This week, an academic research organisation, The Productivity Institute, called upon the UK government to create a national Growth and Productivity Institution. The proposal envisages an independent body, a quango on a par with the existing Office for Budget Responsibility, the Monetary Policy Committee, the Climate Change Committee and the National Infrastructure Commission with statutory backing. It cites the UK as being an outlier in the OECD (Organisation for Economic Cooperation & Development) group of countries in not having an advisory body in such an important area of economic policy (among the 38 members of the OECD, countries such as Germany, France, Italy and Australia do have such productivity councils; the US, Japan, S. Korea, Canada and several others do not: does that make us an outlier?).

Measured by the economic output per worker, productivity has been well-publicised as a blight on the British economy for years. For the record, according to another statutory authority, the Office for National Statistics, for the UK economy overall the productivity index (in which 2019=100) has risen from 81 in 1997 to 99.8 in 2022; however, the public sector has seen zero improvement in the same period, exactly 100 today as it was in 1997. Measured from a different base which removes the effect of exchange rates, relative to our competitors, at an index value of 73 in 2022 the UK scored above Italy (70), Canada (68) and Japan (52) but behind France (83), Germany (87) and the US (90).

Distilling productivity down to a single measure of economic output per worker seems very straight forward. But the socio economic complexity behind it is immense and politically challenging, not just how to improve it but ideologically whether it should be a focus at all. The Green Party, for example, which holds positions of significant government policy influence in countries as diverse as Germany, Belgium, Bulgaria and Scotland, disavows GDP, economic efficiency and wealth creation, of which productivity is a key indicator, as measures of national progress, preferring to focus on socio-political aspects of policy such as climate change, gender politics, equality and wellbeing. In fund management, one of the important pillars of capital provision, by definition an extreme Marxist, anti-capitalist viewpoint about the irrelevance of traditional economic health and progress measures such as that held by the Greens and others on the hard left is not one we on the Jupiter Merlin team agree with, but it is held with conviction by a not insignificant minority and with shades of it increasingly extending towards the centre ground of politics and corporate life.

With strategic planning in mind, clearly consistency and continuity in policy is a preference for efficient and effective long-term decision-making and investment, particularly in areas with long lead-times such as major infrastructure projects or capital-heavy developments (e.g. building a new micro-chip foundry or a giga plant for batteries for electric vehicles). Notice we used the phrase ‘consistency and continuity’ in preference to ‘stability’ which has connotations of ossification leading to relative decline.
‘Policy churn’ and the silo mentality: surely not the only problem
The central thesis of the Productivity Institute proposition (and the main reason they cite at being the root of our productivity malaise) is excess ‘policy churn’ and too little consistency in strategic thinking and application. It certainly is not wrong! Just in one generation it has been like the Twelve Days of Christmas: since the 1997 election there have been 22 Secretaries of State for what we should loosely call industrial policy; 9 chancellors; 7 prime ministers; and a trade & industry department which has been abolished, merged or reorganised 5 times; four calling birds, three French hens, two turtle doves and a partridge in a pear tree.

But enough of this pre-Festive Season frivolity. Growth and productivity do not live in a silo of their own. As we have discussed on many occasions, and again in some detail last week, we maintain that a holistic match-fit competitive and progressive economy is one with a lean and constantly improving public sector supporting the engine of growth and wealth creation which is driven by a vibrant and glass-half-full private sector; that private sector in turn should be chomping at the bit to take advantage of the opportunities, which wants to innovate, to attract investment and take risk.

The broader issues with productivity beyond policy churn and inconsistency include business efficiency, welfare policy, tax policy, employment policy and law, and something not identified at all by the PI, the effects of central bank monetary policy.
OBR: declining living standards and the fiscal drag
In its appraisal of the Autumn Statement, the OBR drew attention to the fall in UK living standards, that household real disposable incomes today are barely better than in 2015 and are still below their 2019 pre-pandemic levels. The disruption created by the twin exogenous shocks of the pandemic and Putin’s war on Ukraine and all the knock-on economic effects have certainly complicated the picture contributing to a significant inflationary hump but also altering the established dynamic of the workplace. Has the hybrid flexi-work model including a significant element of WfH made the workforce more efficient and productive or less? The jury is out.

