Business, Innovation and Skills Committee
Oral evidence: The Productivity Plan, HC 466-i
Tuesday 13 October 2015
Ordered by the House of Commons to be published on 13 October 2015.
Witnesses including written evidence where submitted:
• Anna Valero, Research Economist (Growth), London School of Economics
• Miguel Coelho, Fellow, Institute for Government
• Rebecca Riley, Head of Productivity Group, National Institute of Economic and Social Research
• Jen Rae, Senior Policy Advisor (Innovation policy), NESTA
• Professor Jonathan Haskel, Chair in Economics, Imperial College Business School
At 10.15am
• Rain Newton-Smith, Director of Economics, Confederation of British Industry
• Stephen Ibbotson, Director of Business, Institute of Chartered Accountants in England and Wales
• Allan E Cook CBE, Chairman, ATKINS, and Vice President, Royal Academy of Engineering
• Kenny Richmond, Economics Director, Scottish Enterprise
At 11.00am
• Mike Cherry, Policy Director, Federation of Small Businesses
• Michael Mercieca, Chief Executive, Young Enterprise
• Omar Farag, Director of Operations, The Box of T Ltd (PHOM)
• Helen Wooldridge, Co-Founder and Director, Cuddledry Ltd
Members present: Mr Iain Wright (Chair), Paul Blomfield, Richard Fuller, Peter Kyle, Amanda Solloway, Michelle Thomson, Craig Tracey, Chris White
Questions 1-53
Witnesses: Anna Valero, Research Economist (Growth), London School of Economics, Miguel Coelho, Fellow, Institute for Government, Jen Rae, Senior Policy Adviser (Innovation Policy), NESTA, Professor John Haskel, Chair in Economics, Imperial College Business School, and Rebecca Riley, Head of Productivity Group, National Institute of Economic and Social Research, gave evidence.
Q1 Chair: Good morning and welcome to the BIS Select Committee. We are very grateful that you are here to come and give evidence and help us in our inquiry into the Government’s Productivity Plan. May I ask that we start by you introducing yourselves and where you are from?
Anna Valero: My name is Anna Valero. I am from the Centre for Economic Performance at the LSE.
Miguel Coelho: I am Miguel Coelho, fellow at the Institute for Government.
Rebecca Riley: I am Rebecca Riley from the National Institute of Economic and Social Research.
Jen Rae: I am Jen Rae, a senior policy adviser at NESTA, which is the UK’s innovation charity.
Professor Haskel: I am Jonathan Haskel from Imperial College Business School.
Q2 Chair: Thank you. Consideration of productivity is currently very fashionable. Is it right to be? How important is the issue of productivity in economic and competitiveness terms for businesses and our economy?
Anna Valero: Productivity is essential for sustainable growth. The only way we can have growth in living standards is through growth in productivity, so we need to produce more for the work that we put in. It has been an issue for a long time in the UK, because we have lagged behind our main comparators for a long time, but since the financial crisis, this gap has just been getting worse and worse. The most recent data has shown that, now, we are over 30 percentage points behind France, Germany and the US. Particularly now, we need to devote our attention to this issue.
Miguel Coelho: It is just another way of looking at economic performance. As Anna mentioned, one way of having economic growth is to increase the number of people and the number of hours, but in terms of actually improving living standards, productivity is absolutely crucial. It is a particularly important measure of living standards, in my mind.
Rebecca Riley: I would agree with that. It is key to living standards. It has been an area of focus and an important thing to look at for a long time, but the reason it is of such importance at the moment is the dismal performance of productivity since the financial crisis.
Jen Rae: I completely agree. I would add that solving our productivity problems is essential for our long‑term growth as well, and one of the keys to that is innovation. We can talk more about that in the coming session.
Professor Haskel: I do not have much to add, except that it is, indeed, chart 1 of the Productivity Plan document that we were asked to discuss. High productivity is the key determiner of living standards, and, as it says over the following page, matching the productivity of the US would raise British GDP by about £21,000 per year for every household in the UK.
Q3 Chair: But the Chancellor would say we are the fastest‑growing economy amongst developed nations. We have got high, if not record, employment growth. The economy is now reverting back to a boom time, if I may say so. Why the focus on productivity, given that the good times are returning, according to what No. 11 Downing Street says?
Anna Valero: The good times are returning maybe for some, but we know that wages are still really low, compared to what they used to be. We know that productivity is one of the drivers of wages, and, while we do have lots of people employed, there are more unskilled people employed. This is a good thing—lots of people would actually rather have more people employed than just a few people being very productive—but really, as we said, to get long‑term sustainable growth again, which is what we enjoyed since the industrial revolution and we want to continue enjoying, to improve living standards, have better healthcare and more money for our public services, productivity growth is crucial.
Q4 Chair: Anna, you mentioned that this has been an issue for a long time. The graph on the Productivity Plan shows that it has been moving along quite in line, as you would expect, and then literally flatlines from 2008. Other economies have struggled since 2008 with regards to productivity, but we seem to struggle more than most. My question to you all, really, is this: is this just a phenomenon from 2008? What is distinctive about the UK economy that we seem to be struggling with, compared with our rivals? Do we need to look further back in terms of real, inherent structural weaknesses that we need to now fix?
Anna Valero: What we saw from the early 1980s was that we began to reverse a century of relative economic decline. We started to speed up our productivity growth, and we actually started to close the gap with those other countries. The gap was there, but we started to close it. During the good years, everyone was happy; we were progressing well; the gap was getting smaller, and our productivity average annual rate of growth was sometimes a bit higher than our main peers, and about the same as America. Since the financial crisis, other countries have done badly as well, but we have done one of the worst. Productivity came down, and it is really pretty flat. We are quite similar to Germany, but Germany is such a strong economy in lots of other ways. While I am sure it is something they are looking into, it is particularly an issue here, given we are 30 percentage points behind them anyway.
Miguel Coelho: Obviously, since 2008, there has been a very interesting debate about what has been causing the flatlining productivity in the UK—the so‑called “productivity puzzle”. I do not think it actually only applies to the UK. It seems to be a trend that applies to many other countries. On the international comparison, I very much welcome some of the remarks in the document regarding improving the metrics of productivity, and especially international comparisons. It is a risk that we take: if we take those figures at face value,that is not very useful.
Most importantly, going back to your question about why we are looking at this, fundamentally, there seem to be a number of structural weaknesses in the UK economy, which have a knock‑on impact on productivity. I am thinking of areas like skills and investments in infrastructure and housing, which are long‑standing problems, and, if we are going to improve living standards in the future, we need to address them.
Rebecca Riley: It is true that there has been an international productivity weakness since the financial crisis, but the UK does seem to have performed worse than many of the countries it would compare itself with normally. Therefore, the productivity gap between the UK and these other countries has now, after narrowing for a while, opened up again. At NIESR, we have been doing some work trying to understand what the drivers of that labour productivity gap are, in terms of capital, IT and skills, both before the crisis and after the crisis. That is something that is still preliminary, but I will be happy to share that with you in due course.
In terms of what is specific about the UK, during the financial crisis, one element that does stick out is that the credit shock might have been a bit larger in the UK than in some of its comparator nations. You can see that lending to private, non‑financial companies fell further in the UK than, for example, Germany and France, and it did not recover; it kept falling for much longer than in these other countries and in the United States. There are reasons to think that that kind of shock may influence productivity. One of the key mechanisms through which a credit shock could affect productivity is by hindering the effective allocation of resources to different companies, so maybe funds do not flow to the most productive companies. When we look at that type of evidence, we do find some suggestion that there has been a hindrance of that process, and that has impacted adversely on productivity. However, it is not really the main thing; it would not be able to explain much of the difference between countries.
Chair: Anything to add, Jen?
Jen Rae: No. Jonathan, Rebecca and I submitted jointly to this Committee, so their economists’ assessment of that we would be very happy with. I would add that the UK invests less in R and D and innovation than other countries, and that plays a big role. They contribute a lot to productivity and are potentially one way in which we could look to solve that.
Q5 Chair: This is an important area, and we will come on to that. May I just add a final question? We talk about UK productivity and the gap as if it is a general thing, but, if you drill down deeper, certain sectors are very productive and others are less so. What are the main findings that you would get from that? What can we learn from sectors that are performing well in the UK economy, are productive and are investing? Does the Productivity Plan that the Government has published address that too?
