It’s no new big secret that the UK has a productivity problem. Back in 2016, our productivity lagged behind the rest of the G7 by a sizeable 15%. Productivity subsequently became the buzzword of 2017’s Autumn Budget and this year’s Spring Statement. And now, as we speak, the Chancellor has issued a call for evidence on behalf of the government’s Business Productivity Review, in a bid to unlock vast benefits in terms of employment, wages and profits across the country.
There was a fall in GDP in the first quarter of this year and there was one ubiquitous factor
It seems a good time to throw our two cents into the wishing well. Recently, finnCap’s Chairman Jon Moulton gathered CEOs to our London City offices for the first of our In Session... series of talks. The topic of conversation: ‘The Productivity Puzzle’.
This session also follows finnCap CEO Sam Smith joining business leaders from The Supper Club, BGF Investments and Octopus Investments in penning a letter to Philip Hammond MP. Based on the findings of our jointly-produced The Supper Club guide Way to Grow: How Funding Can Accelerate Scale, the letter urged the Chancellor to do more to support our SME and scaling businesses. These represent not just the lifeblood of UK economic growth, but also, by way of their innovation, the beating heart that’s pumping its productivity.
The Chancellor’s Industrial Strategy encourages more businesses to adopt technologies, such as cloud computing, AI and machine learning, and mobile technology
Solving the productivity puzzle
While the productivity puzzle is not a particularly new thing, our procrastination in putting the pieces together equates to, according to recent CBI research, missing out on a £100 billion economic boost coupled with a 5% reduction in income inequality.
Central to the cause is the Chancellor’s Industrial Strategy, encouraging more businesses to adopt tried and tested technologies, such as cloud computing, AI and machine learning, and mobile technology. These drivers of efficiency were discussed at length during our session.
But these are tools that must be wielded with balance. It’s easy to view, say, smart revolution in national infrastructure as some sort of magic wand. In fact, Mr Moulton pointed out, infrastructure expenditure doesn’t necessarily equate with a transformation in productivity growth. One might spend billions on smart roads only to find that not a lot of people end up driving on them, for example.
To hear our in-depth discussion on smart technology in national infrastructure, download the finnCap ‘In Private’ podcast here.
That’s not to say that such transformations are not important. Far from it. There are, however, more fundamental factors our government must address first. What follows is our three-point plan for Britain’s productivity.
1. Ease the burden of regulation
There was a fall in GDP in the first quarter of this year and there was one ubiquitous factor – GDPR. While the government sees £100 billion in untapped value owing to productivity or lack thereof, the General Data Protection Regulation cost our economy in the region of £10 billion.
GDPR had a vastly more acute effect on the productivity of our businesses than the swirling cloud of uncertainty that Brexit brings. For instance, a vast number of young, tech-centric companies that would be instrumental in implementing our Industrial Strategy, rely on their mailing lists and digital communications to do business. How do they create growth when most of the driving force behind their business model is all but swept from underneath them?
Tax-deductible incentives on R&D expenditure for innovative companies tends to have a stronger effect on productivity
Moreover, increasing, and for the most part unnecessary, regulation puts the brakes on our economy and it is our growth businesses with scant staff to spare that suffer the most. Put simply, how does a founder create a more productive business when their team and talent are focused on regulation?
2. Education, education, education
“Education matters a lot to your long-term productivity,” said Jon Moulton. It probably comes as little surprise that educated, literate, well-trained workers capable of objective analysis tend to be more productive (though this shouldn’t be taken as always true).
Bettering both the next generation’s knowledge and vocational experiences of entrepreneurship, as a formal part of the curriculum, is of paramount importance to creating a skilled, lively and willing future workforce.
This is also the formula by which we achieve wider and, perhaps, a more genuine implementation of so-called corporate social responsibility (CSR). As Mr Moulton pointed out, it’s generally acknowledged that the educated millennial generation are the strongest supporters of employers’ commitments to ‘doing the right thing’. Couple that with a foundation in entrepreneurial thinking, it stands to reason that it is this group in particular most likely to establish companies that consider CSR as implicit to their productivity.
Meanwhile, for employers it is true that educated workers are more likely to make the most of good training programmes. Tying in with part three of our plan, applying tax incentives on training in work will not only contribute to better overall productivity, but also create happy, developing staff that are more likely to be loyal to the cause.
How does a founder create a more productive business when their team and talent are focused on regulation?
3. Create better tax incentives for growth businesses
There are a number of reforms to capital allowances that could serve to boost productivity. The OECD reports, for example, that tax-deductible incentives on R&D expenditure for innovative companies tends to have a stronger effect on productivity than simply funding R&D.
There seems to be no reason why the government cannot step in at this point and widen the remit of this incentive, as increasing numbers of firms look for innovative ways to disrupt their industries as a point of competitive advantage.
To give another example, through finnCap’s research with The Supper Club’s Way To Grow guide, we see that a barrier to scaling businesses is that there is a fundamental knowledge gap amongst founders when it comes to accessing equity-based fundraising. These founders find themselves pushed into the arms of banks by way of offering tax-deductible debt financing.
Firstly, it cannot be ignored that there is a mistrust of banks and a pervasive aversion to debt since the fallout of the financial crisis, especially amongst protective company founders that rightly see their businesses as their baby.
Once again, at this point the government could step in. For a start, by extending the remit Government’s Bank Lending Referral Regulations – and this of course links directly with point one of our three-point plan – which requires banks to refer companies refused credit to Treasury-approved alternatives, we can help SMEs access alternatives to bank lending. Why not oblige the banks to refer companies to alternative, non-debt-based finance, such as specially selected corporate finance houses?
For more on alternative growth finance options for scaling businesses, finnCap CEO Sam Smith published the following piece today in City A.M. - Beyond the banks: Are we asking the right financing questions for SMEs.
The overriding feeling on productivity is the UK can do better. The Business Productivity Review will undoubtedly create a smorgasbord of strategies, many of which will be very industry-specific and should be considered on balance. But as we’ve discovered through this first edition of our In Session With… series, the basic principles around regulation, education and taxation cannot be compromised.
If you would like to be informed about our next In Session With… event, please email: email@example.com