Over the last 15 years the UK’s productivity growth has been encouraging, matching the strong performance of the United States and closing the productivity gap with the EU-15. Overall productivity levels, however, are still nearly 20 percent below the US and 10 percent lower than those of Germany.
The UK enjoys relatively high rates of labor participation (nearly five percentage points higher than the OECD average) and relatively low unemployment. But regional imbalances remain a concern—around half of economic growth over the last decade was concentrated in Greater London and its neighboring regions—and too much recent employment growth has been in the public sector (from 1999 to 2009, the public sector workforce grew by 800,000). Moreover, there is a need to build resilience by managing down high public deficits and private debt levels, and taking practical steps to offset the economic effects of our ageing population.
Beyond the downturn, MGI identifies seven priority areas that, if tackled, will allow the UK to achieve sustained growth over the next two decades:
Focus on raising productivity sector by sector to drive overall growth
Government can lead efforts to improve productivity by working with sector participants and new entrants to remove barriers to growth (such as regulatory burdens, land use restrictions) and support improvements in managerial quality and employee skills.
Secure the UK's position as the location of choice for multinationals
Multinationals may only account for fewer than two percent of UK businesses. But they drive overall economic growth and large scale innovation, accounting for 80 percent of UK R&D and growing productivity eight times faster than smaller firms. Government should work with leading multinationals on a ten year plan to make the UK the most attractive European location for multinationals, addressing skills, immigration, infrastructure and tax.
Unlock infrastructure investment
The UK will need to spend more than £350 billion over the next 20 years merely to maintain its existing transport infrastructure and a further £120 billion – £170 billion to support our energy infrastructure. This level of investment will require greater regulatory certainty and improved economic returns to attract private capital.
Innovate at scale
Government efforts to stimulate the growth of clusters have often ended in failure. Achieving success requires concentration of investments in research into large and connected centers, access to global best practice through the recruitment of top talent and cluster-specific support that builds on existing competitive advantages (e.g., in biosciences).
Unleash the growth potential of education and health
Policy makers should view these sectors as international growth opportunities rather than public sector cost centers. This will require new and existing universities to add capacity and capability to attract international students. In addition, NHS organisations need to be able to restructure and compete for private patients without restrictions, while additional private capital will be needed to meet rising health care demand in the UK.
Pilot devolution to dynamic cities
Cities have been responsible for 78 percent of the UK’s economic growth over the last ten years. Given the urgency of supporting growth across the UK, now is the time to experiment and give cities much greater city-wide coordination roles and financial responsibility, including, for example, the flexibility to negotiate regional as opposed to nationally-agreed public sector pay.
Address generational imbalances
Demographic trends pose two challenges for major developed economies such as the UK. The first is how to maintain growth in the face of a declining working population (estimated to be a 0.3 percent annual drag on GDP growth). The second is how to fund long-term health and social care, whose cost is set to rise by more than 70 percent in the next 20 years. The UK needs a radical increase in employment of older workers, leveraging the practices of innovative firms and ensuring these are spread more widely. Unlocking the £1 trillion of unmortgaged housing wealth owned by those over 60 through equity release would also enable older generations to make a to make a greater contribution to paying for the public services they need.