Professor Haskel: In answer to your earlier question, the extent to which the British economy has declined is relative to the counterfactuals: not only other countries, but relative to how it was doing beforehand. The figures for how it was doing beforehand have been revised, as you know, last week by the ONS, so something you might want to look into a little bit is that that changes what the previous trend was, and it makes the fall not quite as big as we thought it was. That is one area.
Just moving onto your other question about what sectors are doing well and what sectors are doing badly, I have two main points on that. The first is, actually, if you look at what has happened since 2008, the flows of labour between the good and the bad sectors have been in favour of promoting productivity. That is to say, labour has been flowing out of the low‑performing sectors and into the high‑performing sectors. That, in a sense, deepens the puzzle, but it means that the economy is, at least to some extent, functioning in the way that we think it would. That is the first point. The second point is that some of those sectors are, in some ways, slightly special cases. We know that in North Sea oil, for example, which is a big sector in the UK, there has been a well‑documented decline in productivity there. That is nobody’s fault; that is simply because of the geology, essentially, around North Sea oil.
My final point is around financial services. We know, also, that financial services is relatively a large sector in the UK, and therefore any decline in productivity in financial services is going to have a magnified effect in the UK, relative to economies where financial services is rather smaller. That declining productivity is caused by all the gyrations and so forth in financial services, the increased regulation and all that kind of thing, but that is okay, because that may be a price we have to pay for a better‑regulated financial services sector.
Q6 Chair: Does anybody have anything else to say about sectoral performance in expected productivity?
Anna Valero: Just a little bit. The data, which has probably been revised, up to the financial crisis showed that, when we looked at which sectors were contributing to productivity growth, financial services was contributing about 0.4 percentage points out of the annual 2.8 percentage points, so it was not the biggest contributor. One of the largest contributors was business services: things like architecture, accountancy, law, all these types of things we are very good at in the UK, where we do have a comparative advantage. What has been going on in services since the financial crisis is a bit of a puzzle, and it is something that researchers want to look more into, but certainly these are areas we should be trying to focus on building up strength in again.
Rebecca Riley: When we looked at the sectoral split of productivity weakness since the crisis, one of the interesting things we found is that, although different sectors have performed differently—some are more productive than others—we have seen quite a broad‑based productivity decline. If you compare sectoral performance recently to how it was doing before the crisis, in most sectors, there are quite significant productivity gaps. I do not think there are many sectors where you would say productivity is as one would expect.
Miguel Coelho: I have a very quick point, picking up on this idea that the fall in productivity has been fairly broad‑based. The Bank of England has done quite a lot of research into this productivity puzzle. Credit misallocation is one of the things that seem to explain it, but one of the findings from that research is that it is not an overwhelming explanatory variable, if you like. One thing which I have not done research on, but I have been wondering whether it is worth exploring, is the actual impact of the international depressed economic situation that we live in, especially when it comes to Europe, and the way it plays out in the UK through trade, etc. I have not seen any research looking specifically at that particular channel, and I personally think that would probably be a promising line of research.
Q7 Richard Fuller: One of the things that you did not mention in all of that as an explanatory variable is that there are two slightly different aspects of the labour market in the United Kingdom in this recession, compared to previous recessions, which I would highlight. The first is free movement of labour in a European Union that has gone through a considerably more severe crisis than the United Kingdom. Secondly, there have been extensive subsidies of labour through the tax credit system that provides incentives, perhaps, for companies to hold onto labour or to reduce hours rather than to terminate people’s employment. Is there any evidence that these factors had any impact as an explanatory variable?
Professor Haskel: I do not think there is, actually. The overwhelming big, huge, stonking fact since 2008 is that there has been a ginormous decline in the number of low‑skilled workers employed in the UK. They have been absorbed slightly back, or they have gone into other parts of the labour market, but industrial employment has gone much towards high‑skilled workers. I suspect they are less affected by the tax credits thing that you talk about, which I would imagine would impact much more on the low‑skilled side. I do not think that is a big part of the story.
Q8 Richard Fuller: Just to clarify, you are saying that the impact that the low‑skilled sector has on our productivity is not captured in these figures.
Professor Haskel: No. Employment has flown decisively away from low‑skilled employment. Companies have just got rid of low‑skilled employees, and they are hiring much more high‑skilled employees, working in the kinds of creative industries and so forth that we discussed in the document and were mentioned earlier on.
Q9 Richard Fuller: You are saying that the 2 million new jobs that have been created in the private sector since 2010, that substantial increase in employment, are part of a flight from low‑skilled labour to high‑skilled labour, not a substantial expansion of low‑skilled labour by people coming over—I do not know whether the stories are apocryphal—from Eastern Europe and working as baristas at Starbucks. That is not part of the puzzle here.
Professor Haskel: With the exception of the most recent year. The most recent Bank of England quarterly inflation report documented that, in the most recent year, there has been a slight rise in low‑skilled employment, but, since 2008 certainly, it has almost all been a substitution away from low‑skilled towards high‑skilled.
Anna Valero: In addition to that, not in terms of growth rates, but in terms of just looking at the picture compared to other countries, one of the reasons that we have a higher employment rate than, say, France is that we do have more low‑skilled people in the labour market working, whereas in France they tend to be excluded from the labour market. This has also been attributed as one of the reasons to explain our productivity gap with France, so, in some senses, it is a good thing: it is better to have people in work than just claiming benefits.
Q10 Richard Fuller: Can I talk a little bit about management in the United Kingdom? You can have lots of people; you can have lots of pieces of equipment, but then you need management to identify how to allocate capital, reform working processes, make go/no‑go decisions on capital expenditure and do that in a way that enhances the productivity of the country, rather than misallocating those, not taking the reforms or not making measures. What assessments would you make of the impact of the quality of management, and the increase in the quality of management in the UK, on the productivity issues that we face?
Anna Valero: I work on management practices data. At the Centre for Economic Performance, we have this international survey of management practices around the world, and what it finds is that, in management practices, we do lag against other countries as well. This is largely because of a long tail of small firms that are badly managed. We find that our big multinationals and large companies are well‑managed, but these smaller ones are not. Part of the reason for this has been found to be a lack of information, so there is a mismatch between an objective judgment on management practices and how well the managers think their firms are managed. There is definitely a role for trying to improve training and information provision.
Other things that have been found to affect management practices are skills, so the lack of access to skilled workers who are complementary to management practices. Some management practices require people to show initiative or to think more. That is complementary to highly‑skilled people. Also, the people with management skills are, obviously, important for these types of management practices. Then, finally, there has been this finding about family firms being worse‑run. There are things in the tax system that, obviously, are desirable for other reasons. Having tax breaks for family firms when you pass them on in the family is very desirable for families, but perhaps not so desirable when you are looking at how well the firm will then be managed.
Q11 Richard Fuller: I have done some work with the Institute for Family Business. I am sure they would have a different point of view on that, talking about long‑term investment cycles, etc. Are there any initiatives on management? How highly would you rate the importance of improving management in the United Kingdom as part of the answer to improving our productivity? I have heard from Anna; I know her point of view, but, for people in other areas, is it important?
Rebecca Riley: We have looked at alternative indicators to what you have at the LSE of management inputs into production, and we do find a very significant association between management quality or quantity and productivity outcomes in UK businesses. It does appear to be a factor which, on a different type of analysis, is quite important in terms of productivity outcomes. How management influences productivity is a little less clear, but we do find that management is instrumental in generating innovation or making those decisions to invest in innovation, which we know ultimately drives productivity growth.
Q12 Chair: Briefly—and I am looking to you, Anna, because you have done work on this—can I ask where we are, as the UK, in international rankings for management competence, and does the Government’s Productivity Plan address this sufficiently, given that you have said it is a major structural weakness?
Anna Valero: We are around the same as France, but we are below the US, Germany and Japan. We are quite near the top, but we would like to be better, especially if we think we should be a strong, Anglo Saxon‑type economy and there is reason to strive to be like America. I should just add, when you talk about how important it is, the research at the LSE has found that over 20% of the gap with the US in total factor productivity, which is a big part of productivity, can be explained by management.
Q13 Chair: Does the Government’s Productivity Plan address that, then?
Anna Valero: There was a whole section in the Productivity Plan, and there is some recognition of the need to provide training and some ideas for funding that and experience MBAs. It is definitely there. There is probably more that can be done, but that is the case with most things. I hope there will be an ongoing dialogue about how we can improve management practices.
Q14 Paul Blomfield: I wonder if we can move onto something where we are trailing the field, which is the point that Jen made about investment in R and D. We have clearly seen a generational slide since the late 1970s, from being an OECD leader in terms of our investments in R and D, to now trailing the field. I wondered what thoughts you had on the relationship between that and the lack of productivity.
