Time for demand

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When combined with good labour market regulation and the presence of trade union power, rising labour productivity – output per hour worked – is the enabler of higher earnings for workers. Across time, the productivity increases are closely associated with rising pay and leisure time for workers. Across countries, there are also strong correlations between higher productivity and a myriad of social benefits, including improved health, higher life expectancy and reduced child mortality. In view of a suite of environmental challenges – from climate change, species extinction and resource scarcity – being able to do more (or at least the same) with less also represents an important tool in the project to embed advanced economies within sustainable planetary limits.

The UK, however, has a productivity problem. Annual improvements in productivity have stalled relative to their long-term trend, and in particularly dramatic fashion by international standards. Over more than four decades up to 2008, labour productivity grew at a remarkably stable rate averaging more than 2% per year. Since the end of the 2009 recession, however, the annual increase has fallen to around 0.7%, representing a collapse of around two thirds. More than ten years on from the financial crisis, there remains precious little sign of a recovery in the post-crisis trend and the UK has been left with one of the lowest levels of productivity among advanced economies.

This briefing paper argues that alongside continued supply-side interventions such as in corporate governance, industrial strategy and finance, demand needs to be increased significantly over the short-to-medium-term as part of a macroeconomic strategy for boosting productivity. To this end, we set out two packages for government intervention within two key areas:

Boosting demand through fiscal policy

Fiscal policy – changes in the level of government spending and taxation – can increase demand in the economy, either by directly raising government consumption, or indirectly increasing consumption by individuals and firms. We propose a package of broad-based measures to raise demand across three areas where the fiscal multipliers – the ratio of a change in overall demand to any change in spending by government – are particularly high: 

• Frontload public investment for a ​‘green transformation’. The government’s official advisor on climate policy (Committee on Climate Change) estimates that transitioning industry to net zero carbon will require public and private investment worth 1 – 2% of GDP by 2050 (£20 billion to £40 billion in 2019/​20 prices). We propose that a significant portion of the required public investment should now be front-loaded over the next five years.
• Increase public spending on services. NEF analysis has shown that between 0.5% to 1.5% of GDP – around £15 billion to £32 billion in 2019/​20 prices – would be needed to meaningfully improve services and reverse austerity across education, health and care by the mid-2020s. We propose government uses the next multi-year Spending Review to increase investment in public services to meet social need and address inequalities.
• Increase the generosity of social security. We propose government creates a new ​‘weekly national allowance’ (WNA) – worth £2,500 per year for almost all adults, plus an increase in child benefit – by abolishing the personal allowance of income tax. The proposal redistributes £8 billion a year from the richest 35% of families to the remaining 65%, with most of the gains concentrated on the poorest 10% who are most likely to spend rather save any increase to their incomes.

Boosting demand through holiday and wages

Minimum wage policy can increase demand through higher spending power for workers. Giving employees time off to spend their salaries without reducing pay will amplify these effects. Increasing minimum wages are a particularly efficient way of boosting demand because workers on minimum wage are far more likely to spend rather than save any increases, compared with higher income individuals:

• Introduce faster increases in the minimum wage. From 2020, we propose that the Low Pay Commission is given a new mandate to recommend increasing the national living wage so that it reaches the level of an average between the actual living wage for London and the rest of the country (respectively) by 2025; or increase all minimum wages as fast as possible subject to not having adverse unemployment affects; whichever proves to be higher. 
• Increase statutory paid holiday. We propose that an external body be created to make independent recommendations to government on regular increases to annual statutory leave entitlement, and on a similar basis to the work currently done by the Low Pay Commission on minimum wages.