This week, the OBR has been developing its theme about the corrosive effect of fiscal drag: the process by which in an inflationary period more people are hoisted into higher tax brackets when the tax thresholds are frozen (in a stagnant economy, a significant proportion of UK taxpayers will still pay considerably more in income taxes next year than last year thanks to band freezing than they will benefit from the 2p cut in National Insurance). The theme is that it removes the incentive to work harder or longer because the potential financial benefit is immediately appropriated by the government in higher taxes. If improving productivity is a government priority, flawed Treasury thinking on tax giving rise to fiscal drag is self-defeating. The most obvious illustration of failing to identify the unintended consequences of tax policy on productivity until it was corrected was that experienced by senior consultants in the NHS and their pension pots: work too many additional hours and you busted the legal pension cap limit beyond which the tax penalties were so onerous, your marginal rate of tax could mathematically exceed 100%; as a consultant in such a position, you could find yourself paying to go to work for the government. Professional altruism goes only so far; in that particular case productivity had a defined ceiling.
Welfare and employment policy
Welfare policy raises other difficult issues. As also highlighted this week in a Daily Telegraph article, in the agriculture industry for example, and in particular the fruit & veg sector which still relies heavily on seasonal manual labour, post Brexit Britain is relying almost entirely on foreign labour to do the dirty work (anecdotally from as far away as Uzbekistan and Tajikistan); over 90% of all part-time labour is foreign. Those workers, motivated by good wages relative to their domestic earnings, and having no problem with back-breaking grubby work, are individually and collectively highly productive. But local Brits on welfare who are available for work refuse to do it because the benefits system is sufficiently benign that working long hours potentially 6 days a week is not physically or financially worth it. The sector records a high rate of productivity; but is society as a whole productive, when so many willingly opt out and have to be maintained by the state?

The Labour Party also talks about the need to increase productivity. But that sits uneasily with the explicit agenda announced by Angela “Angry Ange” Rayner, the deputy leader, to repeal a swathe of trade union law and significantly to beef up workers’ rights. Increasing frictional business costs and the likelihood of industrial confrontation, Labour’s employment law plans would act as both a disincentive to new investment while also making it more difficult for business to improve efficiency.
And the Old Lady’s dabs are all over the problem of productivity

But a significant contributor to the lack of progress in productivity over the past 15 years has been the monetary policy prosecuted by the Bank of England alongside the other main reserve currency central banks: prolonged quantitative easing combining easy access to credit at ultra-low borrowing costs. The resulting development of the zombie economy thanks to badly-run, inefficient businesses being allowed to re-finance without any incentive to improve, and to survive past their sell-by dates leading to surpluses of unproductive capital and labour, has had an insidiously corrosive effect on competitiveness, efficiency and real wages.

 

 

Productivity gains are a function of Darwinian economics and survival of the fittest. It sounds brutal and heartless but recycling unproductive capital and labour into more profitable ventures is the sign of an efficient and self-sustaining economic system. It is painful for those on the wrong end of rough treatment, but it is in the national interest given the highly dynamic and competitive environment in which the economy operates.

Crowded house: not much room at the inn
The Productivity Institute raises fundamentally important issues critical to our economic prosperity. But among a plethora of existing unelected statutory bodies steering government and policy, several of which have been mentioned here already, notably the OBR (looking at fiscal policy) and the Bank’s Monetary Policy Committee (determining monetary policy, obviously), the Infrastructure Commission (advising on investment in big national kit) and the Climate Change Commission (on a myopic one-track path to net-zero and the devil take the hindmost) it is difficult to see where yet another such body of ‘experts’ as the proposed Growth and Productivity Commission fits in and adds value. That is absolutely not to say that productivity, by whatever measure, as a bell weather of economic wellbeing is irrelevant. Quite the opposite.

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.

Authors

The value of active minds – independent thinking

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

Fund specific risks

The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.

Important information

This document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Past performance is no guide to the future. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.  The views expressed are those of the authors at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change.  This is particularly true during periods of rapidly changing market circumstances. For definitions please see the glossary at jupiteram.com. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and not a recommendation to buy or sell. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM or JAM.