Jen Rae: The research that NESTA and Jonathan have done together looked at the role of investment in intangible assets. R and D is only one part of measuring our investment in innovation. Our work with Jonathan shows just how important our investment overall in innovation is to productivity. We think it is the key to making sure that, over the long term, our economy grows and it benefits everyone across the UK. I will pass to Jonathan, if there is anything more from the work that we have done.
Professor Haskel: As you say, Jen, R and D is just one part of the whole story. On R and D specifically, the major point is that R and D spending is globally mobile. Companies can, and do, take decisions to just send it anywhere, so there are two things, it seems to me, that the UK has to do if it is going to do better on R and D. The first thing is that it has to be competitive with other countries in terms of its tax treatment and so forth of R and D. There is tremendous sensitivity of between‑country R and D spend to between‑country differences in taxes and subsidies, and all of that kind of thing. That is point number 1.
Point number 2 is that the UK has a terrific science base, and that is well documented as being a good attractor—other things equal—to R and D, as well. But, of course, the science base is relatively small and needs the certainty of maintained investment. I would push hard on the science base side, in terms of helping to understand how we could get some more R and D in the UK.
Q15 Paul Blomfield: Following specifically on that point, you rightly say that, in terms of our university system, we have probably got the second‑best or, alongside the United States, one of the best university research capacities in the world. What are those other interventions, if R and D investment is so globally mobile, that need to happen if leading companies are to utilise that fantastic resource that we have? What are the other interventions that Government needs to make?
Professor Haskel: The trouble is that the science base is just one item in the gamut of items that multinational companies are choosing when they are choosing to situate their science everywhere. A very good science base can be offset by a disadvantageous tax regime. We have to keep running in order to stand still.
Q16 Paul Blomfield: There are incentives within the tax system to encourage R and D investment. What more would you be looking for?
Professor Haskel: Well, we are competing with other countries on the tax system side.
Q17 Paul Blomfield: Where are we uncompetitive, in relation to encouraging R and D?
Professor Haskel: We are very competitive at the moment, but, of course, other countries are trying to get more competitive relative to us.
Q18 Paul Blomfield: So we are competitive at the moment. Investment in R and D is globally mobile, but we are doing badly. We have slipped from being an OECD leader to being an OECD trailer. Why is that?
Professor Haskel: Because, again, the science base is not as large as we would like it to be, and there have been periods where we have been rather uncompetitive globally, in terms of the tax treatment. At the moment, we have got that right, but, again, that is a very fast‑moving thing, because every country is competing against everybody else.
Q19 Paul Blomfield: Are there any other thoughts on that issue?
Anna Valero: The UK has been criticised a lot about its innovation system—I am sure NESTA will have a lot to say about this—but, when you compare it to America, there is just an innovation ecosystem there. People are encouraged to think of new ideas and take them to market. Here, while we are strong at having the ideas, we are often not that good at taking them to market, and there are loads of obstacles that have been cited as important, such as access to finance. We are not very good at risky finance in the UK. There is an overwhelming reliance on bank loans, and they are not very conducive to risky investments.
Access to manufacturers is one that is less discussed, but I read an article where small businesses that needed to make prototypes said they found it impossible to make a prototype in a small quantity. China only take orders for very large quantities, and, in the UK, the manufacturers do not find it worthwhile to make one or two units. This is a big obstacle that was cited by some businesspeople. There has to be more contact between the people involved in innovation—the universities, the firms and the finance people—as the Government has recognised with the Catapult centres. That is all required, and America does it much better than we do.
Q20 Paul Blomfield: Could I just probe a little bit on what other initiatives we can take to reverse the decline in investment? In the last Parliament, as a Committee, we looked at the relationship between business and universities. We looked at the issue of R and D. We recommended—and we were not on our own in this—that we should target 3% GDP investment in R and D. We are almost half that 3%; the US are close to it. Do you think that is a reasonable goal, and how do we get there?
Anna Valero: I want to refer to Jonathan, because his excellent research on the role of the public science base and its impact through spill‑overs to the private science base is very important, because we want to raise both public and private R and D.
Professor Haskel: That is kind of you, Anna. There are two types of answers. First, as I was trying to say before, if we are looking for some spending on the public sector side—because part of your question is, “What can the public sector do?”—that will crowd in spending on the private sector side, then the science base is a fantastic example of that. As you know, many economists take the view that lots of public sector spending has an unfortunate consequence of crowding out private sector spending. This is an example where it can crowd in private sector spending, so that is on the science base side.
On the issue about the 3%, my purely personal view is the trouble with the 3% target is that it is just fixated on R and D, and R and D is just one of the types of innovation expenditure that modern economies are doing. As Jen was saying earlier on, and as all the work at NESTA has shown, the creative economy is about more than just R and D. It is also about design and software, and all these various other types of knowledge spending, as well.
Q21 Paul Blomfield: The point you make about public sector investment crowding in private sector investment is a point that was made by the Campaign for Science & Engineering, that there is a growth factor by proxy from public sector investment, so you would endorse that.
Professor Haskel: I would. I am very happy to send you academic research and other types of research that try to document that, if that would help.
Paul Blomfield: It would be helpful.
Jen Rae: BIS published their own research earlier on this year, which looked at the wider science investment and showed that, for every pound invested, an additional £1.36 was given back to the private sector. The evidence is there; we can send that to you.
Paul Blomfield: That would be helpful. Those numbers are even more impressive than the ones that CASE used last year.
Q22 Chair: Anna mentioned the ecosystem for innovation and commercialisation, to help productivity. Could I ask you all, briefly, does the Productivity Plan do enough to improve the UK ecosystem, and if it does not, what additional one or two measures do you think the Government’s Productivity Plan should put in place in order to boost this?
Professor Haskel: The plan does quite a lot. There are two things, though. Increasingly, a lot of the innovation ecosystem takes place over the internet, so that means that our broadband and internet‑type connections are really, really important. I would put that under the “infrastructure” heading, along with the more traditional infrastructure headings of roads, transport, and this, that and the other. That is the first thing. The second thing, which the plan does not mention, are areas like the digital single market around Europe, and the potential importance that that might have in the increasingly digital innovation ecosystem in which we are living.
Jen Rae: The plan, as Jonathan says, goes some way towards addressing the innovation ecosystem. The section on science and innovation has some things that we would agree are good, such as the commitment to science capital, but also expanding the Catapult network and promoting university‑business collaboration. However, the detail of how these things will be done is not there at the moment, and it feels like a pretty critical time. There are two reviews, in particular, that have been undertaken by BIS and other bits of Government: the Nurse Review into research councils, and the Dowling Review, which will look at university‑business collaboration, and the Government’s response to that. All of that is happening in the next couple of months, and, along with the comprehensive spending review, it feels like this is a time in which some of those decisions will be made that look at how those recommendations in the plan will actually pan out for us.
Rebecca Riley: I would like to highlight the role of high‑growth firms in this context. We know that there are relatively few firms at any one point in time that will account for much growth, and one of the ways in which they seem to foster growth is through innovation. The ecosystem needs to allow for the finance for these companies—they may be small or large, but often they are SMEs—to be able to grow. It is difficult to identify these companies, because they may be in different sectors or may be different ages. However, they do seem to have a common denominator, in the sense that they are very innovative. NESTA research has identified, based on standard credit scorings, that this does not do them any favours. They suffer from access to finance, so that is a key issue. The Productivity Plan does mention that there have been policy measures recently, such as GrowthAccelerator and the Business Bank, trying to boost lending to these types of companies. What will actually come out of that is still an unknown factor.
Miguel Coelho: I would like to focus on infrastructure—both traditional infrastructure and IT. As a facilitator of growth and investment, not just in R and D but generally, this seems to be crucial. My own research suggests that we have had a number of problems over the last few decades, in the form of a lack of forward‑looking strategies, policy risk, weak evidence around individual infrastructure projects, and, in some cases, a lack of community consent. It did not seem to me that the Productivity Plan addressed that institutional side of the policy‑making process around infrastructure. Of course, in the meantime, we have had last week—not through the Productivity Plan—the announcement of the creation of a National Infrastructure Commission, which may go a long way in addressing some of the problems that I was mentioning. To me, this is the main omission in the plan when it comes to facilitating investment.
