The debate on productivity

Productivity really matters to us all; and is both misunderstood and under-discussed by many. Productivity is a key factor so far as economic performance is concerned. At the RSE we intend to continue to explore how best to reduce the extent of underperformance on this front for both the Scottish and UK economies.

Professor Jeremy Peat FRSE, RSE VP Economy and Enterprise

As Convenor of the Economy and Enterprise Committee, I have divided our work into the three Es; efficiency, equity and the environment. So far as the first of these is concerned, productivity matters most. Hence the recent events with Professor Van Ban Ark; and hence plans for more exploration in the remainder of 2024. As so often at RSE our objective is to stimulate an open, informed, objective and constructive debate, hoping to contribute to an increase in economic welfare across Scotland. We have a time window for this debate in Scotland in advance of the 2026 Holyrood election, and that is why for our evening seminar we invited representatives of the 4 parties at Holyrood to join in the debate – but sadly SNP could not put forward a representative.

Like others I often struggle to find a succinct but clear definition of productivity. But Bart came up with a goodie. To quote his slides:

Productivity is about how to optimally use resources to get better outcomes for people, firms and the economy.

This is neat, concise and clear and tells us what we need to focus on to work to enhance productivity.

In brief low productivity leads tolower than optimal growth. Low growth means limited resources to work on enhancing equity across Scotland; and lower growth means limited resources to work towards environmental gains of various sorts.

Low productivity also means lower tax revenue than in a more productive environment – because incomes are lower, consumption is lower and corporate profits are lower. Each of these sub-optimal performances means lower tax revenue. Tax revenue below the optimum in turn means pressure on the public finances. Less can be spent upon public services unless a Government is willing to raise tax rates and/or run a larger deficit on the public finances.

During the present pre-General Election debate this issue around the public finances has stood out as one dodged by all. All politicians will want to spend more and tax less. They will also wish to demonstrate their fiscal probity by stating that they will establish and stick to tough rules regarding the public finances.

But as the Institute for Fiscal Studies at the UK level and the Fraser of Allander Institute in Scotland stress time after time, you cannot plan for lower taxes and higher public expenditure alongside robust rule on the public finances unless you have strong economic growth; and you cannot have strong economic growth unless you have robust growth in productivity.

That is where we came in. Productivity matters and is under-discussed. Politicians, in setting out their tax and spend plans, need to accept that such plans generally require a productivity improvement, and describe how they intend to get productivity moving in the right direction – after a long period of poor performance.

Professor Van Art set out very clearly for us the policy areas where action is required to start the productivity ball moving in the right direction. He helpfully breaks these down into: –

  1. Policies aimed at accumulation of factors of production – investment (public and private and human capital problems
  2. Policies aimed at markets and resource allocation – financial, product and labour markets along with regulation and competition policy
  3. Policies aimed at technological and structural change – technology and innovation policies, industrial policies and creative destruction (!!)

AI and all that could be a trigger of a higher productivity movement, but we cannot just sit back and assume that AI will wave a magic wand. We need thoughtful and co-ordinated policies across the areas set out above. That implies thought and action from the UK and Scottish Governments – given the division of responsibilities and powers.

Productivity should be at the centre of the economic discussion for the UK general election and the Holyrood election to come. We have started to get that debate underway; and will continue to play our part. Let 2024 and 2025 be the years of the productivity debate – in an open, informed and constructive manner.

Professor Jeremy Peat FRSE, RSE VP Economy and Enterprise.

The RSE’s blog series offers personal views on a variety of issues. These views are not those of the RSE and are intended to offer different perspectives on a range of current issues.

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