Extract from the 2007 Budget Report by the Chancellor of the Exchequer – Gordon Brown.

Meeting the Productivity Challenge

The world is changing rapidly, and the global economy is becoming more integrated and competitive. Improving productivity and developing a dynamic economy is increasingly important for sustaining growth, prosperity and opportunities for all. The UK is well placed to meet the long-term challenges presented by a changing global economic environment, but continued progress on fostering productivity growth depends critically on building a flexible,
open economy, with a highly skilled workforce, and well-developed infrastructure Reforms introduced since 1997 have made significant progress in supporting productivity, by investing in infrastructure and skills to support the shift to a globalised, knowledge-based economy, nd improving the UK as a place for businesses to start up, invest and grow.

The Government’s strategy for increasing the UKs productivity is based on two fundamental pillars: providing macroeconomic stability to enable firms and individuals to plan for the future, and implementing microeconomic reforms to the business and policy environment to remove the barriers that prevent markets from functioning efficiently.

The five driver framework

This Budget sets out the next steps to improve the UKs productivity performance through five key drivers of productivity:
1.  improving competition to create the right incentives for firms to innovate,
adopt new technologies and improve business efficiency;
2.  supporting science and innovation to spur new ideas and translate them into
innovative goods and services for the UK’s long-run economic success;
3.  raising skills levels to create a more flexible and productive workforce that can
rapidly take advantage of new technologies and organisational structures;
4.  promoting enterprise to build a more flexible business environment, capable
of adjusting to the opportunities and challenges in a more globalised
economy; and

5. encouraging investment to increase the quantity and quality of physical
capital used in the production process.

UK productivity performance
Productivity and employment growth are key to achieving high and stable rates of economic growth and higher standards of living. The latest international comparisons of productivity estimates show the UK is making real progress towards narrowing the productivity gap with its main industrialised competitors since 1995. The UK has halved the output per worker gap with France, closed the output per worker gap with Germany and, despite some recent cyclical widening, is the only G7 country to have kept pace with the USs impressive productivity performance since the mid 1990s. Similar progress has been made on an output per hour worked basis; the UK has narrowed the output per hour worked gap with France by 11 percentage points, narrowed the output per hour worked gap with Germany by 10 percentage points and while the gap with the US has not closed significantly since
1995, the UK is once again the only G7 country to have kept pace with the USs impressive performance.

There are also encouraging signs that the UK is on track to raise its productivity performance over the current economic cycle, compared with previous cycles. Trend productivity growth over the first half of the economic cycle (1997- 2001Q3) was 2.60 per cent per year compared with 1.92 per cent in the previous economic cycle.

These latest achievements in productivity are particularly significant, as they have occurred during a period of unprecedented employment growth. Over 2.5 million more people are in jobs since 1997 and the UK has the highest employment rate in the G7. Traditionally, strong employment growth tends to lower productivity growth, as new workers are less productive while they learn job-specific skills. The UK is now experiencing the longest period of combined productivity and employment growth since current records began.