Anna Valero: I would talk about skills, and a few elements of skills. I will try to be very brief. First of all, we know that we have improved a lot in higher education, but we all know there are still gaps in the vocational and technical skills. There is a need to raise the quality and quantity of vocational qualifications, so that they actually add value to firms and so that they are a real alternative for students wanting a qualification after school. We also need to ensure that everyone realises their full productive potential, and that includes people from less well‑off backgrounds. There is slight concern about the conversion of maintenance grants to loans, based on some academic studies in the US and the UK that show that that can hamper going to university.
Of course, the big thing, really, is the gender issue, so the allocation of skills across the genders. The plan does have a section on that, and it quotes the statistic from the OECD that getting more female participation by 2030 could raise GDP per capita by 10%, which is great, but there is something we need to think about from a slightly different angle, which is to do with the misallocation of skills. Currently, the whole parental leave process, childcare being very expensive and lack of flexibility in lots of jobs hinder lots of high‑skilled women from working in jobs that would realise their full potential, and often the male in the relationship, who may actually be less skilled, is the one who ends up seeing through his career to the highest level.
This is not anything about women not making the choice to be with their children. We need a new culture, and the Government needs to intervene to try and create that culture, so that women can be good mums, be at home, but also be able to have a career and combine the two. There might be lessons to learn from Scandinavia: these “use it or lose it” daddy months, which have been shown to get dads more involved. The same thing happened in Germany. The Minister of Defence has seven children and a crazily impressive career. She has been the real advocate of changing the culture in Germany, and she has made big strides in recent years. There is a lot more to look at there, and there is a policy interest in these types of issues, from what is already said in the Productivity Plan.
Chair: Anna, your comments about skills move us harmoniously onto the next set of questions, which Chris will lead on.
Q23 Chris White: Thank you. Anna, you can probably step out of this session now. How much do you think improving productivity is a function of a skilled workforce? Does each of you think that the Government is investing appropriately in skills?
Professor Haskel: There are many on the panel more expert than I am, so I will just say a word about skills at the very, very highest level; that is, around R and D and scientists and all of that. Part of the answer, as I have said before, is about investing in the science base. To the extent that investing in skills means investing in the science base, that is well documented to be very helpful in crowding in other types of investment. That is just a particular raft of skills, so I defer to others who are more expert than me on other areas.
Jen Rae: I am also not an expert in this area, but, for innovation and making sure that we get the most out of our investment in higher education, it is an essential part of what you would want the Government to invest in. From NESTA’s point of view, we would fully support the idea that you should invest as much as you can into science and into a higher education budget, but also the wider innovation system. Skills are a big part of that, too.
Rebecca Riley: I am another non‑expert in skills, but it is well documented that skills are an important contributor to productivity growth. Certainly, in the work we have done focusing on intangible assets—these are all knowledge assets created by skilled workers—we know that these knowledge assets are very important for productivity growth, so there is one link there. We also know that training is important to enhance what you get out of a given stock of skilled labour. Skilled workers contribute to productivity, both directly through what they do and also by creating a knowledge‑sharing environment, and that knowledge flow seems to be boosted by continuous training. That is also an important aspect of what needs to be done.
Miguel Coelho: I would like to focus on the primary school and secondary school side of skills, in particular. It seems to me that the so‑called long tail of low skills or low academic performance—that we have 20% or so of children that finish secondary school without achieving an acceptable level of academic performance—is one of the most important problems, if not the most important problem, in the formation of human capital. There is a chapter in the Productivity Plan talking about improving the quality of teaching, which, in the academic literature, is known to be the dominant driver of improvement in human capital and educational performance. The problem is that it did not come across as a very detailed blueprint, in terms of what exactly would be done, although there was something on changing the training of teachers to make it better. That is one, probably important, part of the puzzle, but there seemed to me to be other parts of the puzzle, including, for example, the way schools are funded, which are not touched on at all in the plan. It did not come across as a particularly strong and detailed plan, in terms of addressing that problem.
Q24 Chris White: I was pleased to attend the opening of a new apprentice block at Warwickshire College only a couple of weeks ago. Do you think, though, that the Government is right to be paying so much attention to increasing apprenticeships and to HE?
Anna Valero: Apprenticeships definitely work in certain systems—they really work in Germany—but they need to be accompanied by some other things. As I have said, there should be some qualification that the worker takes away that gives them some kind of prestigious feeling that they have achieved something. In this country, we do not have such strong job protection as in Germany, whereby you join BMW and you are kind of there for life, so it really makes sense to become an expert in their systems. For it to work here for the workers and the firms, we need them to be quite transferable and recognised. That is something that comes up a lot with the experts in vocational skills: you need recognised qualifications that are trusted and transferable. The apprenticeship levy certainly seems like a good way to go about getting the funding, because, if everyone has to pay for it, then they have the incentive to do something about it to make it pay off.
Miguel Coelho: The Productivity Plan contains some references to very big numbers of apprenticeships and large amounts of vocational training. The focus on quantity, and not on quality, is one of the persistent problems that we have had over the years, whereas most of the evidence from places like Germany, Austria and Switzerland suggests that the really interesting thing about vocational education is when you get three‑year degrees that combine an academic component with a practitioner component. Of course, the UK has a very different industrial structure compared to some of those countries, which does not create the same type of conditions that they have for generating those types of degrees or apprenticeships, but it seems to me that the most problematic aspect of our policy, certainly historically, seems to have been this focus on sheer numbers, rather than on quality.
Rebecca Riley: This is referring to other people’s work, but I have seen evidence that apprentices can have very different contributions to productivity, depending on the type of apprenticeship it is. Our analysis of cross‑country data does suggest that vocational training is an important driver of productivity, maybe not as obviously as high‑skilled university‑type education, but it does have an important role to play in complementing other types of labour. Even if it is not always directly obvious that there is a link, there is a link through the interactions with other types of skilled workers. One of the findings we have is that the benefits, in terms of productivity outcomes, from vocational training are clearer in countries where vocational training takes place both in the classroom and with the employer. The employer aspect of the training appears to be quite important in generating the productivity benefits of vocational training.
Jen Rae: I do not specifically have a view on apprenticeships, but it highlights a really important debate that relates to productivity in the role of businesses in skills and of businesses in skilling up their workforce, and particularly over the long term, looking at where the labour market is going, what jobs will exist and who is going to get those jobs. Apprenticeships feel like a key part of doing that and allow businesses to think about the types of skills they will want their future workforce to have, particularly around skills for data and digital skills that the jobs of the future will likely require workers to have. The apprenticeship scheme feels like a really good way of looking at some of those practically: “These are the people who are coming into your firm and you want to keep them. What skills are you going to train them in to be able to do those jobs that you will need in the future?”
Q25 Chris White: My final question is specifically to Anna. You have mentioned in your written evidence that productivity growth can be achieved by “more effectively using the skills of women”. I have a particular interest in manufacturing and the creative industries, particularly video games. It is perhaps not about improving the skills, but is it about going one step forwards, or backwards, in getting more women involved in those sectors in the first place? If you have a silver bullet that would help that, could you share it?
Anna Valero: I do not know if it is a silver bullet. It is a difficult one. It has to be a cultural change, and that is going to take a while. I am not envisaging a world where there is an equal sharing of childcare responsibilities, because I am a mum and I know that I wanted to have more of a role than my husband probably, but I have managed to maintain a career, and that is because the kind of career I am in is quite flexible. Academics work any hour from wherever. Obviously, not all jobs are like that, but in other jobs there might be scope to keep women in. After all, it is really only a few years in which they have to take a slightly different role and then children grow up. What we need is that the women in their 40s, 50s and 60s are in the right place and did not take a step back that meant they ended up in a less skilled trajectory.
Take doctors, for example. Junior doctors’ hours are crazy, and I am sure that deters lots of women from becoming doctors who would have been wonderful doctors. Maybe there is scope for some family‑friendly policies there. In the creative industries, in videogames, there is a lot of scope for programming and things, and that can take place at home. As I said, there is no silver bullet, but if there was a slightly different culture, whereby women, deciding what career they want to go into in the first place and what qualifications they want to pursue, feel it is a career that would work as a woman, combining it with family, you might then see more women doing it and being successful as well.
Q26 Amanda Solloway: I cannot remember who it was who mentioned it, but, talking about vocational training in primary school and secondary school, something just occurred to me. It is probably a very ignorant question, but, with the whole raft of vocational qualifications or experiences that people could have, what would you focus on particularly and at what age would you start to introduce that vocational experience?
