John Redwood is a former Secretary of State for Wales and MP for Wokingham. He writes regularly at his diary
There is no surprise the UK’s productivity performance this century has been poor. Indeed if anything it is surprising it has held up as well as it has given the weight of government policies seeking to depress it.
Productivity debates usually relate to the published figures about labour productivity. Productivity goes up if people work smarter. It rises as an economy switches to more capital intensive ways of making a living, or to delivering services with a high intellectual property content. A worker in an automated car plant or in an oil refinery is said to be more “productive” than a waiter in a well staffed restaurant or a care worker tending for a patient, as productivity is the turnover of the business divided by the number of full time employees. It is not a judgement on the social value or hard work of the individual, as the care worker and waiter do important work and often work very intensively.
Productivity is a widely used number to assess how rich a society is overall. The more workers there are helping deliver high turnover the more prosperous the country and the more income there is to tax and to share out. Higher overall productivity in the economy can help us afford more and better care and better personal service where more staff might help produce a better outcome. The NHS has benefited from massive past oil and gas tax revenues from a highly productive sector.
Prior to the Great Recession of 2008-9 UK economy wide productivity grew at 2.1 per cent a year. Since then it has been around just 0.4 per cent. The OBR has forecast this will pick up to 0.9 per cent this decade, though it has been revising down its previous more optimistic estimates. The OBR acknowledges this acceleration will be difficult, and pointed out that by the second quarter of 2025 productivity was only 1.5 per cent higher than at the end of 2019.
There are three obvious reasons for this collapse of growth.
The first is the UK’s membership of the EU single market for the first 20 years of the century, and the failure to roll back some of the more damaging laws, bans and taxes the EU made us impose once we had left. The single market was said to have been completed in 1992, but in practice many of the key regulatory frameworks were only introduced some years later. There has been a massive legislative programme over the last 34 years greatly increasing the costs and complexity of business life. The main economies in the EU have experienced similar slow growth issues.
The second is the policy to de industrialise the UK to cut the carbon footprint, pursued by Labour, Coalition and Conservative governments in power. This is derived from or mandated by similar EU policies with high energy prices, carbon taxes, emissions trading, creeping bans on fossil fuel products and a wide range of regulations.
The third is the presence of a large and growing UK public sector. More money from higher taxes rather than smarter working is always seen as the solution to whatever problems the different departments and services encounter.
The EU itself now recognises the big errors it has made with too much regulation and tax. The Draghi Report, written by the saviour of the Euro himself, rightly points out the way the EU has fallen badly behind the US. It is anti innovation, with the large EU companies being much older than the US tech giants, and damaged by higher energy and regulatory costs. The digital revolution has largely passed the EU by, as European companies and families become users of US services in a tetchy colonial style arrangement. The EU says it is going to deregulate, but so far the evidence points to the EU staying as a legislative factory churning out more and more rules whatever the Draghi Report says.
The most damaging rules hitting growth have been the net-zero-driven dear energy policies with bans, extra taxes and targets for transition away from fossil fuels. Progressively introducing bans on the manufacture of new petrol and diesel cars is hurting the vehicle industry. Dear energy is closing industrial plants.
The development of Environmental, Social and Governance policies for the financial and wider business community have imposed large new costs, limiting innovation and sales of products, and reducing productivity as firms hire many Compliance, Audit, Training and Personnel staff to satisfy the Regulator. As these extra people are added without adding to sales or output, so the productivity of the UK’s financial services industry takes a hit. Diversity policies have concentrated on ethnic and religious backgrounds, rather than on encouraging diversity of view around the Boardroom table.
The UK has sought to be a leader in the European drive to get quickly to net zero. As a result the UK has suffered badly from deindustrialisation. Dear energy has closed down steelworks, petrochemical plants, ceramics factories, glass production, plastics and aluminium manufacture and much else. The government bans new exploration and development of offshore and onshore oil and gas, a very productive sector. These capital intensive industries score highly for labour productivity. The fewer we have the lower our overall productivity. The output of the production sectors has shrunk from 21% in 1997 to 13% and is still falling. Germany has traditionally had higher productivity because it sustained a larger manufacturing sector for longer.
Around one fifth of the UK economy is services supplied by the state, including health, education, and some transport. This area has been the most worrying, with productivity still below 2019 levels. This is despite the method of calculation where 40% of the activities are assumed to stay the same owing to difficulties of measurement. There is also the troubled nationalised business sector, with British Steel, British Rail and the Post Office in heavy loss before grants, and with the Bank of England running up huge losses on its bond dealings.
Productivity growth in public services was always sluggish. Home working and the closure of schools, surgeries and some hospital activity over covid hit the sector badly. There has been limited progress in even getting back up to 2019 levels of achievement. Productivity is scarcely higher than in 1997, when a new Labour government came to power. There was a productivity decline under that government over 13 years, followed by some gains under the 2010-19 governments reaching 4.7 per cent above 1997 levels by 2019. Even that was a poor performance. This was followed by the covid collapse and partial recovery. The NHS has been especially poor since 2019, still 8 per cent below the 2019 levels in 2024.
Civil service numbers have expanded from a low of 384,000 in 2016 to 515,000. NHS employees now number 1.37 m compared to 1 m in 2016. (All full time equivalent numbers) Of course more nurses and doctors were needed to handle growing volumes of work, but there has also been substantial rises in administration and management. Throughout the public sector there should have been big gains from the arrival of so much extra computing power this century to help handle the administrative load but so far there have been no overall productivity wins for all the money spent on technology.
I will turn to what can be done about quality and productivity in public services in a later article. Meanwhile the government needs to see the damage these three policy trends are doing. The UK economy cannot grow more quickly without higher productivity. It cannot afford to shed oil, gas and manufacturing in the way it is doing. It does need to grapple with the inefficiencies and excess spending of the public sector. It needs to repeal large chunks of over the top EU derived law that has been holding back a whole continent. Our leading private sector services are now saying No to realignment with EU laws.
No wonder the US grows so much faster and has all the large dominant digital companies on the world stock market.