The Great ‘Productivity’ Puzzle – or the Real Reasons for Britain’s Slump Economics

Would you believe it, asks Phil Hearse? Just when Theresa May was about to deliver on her October 2016 promise of a more equal society in the sunny uplands of Brexit Britain, along comes this ‘productivity’ business and it all goes pear-shaped. So, from Chancellor Philip Hammond continued austerity all round, just a few more shillings for the NHS, but no significant wage rises until 2027. Maybe, according to some commentators, austerity until 2060!

This fiasco has sent pro-Tory media commentators rushing all over the place, trying to discover what this productivity business is all about, and how ‘we’ got into trouble with it. In the process there is no end of mystification about why the UK is stuck in slump economics.

Low productivity growth rates – the amount of increase in what workers produce per hour – is a symptom of deeper problems, not the fundamental cause. Behind Britain’s inexorable slide towards deepening recession and poverty is the chronic deflationary dynamic of neoliberalism, greatly worsened by Tory policy on wages, state spending and investment. This in turn is creating a massive debt bomb that will surely explode in the next few years and could make the 2007-8 crash seem like a minor event.

Let’s go back to productivity growth. Overwhelmingly the biggest determinant of that is capital investment. An April 2017 study by chartered accountants Hacker Young showed investment in physical capital and research and development in the UK at about 16.5% of GDP, as opposed to an average of 21% in the G7 advanced capitalist countries (1). In the period of low profits after 2007, followed by the easing of credit under ‘quantitative easing’, British banks (and many companies) have been concerned to guard short term profits and shareholders’ interests over long- or medium-term growth.

Some commentators prefer to turn attention towards the lack of skills of British workers, blaming the tertiary education sector, but skills are also crucially determined by the willingness of employers to provide on the job training take on apprentices as something more than cheap labour.

Former CBI director and now chairman of the Royal Bank of Scotland Howard Davies (2) argues the retention by companies of ‘not very productive’ workers after the 2007-8 crisis could be lowering productivity statistics. What this really means is that companies prefer to keep on cheap labour in a low-wage economy, rather than invest in new machinery.

But that has to be fitted into the overall picture, which is government-fuelled austerity driving the economy into slump. Spending power, especially of the young and the low paid, has collapsed into crisis levels. We have entered another period of stagflation, which those old enough will remember from the mid-1970s. Wages stagnate while prices rise. High street shops are empty and closed down; small businesses like restaurants and pubs face grim times. Bankruptcies mushroom.

The specific form of the current UK stagflation crisis is low or no pay rises in the public sector (but not only there) and the housing crisis which eviscerates the earnings of millions through chronically high rents and mortgages, which is itself an aspect of the financialisation of crucial services and utilities through privatisation and deregulation.

This is then topped off with a ceaseless campaign against benefits of all sorts, cutbacks on all social spending from hospitals to libraries, and against the poor and disabled people, of which the Universal Credit scandal is just one example.

The Universal Credit crisis goes way beyond delays in payment, to vicious conditions like minimum earnings for low-paid self-employed. So, if you are a single parent, working only part-time to look after your kids, you will be required to earn a minimum, usually around a £1000 a month, to trigger Universal Credit. In other words, work more hours. Which will in all likelihood land you with giant childcare bills.

The consequence of all this is that millions of people are relying on credit cards for regular cost of living payments like rent, food and transport.

A recent article by Deborah Orr (3) pointed out that:

“We are 10 years on from the start of the financial crisis, and unsecured consumer debt has reached more than £200bn for the first time since 2008. It’s up 10%, year on year.”

She also points out: “A TUC report, Britain in the Red, highlighted this issue a year ago. It suggested that the problem is greater than official figures show, with 3.2 million households in problem debt – defined as spending more than 25% of income on unsecured loans – and 1.6 million households in extreme debt, paying out more than 40% of their income. It’s horrific.”

At a time of extreme economic instability, this is especially dangerous, both for individuals and the economy. If there is another 2007-8 type crash then it is likely to lead, at least, to hundreds of thousands being unable to pay rents and mortgages and losing their homes.

The situation with public sector pay is going from wage restraint to an historic restructuring of the pay system. By limiting teachers to 1% increases only since 2010, the coalition and then Tory governments have pushed down real pay in the education sector by 15%. This, coupled with the draconian Ofsted inspection culture, underlies the crisis in teacher recruitment and retention – perhaps now 40,000 missing teachers. The same is true throughout the public sector, and the marginal concessions to the police and prison officers are making little substantial difference.