Anna Valero: I do not know. I am a believer in learning the basic skills at school and that further education is the place to start properly with the vocational skills, but, these days in schools, CDT is a different thing to what we may remember, i.e. bending some metal. Now they are actually learning some programming and lots of electronics. Creating that interest in schools as one of the classes is great, so that, if we get to a world where, in further education, some of these technical qualifications are as good as university, we might end up with some people really inspired by their CDT lessons and going off onto that route.
Chair: I am conscious that we have overrun, but your answers have been really worth while. I have a couple of very brief questions from colleagues and I would appreciate it if we could have very brief answers as well, so we can move on to the next panel.
Q27 Peter Kyle: I will invite a very quick response. This is following up on the skills agenda. Your responses—and thank you very much for turning up—have been really fantastic. I did not get, on the skills agenda, the scale of the challenge that we face. I note that, back in June, ManpowerGroup said that George Osborne’s vision of a northern powerhouse will be more like a “northern power cut” if we do not get more talent coming onto the market. Is that an accurate statement?
Anna Valero: I know that businesses are crying out due to skill shortages. There has been a lot of pressure to try to relax the visa restrictions on some of the more skilled people. It is particularly the case, if there are regions of the UK that do not have enough skilled people, that a short‑term solution is certainly to let more—
Peter Kyle: But the challenge is that acute.
Anna Valero: Certainly, from the business surveys, something like 30% of businesses say that they are facing skill shortages. From the economic research point of view, we know how important human capital is to growth, so it certainly seems like a big challenge.
Miguel Coelho: As Anna said, business surveys seem to suggest that. The other more objective data from the OECD does not necessarily place the UK at the high end of skills mismatch in the current situation, so I am not so sure whether the problem is as acute as that. I would personally still put my finger on the school system and what we are creating in terms of human capital today as being the main problem, and a persistent problem, because this 20% that I mentioned is not something that happened today. 10 years ago, 15 years ago, we were in the same position.
Q28 Craig Tracey: I will give Anna a rest here. Picking up on a point that Rebecca made about this being a broad‑based productivity gap, in the NESTA joint submission, you mentioned that new businesses actually make very little contribution to productivity and most productivity is driven by firms. Did you find any common reasoning for that? Was it things like access to finance, for example? Does the Productivity Plan actually address this?
Rebecca Riley: Entrants to the market are often relatively low in productivity compared to incumbent businesses, because they still have a learning trajectory to go through. Also, certainly, during the financial crisis you do see—I hope I am remembering this correctly—that there is some reduction in the quality of entrants relative to incumbents, which could be because it is harder to enter with capital when there are restrictions on finance. More broadly, however, a lot of entrants do not make it very far. You have lots of churn in the market. You have lots of companies coming in who do not last very long and who never actually progress and become very productive, large companies. That is a feature of the market.
Jen Rae: To add to that, there are companies that do not want to grow and are happy with the size they are. For the Government, the challenge is supporting those businesses but also supporting the ones that will grow. Identifying those can be hard. It is about looking at the companies that have ambition and show they are on a trajectory that looks like they are going to grow.
Professor Haskel: The companies that are trying to come into the market in a knowledge economy typically are just full of knowledge assets; they are not full of the traditional assets like buildings, plant, this, that and the other. In the current banking system, they are really up against it in terms of trying to borrow in order to enter, because they often cannot secure loans against these intangible assets. Something looking at those issues around banking might be important.
Q29 Michelle Thomson: The comparators we traditionally draw on are against the G7, both in the Productivity Plan and in general terms, but, if you look at medium‑sized countries, with 3 million to 10 million people, they seem to be much, much further ahead in terms of productivity. Pulling everything together in terms of themes for today, what would you highlight out that fundamentally we need to do differently to get more to that level of productivity? I am thinking about countries such as Norway, which is about 77% ahead of the UK. It is a hard question for a brief one; I know that.
Anna Valero: Building on this Productivity Plan, we need a holistic growth strategy that considers areas that affect growth across the whole spectrum of things, and in a joined‑up way, thinking about what the bottlenecks are—many of them have been identified here—and trying to have that in mind, and not be afraid of having some kind of industrial strategy. I know the coalition Government had its industrial strategy. As I understand it, it is not clear what the situation will be going forward. Lots of these other countries do have some form of industrial strategy, even if it is just on the supply side, i.e. how to support the sectors that we think are growth sectors.
Miguel Coelho: Again, we need to be cautious about those international comparisons, but, in terms of the areas, I would say: skills, the point I made before on the 20%; infrastructure, which I mentioned before; and planning/housing. That is an area we did not discuss at all, and it strikes me as one of the most important issues and challenges the UK is facing in terms of living standards in the future, with knock‑on impacts on measurable productivity.
Chair: Does anybody have anything else to add?
Jen Rae: I was going to say that NESTA actually wrote a report on innovation in small countries. One of the things they do is invest in R and D and innovation.
Professor Haskel: I would add digital infrastructure and the science base.
Chair: Thank you very much. We have kept you far too long, but your answers have been really valuable to us. We really appreciate your time and your input. Thank you very much, again, for coming to talk to us. Thank you.
Examination of Witnesses
Witnesses: Rain Newton-Smith, Director of Economics, Confederation of British Industry, Stephen Ibbotson, Director of Business, Institute of Chartered Accountants in England and Wales, Allan E Cook CBE, Chairman, Atkins, and Vice President, Royal Academy of Engineering, and Kenny Richmond, Economics Director, Scottish Enterprise, gave evidence.
Q30 Chair: Good morning. Thank you for coming to give evidence. I am sorry to have kept you waiting. Can I ask you to begin by introducing yourselves and saying where you are from?
Rain Newton-Smith: Rain Newton‑Smith, Director of Economics at the CBI.
Stephen Ibbotson: I am Stephen Ibbotson, the Director of Business at the Institute of Chartered Accountants. Previously, for most of my career, I was a finance director.
Allan Cook: I am Allan Cook, Chairman of Atkins engineering consultancy. I am also Vice President of the Royal Academy.
Kenny Richmond: I am Kenny Richmond, Economics Director at Scottish Enterprise, which is the main economic development agency in Scotland.
Q31 Chair: We are looking at the Government’s Productivity Plan. Government has a role, but businesses are key to improving productivity. In your experience, are your members doing enough to raise productivity? Are they doing enough to invest in things like new capital, new innovation and new skills? What is the feeling of businesses out there? Should they be doing more?
Rain Newton-Smith: You are right that, ultimately, productivity needs to be led by business, but Government plays an important part in enabling a lot of that productivity. In some of the research we have done and from talking to our members, we know that there is more that can be done to improve management skills. That is one of the things that came out of our “A better off Britain” report, which compared productivity in different sectors but also at the firm level between the US and the UK.
You can see from what our members are doing that they are investing in training, but there is clearly more that can be done. One element on that that we welcomed in the Government’s Productivity Plan was the income‑contingent loans for MBAs, because we know that has been a bit of a gap for the UK. There is probably more that can be done within that. We are certainly a big advocate of people learning throughout their careers and the ability to study while you are also in part‑time employment. That is why we think it would be good if the Government looked at lifting the ELQ bar.
Chair: Stephen, can I bring you in? I should also say that I am a member of the Institute of Chartered Accountants in England and Wales.
Stephen Ibbotson: I agree with Rain, in that it is mainly down to business to do this, but clearly the Government has to set the right framework. Over half of our 145,000 members are in business, so they are finance directors, finance controllers and that sort of thing. The other less than half are advisers. They advise over 1.5 million businesses, so they are clearly very involved and engaged. They tell us, in recent surveys, that they are slightly concerned about geopolitical things. It was uncertainty around the election, uncertainty around Europe. They also tell us that, therefore, they are not investing as much as they would and they are keeping hold of their cash. There is a part the Government can play there in terms of creating the right environment for investment, which is an environment of stability and confidence.
I can give a more micro example around the annual investment allowance, which has floated up and down from £25,000 to £500,000. There was no certainty. There is now, over how much it is going to be for the long term, and it is going to be fixed at £200,000, but things like that, which actually give confidence and certainty, are the things that can help.
Allan Cook: From my point of view, industry absolutely has a responsibility, Government has a responsibility and education has a responsibility to deal with productivity. If you speak to any of the advanced manufacturing or engineering companies in the UK, they will absolutely tell you that productivity is one of the key drivers towards improved profitability and, of course, future growth.
Certainly, there has to be responsibility with industry, but there also has to be, as Stephen said, a framework in which the industry can actually operate effectively within this environment. I really do wish, Chris, there was a silver bullet on this particular one, but, believe me, if there was a silver bullet, I think we would have found it by now, and I do not think we have. It is an ongoing issue and challenge that we face, but it is a joint responsibility, absolutely.
