Douglas Carswell

Britain's productivity puzzle - what needs to be done

Listen to Government bravado, and you'd think our economy is in rude health. New productivity figures tell a very different story.

The Office for National Statistics records that UK output per hour lagged behind the G7 average in 2014 by 20 points – "the widest productivity gap since comparable estimates began in 1991." In fact, there is only one G7 country with lower productivity than the UK: Japan.

Why is our productivity so low? The answer lies in what the UK and Japan have in common: easy credit.

Our economy can't kick the addiction to cheap money. Like Japan, the UK has kept interest rates artificially low to prop up effectively insolvent banks: zombie companies that would otherwise fail.

Socialising the losses of a broken banking system is a bad idea in itself. Yet the broader consequences of negative interest rates are worse still. Because it is cheap to borrow, consumers borrow to spend instead of saving to invest. Money flows into speculative asset bubbles, instead of innovation. In short, the result is malinvestment: the misallocation of resources to unproductive sectors of the economy.

We are living on not just borrowed money but borrowed time. We are relying on consumption-fuelled economic growth, made possible only by an ever-growing inflow of foreign capital, and ever-widening current account deficit.

But foreign lenders will not finance our profligacy forever. They know that if we are chronically incapable of earning as much as we spend, then we won't be able to pay them back. Sooner or later the markets will react: the cost of borrowing will grow, the value of sterling will fall, the price of imports will rise – and households across Britain will suffer.

What can we do to avoid this? One thing we cannot do without is genuine banking and monetary reform – and UKIP will be putting forward practical policies to achieve this.

But other reform is necessary too. We need to reform the tax credits system and stop incentivising companies to rely on low-paid workers instead of capital investment to increase their efficiency. We need to take back control over our borders, with a points-based immigration system that doesn't discriminate in favour of cheap labour from Europe at the expense of high-value-added labour from the rest of the world.

The only way to increase our prosperity is to improve our productivity. Human history gives us every reason to be optimistic about economic progress: we can look forward to working less and earning more. Only bad public policy is holding us back.

Back to all posts