 1950s and the 1960s. It has been suggested that, at a sectoral level, productivity gains are easier to make in the manufacturing sector than in the service sector and we have traditionally been a service area. We are far from complacent on this and are making progress on a whole range of issues to ensure that we improve our performance in the future.
My Lords, the chairman of John Lewis, Sir Charlie Mayfield, has also examined the UK’s productivity puzzle and he found there is significant variability in productivity for SMEs. Can my noble friend say what support we are giving SMEs to improve their batting average?
There are incentives for R&D spend. We know that things such as infrastructure and capital investment—we have had a patient capital review—contribute to improvements in productivity. We know that education and skills are a key part, and that is why we have T-levels and the apprenticeship levy. We also know that investment is very important, and that is why the capital breaks we have for R&D, particularly in small firms, are very important. But this is a whole-economy effort in which small and medium-sized enterprises, as well as the large companies, need to play their part.
Will the Minister respond to one of the questions asked by my noble friend Lord Haskel about share buybacks and, indeed, excessive dividend payments? There is a management culture that all too often seems more interested in the extraction of wealth than the creation of wealth.
If that criticism were true, we would not see that the UK is regarded as the number one location for foreign direct investment and we would not see companies coming here in the numbers that they are. We have a great strength in our economy. We have an historic weakness in productivity and we need to look at all the possible contributions to that and address them; that is what this review is all about.
My Lords, I remind the noble Lord that foreign investment has halved over the course of the last year, so perhaps that is not the best statistic to choose. Meanwhile, manufacturing output has fallen for three successive months, construction output is 3% down year on year and the trade deficit is widening. We are pleased to hear that the industrial strategy does not have dust on it, but when do the Government think that some of their measures might actually take effect?
On the point about foreign direct investment, just look over the past couple of weeks: we have seen Amazon announce 3,000 jobs in the east Midlands; a major biomass investment in Cheshire that will bring 3,000 jobs; and Vauxhall has announced the investment of 1,400 jobs in Luton. We are seeing record investment levels and a doubling of tech investment in the UK. This is all part of a strong, vibrant British economy that we are absolutely confident will continue to progress and improve beyond Brexit.
My Lords, businesses need long-term investment if they are to improve productivity. Does my noble friend agree that we need some sort of incentive for organisations to be long-term shareholders? Algorithmic trading is the absolute reverse of long-term investment, and there is far too much of it. We should have incentives for people to hold for the long term.
My noble friend makes a very interesting point. That was the premise on which we undertook the patient capital review and one premise on which we set up the British Business Bank, so as to offer that kind of long-term patient funding that allows businesses to grow and prosper.
My noble friend Lord Heseltine undertook a review for the Government on competitiveness in 2012, which was a key part of what fed into our industrial strategy. The point that he made is that it is absolutely critical that we leverage our technical research and that innovation becomes a core part of what we do going forward. We totally accept that and recognise we need to do more. That is why R&D investment from the public sector is at its highest level for 30 years and why we are investing £4 billion in aerospace research and development; it is all to take forward those types of policies.
First, I pay tribute to the work that my noble friend has done consistently to promote family as a key part of our society. We know the devastating effects that family breakdown can have on people’s health, well-being and educational opportunities. We have not conducted any piece of work in that specific area, but it is certainly something that I am prepared to look at and discuss with him further.
It is a very interesting point. There is an excellent book that a long queue of people were trying to access in the Library by a certain Jonathan Haskel—he may be known to the noble Lord—called Capitalism without Capital. In it, he unpacks that we have not really invested enough in intangible assets, such as R&D, patents and intellectual capital within firms. He thinks that there is more to be done. It is a very live, very important, crucial debate that we have to have as a country. That is the reason for the review, the reason for the strategy and the reason we have £31 billion in the fund.