Kenny Richmond: Our evidence and research suggests that there is a relatively small core of companies in the business base that are highly productive, innovative and are growing. It seems to be the wider business base that has a very long tail with less productivity growth and less ambition to grow that is dragging down the UK’s average.
Q32 Chair: You have said that Government has a role in terms of producing a framework, and in terms of having an environment that is conducive to investment, to moving up the value chain and to being ultimately better in terms of productivity. Does the Productivity Plan published in the summer achieve that? Allan, you said there is no silver bullet, but is the blend and mix of policy prescriptions contained within the plan appropriate for your members in order to solve the productivity puzzle? If not, what else should be in there that could really help to address businesses’ concerns about productivity?
Allan Cook: The plan itself has 15 points. Effectively, it covers almost everything. To be perfectly honest, there is not a lot there that you could say has been left out or omitted. What I would like to see—and what the fellows of the Royal Academy and industry, if I am speaking on behalf of the engineering industry, would like to see—is a degree of pressure on certain points. There are three points that have been talked about this morning already: skills, innovation and investment. Those three factors, from an engineering and advanced manufacturing point of view, are absolutely critical.
Kenny mentioned the fact that there are certain innovative companies that are really, really committed to driving productivity. The reason they are committed is that they are operating on an international stage. The landscape, now, is international. Michelle talked about Norway. Of course, that goes to North Sea oil and the energy side of things. We talk about growth in terms of China and India, where one of the things Paul was talking about was education. In actual fact, our education system itself has been world class, but you will find now, if you look at the top universities in the world, that there are more and more Chinese and Far Eastern universities creeping into that, basically, to challenge Oxford, Cambridge, York, Durham, Leeds, etc. The challenge that we face is actually an international challenge. Productivity is all about how we deal with that international challenge, for my members.
Stephen Ibbotson: In my old job, I would have struggled a bit with the Productivity Plan, I have to say. It is a worthy list of 15 things, but it is not prioritised. There are no timeframes, there are no responsibilities, there are no outputs and there are no measures in there, and they are all things that, as a finance director, I would have looked to see. There was some discussion in the earlier panel about the validity of productivity statistics, but they are what they are—they are internationally accepted at the moment and changing them would be a big thing. We would certainly recommend some form of productivity target that was attached to the plan. Singapore does that and it seems to work very well. They have huge productivity in Singapore.
To Allan’s point, too, there are three things that come out from my discussions with our members. They are not quite the same three things, but they are, certainly, skills and education. We are hearing increasingly about difficulties and skills shortages. I was talking to FDs last Thursday in Devon in Cornwall. They could not get anyone to quote to build 20 to 30 developments of houses in Cornwall—not even to quote for it—because of skills shortages and, I guess, a bit about the regional area, so skills and education is the top one. Second would be infrastructure, which would be where we would differ. To your earlier panel, it is digital and physical. We get a lot of feedback on infrastructure. Third would be investment and innovation together.
Rain Newton-Smith: You highlighted the three main drivers around skills, innovation and also investment. I know you have discussed a bit previously around skills. In the UK, we have a unique challenge in terms of getting the people to where jobs are being created, which does relate to our housing and infrastructure. On that, in the plan, where they got things right was the element on brownfield sites and prioritising in particular brownfield sites for housing developments that are related to big infrastructure projects. That shows a more joined‑up approach between decisions made on infrastructure and housing. There is clearly more that needs to be done. We know that, in terms of housing supply, we should be building 200,000 homes a year; we are not coming close to that.
On infrastructure, we certainly welcome Lord Adonis heading up the infrastructure board and we really hope that will provide a focus on the long‑term infrastructure needs in the country, but we need to make sure that we deliver on some of the infrastructure projects that are in the pipeline. In particular, we know that we need to see a final decision on south-east capacity in terms of aviation. It is important that we see that, because that is important not just for our productivity, but for our exports. We know there is a clear link between firms that are able to export and their overall productivity.
In terms of innovation, the UK ranks fourth according to the World Economic Forum in terms of our overall availability of technology, but we are not so good in terms of how that diffuses throughout the economy. One of the real successes over the previous few years has been the Catapult centres and the work that Innovate UK has done in terms of allowing access to some of these technological innovations to firms of all sizes. It is important that we protect some of those innovations going forward.
Finally, in terms of investment, we certainly welcome the annual investment allowance finally being made permanent, but the other element that was welcome within the Productivity Plan was the announcement about a business tax road map and the overall focus on broader business taxation. We know we are in a situation now where, if you make one of your buildings more energy‑efficient or invest in it otherwise, you will end up facing higher business rates. Our broader system of taxation does not recognise some of the issues within that. That is one of the reasons why investment as a proportion of GDP in the UK still lags behind some of our G7 peers.
Kenny Richmond: We see evidence suggesting that the productivity challenge differs by sector, by region and by company size. It is having the evidence underneath that to understand why that is so that we can start to focus our policies at the right area.
To recap on a couple of comments made about the importance of innovation and internationalisation, there is lots of evidence, obviously, that internationalisation and innovation are closely linked and both drive productivity. Looking over the last 10 years, though, there are some concerning trends. The proportion of the small and medium‑sized business base that is exporting has been declining, as is the case for those introducing new products and services. Again, that suggests that, within a large proportion of the business base, there is something going on that we need to understand better and to make sure the policy focus is on.
Q33 Chair: Kenny, you mentioned sectors. Allan, you are Chair of Semta. Semta has provided a submission to us where it says, “The phrase ‘industrial strategy’ does not feature within the Productivity Plan. Without thinking sectorally, and ensuring that there are co‑ordinated and sustained efforts by Government and employers within individual sectors, we will not meet their skills needs.” Is there a direct correlation between an industrial strategic approach and improvements in productivity?
Allan Cook: Absolutely. I do not think there is any doubt at all about that. In fact, one of the sectors we do represent is aerospace and defence, of course. In the last five years in aerospace, they have seen an improvement in productivity of about 30% over that period, compared with about 4% in the UK as a general figure. That has certainly been helped by demand. Everybody recognises that aerospace, certainly from a civil point of view, is an international marketplace. It is very heavily demanded from an international point of view. Actually, if we are to compete from an aerospace point of view, we have to be competing on an international basis. Also, it is demand‑led, of course. There is a high demand for the skills, expertise and capabilities that we have.
The sectoral approach and the industrial strategy that was brought about within BIS over the last five years have proven to be effective. If you talk to probably all the companies in the advanced manufacturing and engineering sector, they will say that a consistent approach over the last five years of the previous Government has led to an improvement in collaboration and co‑operation.
Ray mentioned the Catapult. Analysis of the High-Value Manufacturing Catapult[1] has shown that for every £1 investment, you get a £15 return, and that is based upon innovation capabilities, technology and access to that by not only the large companies like Rolls‑Royce, Jaguar Land Rover and JCB, but SMEs. You have access to that sort of information and you see the return. Although it is not mentioned in the Productivity Plan put forward by George Osborne and the Secretary of State for BIS, it is inherent in terms of what needs to be done from a sectoral point of view. I honestly believe that it is fundamentally important to what we are doing.
Q34 Chris White: Perhaps it should be more explicit than inherent, I would suggest. My question is directed to yourself, Allan. The written evidence from Engineering the Future stated that, in half of engineering companies, a “shortage of skilled people is causing a significant impact on their productivity and growth”. Would you agree with that statement? If you do agree, what should businesses do to improve this deficit? Are apprenticeships and work experience making a difference? What more could be done?
Allan Cook: There are three big questions in there, Chris.
Chris White: My apologies.
Allan Cook: The first thing is that it is absolutely correct about the skills shortage. People speak about the potential or risk of a shortage. Stephen mentioned it in terms of the West Country already, but our estimates say that probably by 2022 we will be 550,000[2] skilled engineers, technicians and apprentices short in the advanced manufacturing and engineering sector. That is a huge shortage. We need about 1.28[3] million engineers just to satisfy existing growth targets in the engineering sector by 2020. That is to cover for the people who are leaving the industry, going through the area. It is absolutely critical now and it will become even more critical.
The second part of your question was: are we doing enough? Absolutely not. We are not doing enough in terms of changing the perception of the industry by a whole generation of schoolchildren, in my view. Too often, teachers and parents certainly regard engineering—I cannot speak for the rest of the sector—as maybe not a career they should be aspiring towards. Maybe it is financial services, medical etc. Actually, when you think about what engineering can do and is doing for this country, it is absolutely something that we should at least be encouraging our children to look towards. Consider this as an option. If you take design and technology, something that is at the heart of innovation, and look at the figures, from 650,000 kids going into GCSEs over the past five years, the number has dropped down to about 225,000. It has halved over the last five years. It is an incredible gap we are going to face.
