Monday, January 31, 2005

UK productivity growth- another Labour flop

In the nearly eight years since Gordo took over the economy, our productivity growth rate has slumped to 1.5% pa. Over the previous eight years- under those hopeless boom and bust Tories- it was 2.5% pa. That may sound a small difference, but over time it builds up. It means that the average British family is already nearly £3,000 pa worse off.

This isn’t how it was supposed to be. No, you remember, back in 1994 he reckoned we were falling way behind the pack in terms of productivity, but that he could get us back on track by pumping us full of neoclassical endogenous growth steroids.

Unfortunately once he got to the Treasury, we found out that the steroids comprised nothing more than the usual voluminous plans drawn up by various boffins, and tinkering. And he’s tinkered with just about every lever he could find around the place. Some of the levers were a bit rusty because they hadn’t been used since the great days of the National Plan and flowerpower. Others had never been used at all, but the mandarins were keen to give them a whirl.

One result has been the ballooning DTI budget, which is fast approaching £5 billion incinerated annually. But he’s done plenty else besides, like pumping hundreds of millions into the R&D subsidies now lining the pockets of pharmaceutical company shareholders, setting up crackers training schemes like the one to teach thirteen year olds to be entrepreneurs, and massively increasing regional aid, which has never produced sustainable growth anywhere.

As usual, it’s the productive bits of the economy that are squeezed to pay for it all. Just like the lunatic Selective Employment Tax introduced by the Wilson government, which taxed the growing service side of the economy in a Canute-style attempt to prop up the declining manufacturing sector. Penalising dynamism and sheltering inefficiency didn’t boost productivity then, and it isn’t doing so now.

Governments are just no good at outguessing the markets on what is required to boost future productivity. They aren’t even any good at managing productivity in things like the NHS and education, which are directly controlled by the state.

So the Tories’ promise to drastically scale back and refocus the DTI on competition policy may not immediately push our productivity growth back to where they left it, but it will certainly help.

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