UK Politics

Osborne says low productivity key economic challenge

George Osborne on a recent visit to an engineering site in Bolton Image copyright Reuters
Image caption Mr Osborne said the UK had historically been held back by under-investment in key areas

George Osborne has signalled a major push to boost the UK's economic productivity as he vowed not to "take his foot off the pedal" in the wake of the Tories' election victory.

The chancellor told business leaders the UK could only find an "extra gear" if it tackled long-term deficiencies in transport, skills and broadband.

He promised a "productivity plan" in the run-up to the Budget in July.

Departments are also being asked to find savings as soon as possible.

In his first major speech since his return to the Treasury, Mr Osborne told the CBI annual dinner that boosting productivity was vital to sustaining rises in living standards.

Productivity is generally defined as the level of economic output per hour worked against the cost incurred.


The BBC's economics editor Robert Peston said productivity in the UK was historically 30% lower than in Germany and America - a gap that previous governments had wrestled with but failed to do much about.

Insisting there would be no let-up in his efforts to embed the economic recovery, Mr Osborne identified increased productivity as one of the government's central economic challenges over the next five years.

The UK, he suggested, could become the "most prosperous country in the world" but only if historic weaknesses in the UK's infrastructure and skills base were remedied.

Steps to upgrade transport links, reduce red tape, streamline planning and incentivise business ownership would be at the centre of a plan to "make Britain work better" and rebalance the economy, he said.

Analysis by BBC economics editor Robert Peston

Image copyright Getty Images

If I were cynical I would say that it is a shame that the so-called productivity challenge hardly featured in the general election battle.

Or I might point out that successive governments and chancellors have vowed to improve the UK's internationally substandard productivity, to very little effect.

But I am minded to say that George Osborne's focus on productivity at the CBI dinner matters, not least because it represents an important shift of emphasis at the Treasury - towards an agenda for economic growth, rather than the almost exclusive focus of the previous coalition government on reducing the large deficit between public sector revenues and outgoings.

Read Robert's blog

Addressing what he called the "productivity puzzle", Mr Osborne said. "Frankly, nobody knows the whole answer. But what I do know is that I'd much rather have the productivity challenge than the challenge of mass unemployment.

"And what I also know is this: we have a once in a generation opportunity, right now, to find an extra gear for the British economy, and ensure higher living standards for the next generation to come.

"Confidence in the British economy is at its highest level in 12 years. If we don't, together, fix our country's long term weaknesses now - when will we?"

He added: "It would be very easy at the beginning of a second term to take our foot off the pedal. That's not what we are going to do."


The CBI welcomed the focus on productivity, saying it was "the missing piece" from the UK's positive economic prospects but unions said output per worker had "stagnated" since 2010 and was symbolic of the "weak recovery".

But Frances O'Grady, the general secretary of the TUC, said: "It's no good putting your foot on the pedal if you keep cutting the fuel in the tank. The extreme cuts the chancellor is planning will put growth at risk during a recovery that is already precarious."

Image copyright EPA
Image caption George Osborne is envisaging a speedier sell-off of Lloyds shares

Mr Osborne also said the Treasury was asking ministers to identify areas where money could be saved this year and to report back within weeks, although no target for the level of savings will be set.

All departments excluding health, education and international aid, whose budgets are being protected to some degree, will be expected to spend less money than they have been allocated in the coming year as part of the process.

"When it comes to saving money, we all know that the more you can do early, the smoother the ride," he said.

Before the election, the Conservatives said £30bn would need to be found in the early years of the Parliament to achieve their target of balancing the books by 2017-18 - £13bn of which is earmarked from departmental spending cuts.

Share sell-offs

Mr Osborne has also paved the way for a quicker sell-off of government-owned assets by announcing the consolidation of two bodies which manage taxpayer stakes in UK banks and other businesses.

The Shareholder Executive and UK Financial Investments - which oversee government shareholdings in Lloyds Banking Group, RBS, Bradford & Bingley and Eurostar - are to be brought together under a single holding company, UK Government Investments.

The move is designed to ensure value for money from the sale of assets, set to total £23bn this year, and to improve the performance of assets that remain in public hands.

"If we want a more productive economy, let's get the government out of the business of owning great chunks of our banking system," Mr Osborne said.

The Conservatives have pledged to make £4bn worth of Lloyds shares available to small investors - at a discount to the market price - as part of a £9bn share sell-off.

The government has already raised £9bn from the sale of Lloyds shares, and the state's stake in the bank - which was 43% at the time of its 2008 bailout - is now down to 22%.

More on this story