The conventional wisdom is that Gordon Brown’s 10-year tenure as chancellor of the exchequer was a success. One of the main arguments against this view is his abject failure to meet his stated aim of closing the productivity gap with Britain’s competitors.
A new study by the Centre for Economic Performance (CEP) at the London School of Economics* shows there is still an enormous productivity gap between Britain and other developed economies. Output per hour worked is 13% lower than Germany, 18% below America and 20% below France.
To put this into perspective the report points out that: “if we could reach French productivity levels, we could award ourselves 20% higher wages or take a day off and still earn the same. Or we could spend the extra resources on schools and hospitals, greater benefits for the needy or lower taxes.”
The productivity gap also has important implications for the British corporate sector. Over the long-term it is a key determinant of corporate health. As the old adage says: “productivity isn’t everything, but in the long run it’s almost everything.”
To be fair Britain’s productivity gap with France and Germany has gradually narrowed since 1991 – although that was before New Labour came into office. But the key continental economies remain substantially more efficient than Britain.
The CEP gives several reasons for Britain’s relatively low productivity. Britain’s research and development (R&D) as a proportion of national income has steadily declined since the early 1980s. Britain spent 1.1% of GDP on R&D in 2004 compared with 1.7% for France, Germany and America.
Another part of the explanation seems to be the relatively low skill level in Britain. According to a 2006 report from the Organisation for Economic Cooperation and Development: “the UK’s skills base remains mediocre by international standards.” Seven million adults lack functional numeracy while five million lack functional literacy.
Britain’s skill level is substantially worse than its peers. The proportion of low skilled people in Britain is three times higher than America and almost double the level in Germany and Japan.
No doubt there are other important elements of the explanation for Britain’s productivity gap. But whatever the reasons it represents a key failure of Brown’s time as chancellor.*”UK productivity during the Blair era”. Available at: http://cep.lse.ac.uk/briefings/pa_uk_productivity.pdf.