UK economy failing to innovate

Britain has been issued a fresh warning over its poor record in innovation and embracing technological change, with new estimates showing a key measure of productivity fell in 2014 for the third year in a row.

The data will raise concerns that the financial crisis has permanently damaged one of the main sources of long-term economic growth. While Britain expanded by 2.8 per cent last year, the fastest of any major advanced economy, this was because of an increase in investment and in the number of hours worked, not because of an improvement in overall efficiency.

"UK businesses have made good progress on job creation but productivity has not yet followed suit," said Neil Carberry, director for employment and skills at the CBI. "The focus now must be on spurring businesses to innovate and raise their performance."

Britain's poor productivity performance poses taxing questions for the political parties ahead of the May 7 general election. Productivity growth is a key determinant of wages and living standards, as well as of the health of public finances.

Total factor productivity (TFP) - a measure of improvements in technology and in the efficiency of management - fell by 0.1 per cent in 2014, after sliding by 1.5 per cent in 2012 and 0.4 per cent in 2013, the Conference Board think-tank has shown. It is the first time since at least 1992 this indicator of efficiency has fallen for three consecutive years.

Britain is not the only country to have experienced a TFP decrease in 2014. France and Germany saw even larger declines, with this measure of efficiency falling by 0.6 per cent and 0.3 per cent, respectively, according to the Conference Board.

However, the size of Britain's productivity problem becomes apparent when looking at what has happened since 2010. Over the course of this parliament, Britain saw TFP fall on average by 0.1 per cent per year, while the same measure increased in Germany and in France.

The findings underline why it has been difficult for David Cameron to capitalise on Britain's strong economic performance in his bid to win a second term as prime minister. Labour and the Conservatives are neck-and-neck in the polls with just over two weeks to go before the vote.

A Conservative spokesman hailed their record in office, arguing the Tories had begun "the most far-reaching programme of supply-side reform for a generation, including welfare reform, investment in science and infrastructure, a new approach to industrial policy and a more competitive tax system". He admitted however there was "much more to do".

Chuka Umunna, Labour's shadow business secretary, told the Financial Times that the fall in productivity last year "should ring alarm bells". A Labour government would, he added, "deliver thousands of new quality apprenticeships, put in place an independent infrastructure commission and a long-term funding and policy framework for science."

Economists blame the lack of a vibrant manufacturing sector as a reason for the UK's disappointing productivity performance.

"Total factor productivity growth is typically faster in manufacturing than in services," said Bart van Ark, chief economist at the Conference Board. "In the UK there is a much smaller manufacturing sector [than in Germany] and the services sector is often delocalised and unskilled."

"The UK does not have a particularly distinguished record when it comes to investment in R&D," said Ken Mayhew, emeritus professor of education and economic performance at Oxford university. "While we think of ourselves as a high-tech economy we are not doing as much as other countries such as Germany."

Vince Cable, Liberal Democrat business secretary, said he had a lot of sympathy with the view that credit supply had been a key factor in holding back productivity.

"However, over the long term, productivity growth has to be based on improving skills and investing in innovation - both of which are central to our industrial strategy."

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