(Bloomberg) -- Britain is headed for feeble growth and lost living standards unless wide-ranging action is taken to lift weak productivity that has plagued the economy since the financial crisis, analysis by Bloomberg Economics shows.
In a report, economists Dan Hanson and Ana Andrade calculate that hourly labor productivity in the UK is 24% below where it would be had it maintained its pre-crisis trend. A lack of investment explains a quarter of the gap, with less innovation and a slowdown in the adoption of new ideas accounting for the remainder.
“Lifting investment spending, aiding the flow of capital to where it’s needed most, taking advantage of opportunities presented by artificial intelligence and opening up the economy to trade should all be part of that plan,” the economists wrote in a note published Friday. “There will need to be some tough fiscal choices along the way, but get the plan right and the reward will be a sustained rise in living standards.”
The conclusions set out the scale of the challenge facing Prime Minister Rishi Sunak’s government to bolster Britain’s economic fortunes ahead of an election widely expected next year. In his Autumn Statement last week, Chancellor of the Exchequer Jeremy Hunt announced an £11 billion ($13.9 billion) tax cut for business in a bid to spur investment.
Hanson and Andrade describe the decision to make full expensing permanent a “positive step forward” and recommended widening the coverage of allowances, so firms can expense more than just plant and machinery.
Hourly productivity has averaged 0.4% since 2008, nearly 2 percentage points below average between 1972 and 2007. The slowdown, according to Hanson and Andrade, has limited how quickly the economy can grow without stoking inflation to just 1.2% a year.
“Britain has seemingly bounced from one crisis to another since 2008,” they write. “The result is that decisions on tax and spending have, more often than not, been focused on guiding the economy through the turbulence rather than longer-term challenges.”
While productivity has slowed across advanced economies, the UK has fared poorly. In 2007, British productivity levels matched the Group of Seven average. In 2022, they were 6.5% below it, with the gap with the US rising to 18% from 10%.
“Raising investment isn’t cheap and creating a dynamic economy would mean job losses and business failures are more frequent. That would create more pressure on the state to support those who do lose out,” Hanson and Andrade write.
“Does that mean policymakers should shy away from taking a big swing at it? Absolutely not. Efficiency gains are the only way to meaningfully boost living standards in the long run so the reward for getting the strategy right would be huge.”
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