Apprenticeships are part of the solution; they are a big part of the solution. I applaud the previous Government and this Government for highlighting apprenticeships as a part of the solution. There is absolutely no question. In the last session, Anna mentioned the importance that Germany places on apprenticeships and they have had that consistent approach for certainly decades and maybe even centuries. We have had a stop‑start approach to apprenticeships. In the 1970s and 1980s, apprenticeships almost ceased. Companies were not encouraged; Governments did not encourage. There was really a lack of investment into apprenticeships. We are seeing and have seen the importance of this and the difficulties that it creates.
I am pleased to say that that has changed. The approach is consistent now. It is absolutely a part of the solution, but it cannot be the only solution. Kids need to have options and those options should include technical training, universities and options for apprenticeships. It is basically “earn while you learn”. It is a great idea; a fantastic idea.
Q35 Chris White: To follow up a bit on that, whether that is scholarships, bursaries or work experience schemes, is there a lack of co‑ordination between all the different options on the table? Could businesses, schools, colleges and universities work better together to take a lead on influencing some of our younger people into these industries?
Allan Cook: One of the things that businesses say openly is that they find it very difficult to choose. There are a lot of initiatives around in various forms through BIS and other initiatives. They are all well meaning but, if you look at small and medium enterprises, they find it very difficult to manoeuvre and navigate their way through these options. The co‑ordination that has to exist between education, further education, higher education and industry, helped by the Government, is absolutely essential. It has to be a holistic approach; it cannot just be an individual approach.
Q36 Chris White: Do you think that businesses, particularly in your sector, are being forced, because of the skills shortage, to bring people from abroad?
Allan Cook: From an overall point of view, bringing people and encouraging people to work within this country can, in many, many ways, help our productivity and growth. There are certain parts where we have skills shortages and, at this particular moment in time, from a short‑term point of view, it is the only way we can actually address those.
Stephen Ibbotson: I absolutely agree with everything Allan has said, but I would just like to emphasise at least that what I hear from our members is the difference between SMEs and larger companies. For SMEs, particularly around apprentices, while they tell me, at least, that they support the principle, actually getting an apprentice in a small company can be detrimental to productivity because it takes experienced people to work with them and they also sometimes struggle to get the calibre of apprentice that they want. I am just hearing this straight from the coal face, but I do not have any evidence.
Rain Newton-Smith: I would say, more broadly on apprenticeships, that we certainly see eye to eye with the Government and others on the need to increase the overall number of apprenticeships. It is clear that this is one of the keys to addressing some of our skills shortages. We know that by 2022 we need to create over 2 million skilled jobs. In particular, we know in the UK we are less good at developing the level 4 and 5 skilled technicians, and apprenticeships are a clear way to deliver that.
Some of our concerns around the apprenticeship levy in particular are that it is a blunt tool and that it could lead to lower‑quality apprenticeships. We are keen to work with Government on making that apprenticeship levy work well, which is why we think there should be an independent apprenticeship levy board that controls the funding and works with businesses on making sure that we have the right skill level for those apprenticeships; that we are ambitious in terms of the overall quality of apprenticeships being offered; and also that the overall levy is put at the appropriate level so we do not crowd out some of the investment that companies need to do in other employees, improving their skill sets and the in‑house training that is vital as well to address overall productivity.
Q37 Peter Kyle: I have a follow‑up question to Stephen. Stephen, you mentioned the worthy list and the absence of productivity targets. Can I invite you, on the three areas that you suggested as your priorities—skills shortage, infrastructure and innovation—to say what targets you would like to see in the Productivity Plan?
Stephen Ibbotson: I was referring there to a target for productivity itself, which you would have to break down by segment, and nothing more than that. As I said, in my old job I found that what got measured got done, and that was a way of doing it. I would happily answer your question from the earlier section, too, when you asked about the northern powerhouse. I happened to be with a group of our FD members last week in the north, in Manchester, and they expressed that concern: that infrastructure and the availability of skills would be real handicaps to having a northern powerhouse.
Q38 Peter Kyle: Could I come back to the question to you?
Stephen Ibbotson: I thought I had answered it.
Peter Kyle: You did, but, if I could prod your creativity a bit more: if you were to suggest targets for productivity, what would they look like? Could you give more formal productivity targets that are not included in the plan?
Stephen Ibbotson: Again, in my old job as an FD, I would try to quantify the impact of some of the priority areas of those 15. Fifteen, in my view, is too many. I would then apply those potential impacts to the current productivity levels. You would probably have to do something about international comparison and purchasing power, and then those would be the targets.
Peter Kyle: So we get the methodology but not the outcome.
Allan Cook: To that one, I would take the OECD data that was in the graph right at the front of the report and say, “Okay, which countries”—because I come back to the international perspective—“are actually outperforming us in terms of productivity?” It is the USA, France, Germany, etc. The USA is miles ahead of where we are, between 20% and 30% ahead. If we are going to compete as a nation in the international marketplace, we have to take that as a target. I would strip out that information and use that as a benchmark that we should be aiming towards.
Certainly, if you talk about investment in R and D, etc, the general impression, certainly from our members and through the Royal Academy, is that we need to have between 2.8% and 3% of GDP invested in R and D. That is the sort of figure that we would see. It has dropped, and we starting to see and have seen the actual effect of that drop in R and D. Actually, it goes back. Even if you whack that up to 5%, the most important thing is: where do the skills come from; and where do the people come from who are actually going to be able to spend that money in terms of developing technologies, capabilities and expertise?
It all comes back to the approach that we take with regard to skills and the gap. Stephen mentioned the northern powerhouse, and it is absolutely true. Unless in Manchester, Liverpool, Newcastle and further north, you have a skills structure in place, you are not going to be able to see that powerhouse come through.
Kenny Richmond: On that, the Scottish Government has set targets or aspirations for Scotland’s productivity performance to match the OECD top quartile. Underneath that, for a number of the drivers of productivity, there are targets and aspirations. We think it is really useful, and we can look at those countries that are performing well and try to understand what they are doing and whether there is any learning we can get from those countries. That is a good framework to achieve and to aspire to.
Rain Newton-Smith: Before we get to the stage of setting targets for productivity, we need to get better at measuring productivity itself. That is partly what Sir Charlie Bean has been tasked with, and we know we do not measure well service‑sector output, particularly. When you have a changing technology that drives changes in relative prices, some of our productivity puzzle does reflect measurement.
We also know from research we have done and talking to our members that you really need to look at the different sectors and what is driving productivity at the sectoral level. Again, when you introduce a target, it needs to be something that is within your control. Businesses can control productivity within their own business, but it is much harder for them to have control over the sector or the whole economy. I suppose it would probably be more fruitful to hold Government and businesses to account for some of the drivers of productivity, so making sure we deliver on some of our big infrastructure projects that we know help to underpin productivity, and equally on the skills agenda both for businesses and Government.
Q39 Paul Blomfield: I wonder if I could follow up on the theme I was raising in the first session; Allan has touched on it. Allan, you said that the Government’s Productivity Plan has everything.
Allan Cook: Yes.
Paul Blomfield: It does not actually have a target for R and D, but you suggested in your contribution a moment ago that it ought to have one of 2.8% to 3%. Is that your view?
Allan Cook: Absolutely. We think it needs to be a minimum of 2.8% on that. Those 15 points, if you stripped them out, actually do cover innovation, skills, gender and diversity. The point that I make is that it needs to be more specific in overall terms. I see the Productivity Plan as the framework. From that, there has to be more detailed work going into that that targets specific areas. The report said, if I am correct, that if we matched the US in terms of our productivity, GDP would increase by something like 31%. That is huge. There are two things: first, it shows the prize that we could get; and, secondly, it shows the gap that we have in overall terms. Certainly our view is that we must increase R and D investment.
Actually, this is also proven. Dame Ann Dowling, our president, has just submitted a report that will be discussed after the comprehensive spending review on the relationship between universities and industry, and the role that Government plays in that. Part of that says that for every pound of matched funding that goes in there, we get £1.30 back. Industry is prepared to put even more than that in, so there is a real incentive for industry and Government to work together. On Rain’s point about the companies doing their own part within their own sector, one of the things the industrial strategy did, in certain sectors, was to get organisations—companies and Government—working together to address some of the long‑term challenges that we face.
