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Increasing productivity is crucial in low wage economy

By Esmond Birnie

Published 07/07/2015

We are expecting the Chancellor of the Exchequer to deliver a plan for UK productivity alongside his July 8 Budget
We are expecting the Chancellor of the Exchequer to deliver a plan for UK productivity alongside his July 8 Budget

It is not often that there is a subject that Chancellor George Osborne and Nobel Prize winning economist Paul Krugman agree on but productivity is that subject. Krugman has declared: "Productivity isn't everything, but in the long run it is almost everything."

We are expecting the Chancellor of the Exchequer to deliver a plan for UK productivity alongside his July 8 Budget.

An improvement in Northern Ireland's comparative productivity, defined as halving the private sector productivity gap between Northern Ireland and the rest of the UK excluding the greater South East, was in fact a target in the 2008-11 Programme for Government. There was no similar target in the most recent programme, and that is a pity given that the Executive was courageous to include it last time round even though little progress was made in attaining the target. So, three questions about productivity.

Why does productivity matter?

Rising productivity would be at the heart of a more sustainable economic recovery. That is, one where we could afford to pay for rising real wages and also be competitive, the latter being demonstrated by improving exports. The Office for Budget Responsibility (OBR) has already implied that raising productivity is of critical importance for the UK as a whole, but it is a challenge which applies even more strongly to Northern Ireland in particular. This is because we experienced the greatest decline in living standards during the recession and since.

What happened to Northern Ireland productivity?

Well, we know that UK productivity - output per worker - has been flat since 2007. At the same time, Northern Ireland's position has fallen compared to that UK average.

The Office for National Statistics (ONS) (February 2015, subregional productivity) indicates that gross value added (GVA) per hour as a percentage of the UK average was 82.8 in 2004, climbed to 85.2 in 2007 and then fell back to 82.2 in 2013. There was a similar pattern in terms GVA per worker (strictly, per job filled): 86.7 in 2002, rising to 90.7 in 2007 and falling back to 88.7 in 2012.

Since 2007 according to the ONS data, the UK's labour productivity level has fallen back compared to many Western economies (ONS February 2015, International Comparisons of Productivity, Final Estimates 2013). By implication, the same is true for Northern Ireland and to an even more marked extent: see the chart:

Source: ONS February 2015 (NI/UK comparison GVA per job filled).

By 2012, the latest year for which the data for Northern Ireland were available, the level of labour productivity in per worker terms in Northern Ireland had fallen back such that major European economies such as France and Germany had levels more than one-fifth higher. In the US and Republic of Ireland (not shown in the chart) levels were about three-fifths higher.

What can we do about

productivity?

To progress, we need to recognise this as an issue. True, we also need to accept some of this is a very old problem, so there are no quick fixes. At same time, we should be stretching in our aspirations. The Scottish Government's current economic strategy (of March 2015) aspires to place Scotland in the top quarter of Organisation for Economic Co-operation and Development (OECD) performers in terms of productivity.

For sure, if corporation tax could be cut in 2017 any consequent boost to investment would probably raise productivity, but in any case let's use to the full the existing tax and other incentives such as the patent box and research and development tax relief.

Existing policies around labour skills and innovation are good, but they need to be applied ruthlessly and relentlessly towards raising productivity. There needs to be even more emphasis on developing business clusters.

To sum up, for sure the Department of Enterprise, Trade and Investment (DETI) and Invest NI had a very good year in 2014-15 in terms of performance and especially jobs promoted and jobs created. However, economic policy cannot simply be all about jobs, important though they are. In the absence of significant productivity improvement, a sustainable recovery based on real wealth creation will not occur.

I began with Krugman but I will end more poetically, as Dean Jonathan Swift put it in Gulliver's Travels, "…whoever could make two ears of corn or two blades of grass to grow upon a spot of ground where only one grew before; would deserve better of mankind, and do more service to his country, than the whole race of politicians put together". Nevertheless, the Northern Ireland Executive politicians should include productivity in their next Programme for Government.

Esmond Birnie is  chief economist with PwC

Belfast Telegraph

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