This is only held in place by the persistence of the anti-trade union laws, hangovers from Thatcher’s time, which the Blair-Brown governments refused to repeal. Without these impediments to strike action, the trade union movement would have burst through the pay cap long since.

There is of course a deep-seated irony in all this. Far from stabilising British capitalism, austerity economics is undermining it. The tax raising crisis that Chancellor Philip Hammond outlined in his November budget is self-evidently a product – in part – of low levels of economic activity. Only government spending on investment and public sector wages could turn it around.

The government faces a tax raising crisis, there is a huge debt crisis among individuals, and this raises an obvious question – where did all the money go? If not to the government and not to workers, who took it? The answer is fourfold. First, the shareholders of privatised utilities took it, making vast profits even as the cost of their raw materials like gas and oil fall.

Paying utility bills is a crucial part of the torment of every economically stressed household.

Second, a cluster of businesses that gather round housing assets took it – landlords of course, but also banks and other lenders, estate agents and lawyers. Third the finance capitalists that own fixed assets like shopping centres took it – probably 40% of that short or blouse you bought in TK Max went to the owners of the mall. But most of all, transnational companies that operate as ‘virtual banks’ took it, by arranging their affairs so they don’t pay significant amounts of tax.

Money doesn’t grow on trees but it sure does pile up on islands, from sunny Bermuda to the more windswept Isle of Man. Vast sums from companies like Apple and Amazon piles up in tax havens, and most of this is quite legal.

As a consequence of the Panama Papers financial regulators have been trying to ensure that companies and individuals pay all the tax they are legally obliged to. This is what Theresa May and the British government have been saying – HMRC is getting better at making sure the rich pay what they ‘ought to’. But as it happens most tax havens are British crown dependencies; the Tory government will take no stand as such against the right of the rich to store their wealth there, shielded from tax. Why is this just or legal?.

Tory policy aims to bring about an historic decline in wages as a share of the economy and an historic decline in the social wage, eg the benefits, services and infrastructure that everyone gets through taxes.

This is a more radical transformation of the Keynesian-welfare state settlement than has been tried in any advanced capitalist country, exception being made of the United States, where the post-war settlement was on a different basis. This represents an grim new stage of neoliberalism, which can only possibly benefit sections of the capitalist class itself, plus the asset-rich upper middle class.

Can this system be maintained? Surely this vast polarisation between the tiny core of rich people and the rest cannot be maintained indefinitely? It’s here that the political Left has to face some harsh facts.

After the 2007-8 economic crash there was an expectation that there would be a new wave of Keynesianism, that the neoliberal, ‘Washington Consensus’ has passed its sell-by date and that a new settlement would have to come. It never happened. Instead we got Trump and Brexit.

Let’s put it another way. Lenin famously said there was no crisis from which the capitalist class could not escape, provided the working class was prepared to pay the price. So today that means, for the capitalists class,  finding the ways and means to get millions of people to vote against their own self-interest.

And the way to do that has been, for the moment, found. Racism, xenophobia and nationalism have moved centre-stage in the official politics of most advanced capitalist countries. It is the way that the working class is kept, in its majority, from seeking radical and anti-capitalist solutions to the crisis. It is the reason why, even in the November austerity gloom of cuts-ridden, pay capped Britain, the Tories can still rack up 40% approval ratings in opinion polls.  It is not of course that the majority of the working class has been won over to racist or xenophobic ideas, but a sufficient minority has to generally enable the right to stay in power. This is the challenge that faces the Labour leadership and the Left.

A hilarious footnote to the productivity puzzle is the suggestion that many workers are insufficiently ‘engaged’ with their jobs. An October Gallup poll (4) found that only 10% of British workers felt engaged with their jobs, while 35% felt actively disengaged. The figures were exactly the same for the rest of Western Europe. Would you believe it – employers give out all those zero-hour contracts and zombie low-paid McJobs, and what do they get in return? No gratitude at all. No wonder our productivity is so low.


1)    http://www.uhy-uk.com/news-events/news/uk-lagging-europe-in-capital-investment-despite-raising-levels-30-in-five-years/

2)    https://www.theguardian.com/business/2017/jun/21/productivity-crisis-uk-real-wage-growth

3)    https://www.theguardian.com/commentisfree/2017/aug/04/ten-years-on-another-debt-crisis-austerity-loans

4)    http://www2.cipd.co.uk/pm/peoplemanagement/b/weblog/archive/2017/10/18/just-one-in-10-brits-feel-engaged-at-work-says-gallup.aspx

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