Q40 Paul Blomfield: I wonder if I could pursue that a little more and perhaps ask Rain a question as well. You talked about Government having only a limited role and business having a critical role. That is right, although we have also heard about the benefits of crowding in further investment in R and D. If we look at that generational slide in R and D, actually, public sector investment in R and D masks the real worrying trend, which is the slide in private sector investment in R and D. How do you change that? That is something business has control over.
Rain Newton-Smith: There are some elements we can do in terms of encouraging more R and D. The patent box and the R and D tax credit have helped to increase some of the focus on R and D by businesses. Those are important innovations that we need to keep. The other thing is, in the UK, the overall definition of R and D within that credit is relatively narrow and more focused on the research end. There is probably more that we can do to encourage businesses on the full spectrum of R and D. That is one of the important elements within that.
The other issue, as well, is that it does link into the measurement. We know that overall in the UK we are a more services‑oriented economy and the way we measure R and D is probably not a full reflection of the R and D that is taking place. The way we measure intangible investments or investment in brands, creativity and some of the other areas of technology is not properly reflected in the overall average. There is no doubt we need to do a lot more, because the current share of R and D in the UK, at 1.6% of GDP, means we fall way behind our peers. It is much lower than our target, which should be around 3%.
Chair: Thank you. I am conscious of time again, which seems to be passing by. Michelle, it is over to you for the final question.
Q41 Michelle Thomson: I have a question for you, Kenny, specifically. In terms of how the Scottish Government is trying to increase productivity, you mentioned internationalisation and a focus on exports. Where do you see upsides and downsides when compared with the productivity plan of the UK Government?
Kenny Richmond: The Scottish Government’s approach to raising productivity based on investment, innovation, internationalisation and that kind of inclusive growth, which looks at the quality of employment and the quality of growth alongside productivity, covers the main drivers. It has been said that the UK Productivity Plan is quite broad; it is quite high level. What we see in the Scottish Government’s approach and strategy is a bit more detail, drilling down and discussing some of the issues in more depth. You could say that the Scottish Government’s economic strategy is a slightly more detailed version or perhaps a slightly narrower version of the UK‑wide Productivity Plan.
From a Scottish Enterprise point of view, it really helps us to focus on those areas where we know we can influence to grow productivity. As I mentioned, the overall or wider targets related to some of those drivers are very useful. Those are some of the lessons that could be taken on for the UK Productivity Plan as well.
Chair: Colleagues, thank you very much. That was really valuable and we welcome your input. Thank you for your time.
Examination of Witnesses
Witnesses: Mike Cherry, Policy Director, Federation of Small Businesses, Michael Mercieca, Chief Executive, Young Enterprise, Omar Farag, Director of Operations, The Box of T Ltd (PHOM), and Helen Wooldridge, Co‑Founder and Director, Cuddledry Ltd, gave evidence.
Q42 Chair: Good morning. Thank you for coming to give evidence. Can I ask you to just briefly introduce yourselves and say where you have come from?
Mike Cherry: I am Mike Cherry, the current Policy Director at the FSB.
Michael Mercieca: I am Michael Mercieca, Chief Executive of Young Enterprise, an educational charity.
Omar Farag: I am Omar Farag, Director of Operations of PHOM Tea.
Helen Wooldridge: I am Helen Wooldridge, Founder and Director of Cuddledry Ltd.
Q43 Chair: Thank you. I do not know if you were here for an earlier session we had this morning, but on the first panel it was said that entrants to markets have productivity as relatively low on their priorities. Does productivity matter to you? Helen, let us start with you.
Helen Wooldridge: Is that in relation to entrants to markets around the world?
Chair: I mean in terms of being a relatively new business. You are entering this marketplace and you want to gain market share. You are not bothered about productivity at the moment. Is that true? Is that a fair reflection of where you are in terms of business performance and success?
Helen Wooldridge: No. Productivity is absolutely fundamental to our business. The productivity of every single member of our team is critical. The output that we can create is entirely based on the skills and productivity of the people who are working with us and ourselves. That does apply to us now internationally, as we enter new markets. We are always looking for people with a very ready skill set who can bring that to us very quickly. We are a very small business, so we cannot afford the risk of working with anybody at all who cannot immediately bring the kind of entrepreneurial approach, and the real self‑starting approach, to making their role extremely productive within our business. Otherwise, that role simply cannot exist.
Omar Farag: I would agree with Helen. Being a small business, the human capital and the productivity of your team is essential. There are only eight of us who operate PHOM Tea. We all have to be completely productive all the time; otherwise it just does not work. To grow, it is important for small businesses.
Q44 Chair: Does the Government’s Productivity Plan help you in that? Is it relevant to you in terms of growing your business and making you more productive and successful, or is it just a nice, worthy, if bland document that can sit on a shelf?
Helen Wooldridge: It is a good way of putting it. That was going through my mind earlier. I and Omar are coming at this as businesspeople. Everybody else here today has been talking from a policy perspective. My take on things is very different, even in terms of how I would verse it. In my day‑to‑day operations, I am head‑down, making a business succeed. I actually do not spend a lot of time thinking about what the Government is doing or bringing to us as a business. It kind of has to come to us.
When we founded the business, we looked into things in depth and we looked at what was available to us from the Government. We started in 2006, so we had Business Link to work with, which was hugely supportive. Subsequent to that, as a business, perhaps we have dropped off the radar a little in terms of information coming to us about productivity and management. Going back to Anna’s earlier point about management and initiative amongst workers and how that interplays for us as a small business, I do not know that we are receiving a great deal of information about that without us initiating that ourselves.
What we do find hugely supportive and we do receive, which does affect our productivity and which the Productivity Plan is relevant to, is from UKTI. I say “Government” and I should not say that as a whole. UKTI specifically we find, as a business, hugely supportive in terms of our current growth agenda.
Omar Farag: As Helen said at the beginning of what she was saying, at this stage in our business our heads are down and we are just running it, trying to succeed. Wider Government policy and things like that are not necessarily things that we seek out constantly—all the time. Our main goal is to generate profit, so we are quite blinkered in what we do. Obviously, sometimes it is good to take a step back and assess what you are trying to achieve, but running a small business is quite intense and full on, all the time.
Q45 Chair: Mike, you are smiling at that with a hint of recognition. Is that what your members are telling you—that this is not relevant because people running small businesses are just head down, trying to make sure that the money comes in and profits are made?
Mike Cherry: That is true to a certain extent, but I also feel that many small businesses are actually working at their optimum to increase their productivity, which increases profits, which increases competitiveness, which opens up export markets, particularly with exchange rates at their current levels. It all goes hand in hand. We would contend that the Government has a far bigger role to play in this on making sure that delivery on investment in infrastructure in particular—and that includes not just normal infrastructure, but broadband as well—is moved apace. We have a huge problem, as we heard from the earlier session, around education, careers advice and skills. Small businesses have a role to play within that. I am happy to open those areas up to exploration.
Q46 Chair: Michael, what is your perspective on this in terms of the relevance to young people thinking about an enterprise career, in terms of entrepreneurialism? Will this help in any way?
Michael Mercieca: Yes. We welcome the report. Young Enterprise has a focus on young people, helping them to earn a living and succeed in life, but also there is an economic angle. We firmly believe that if you have an enterprising workforce, you have an enterprising nation. We came out of the States about 53 years ago and we are part of a global group of charities; Junior Achievement it is called in most places. Maybe there is something in looking at the productivity in the States.
We firmly believe that you have to empower young people with skills, and the academic route is not the only way. In a way, the vocational piece is seen as the underdog. You are leaving at least 50% of young people’s potential on the table, because, if you are monitored on academic results, which is what schools have to do, as you go through the education system, you tend to get beaten down and you can go down some very bad paths.
If you unleash that potential—and Young Enterprise does that through business and financial skills—you will just empower people to be successful employees; successful businesspeople, as we see from Omar and Helen; and happy people in the community. We are firmly behind the report. A great step was setting up the Careers & Enterprise Company under the Department for Education. We are looking forward to working with them and moving their agenda forward.
Q47 Richard Fuller: I will address my first comment to Omar and Helen, and that is to say thank you. Thank you for taking the risk and thank you for starting your business. Through you, thank you to the millions of people who do likewise. Our country is stronger for it. We heard in other sessions about the value of a so‑called industrial strategy, and you talked about how your focus is very much day‑to‑day, getting the work done. Some have fears that an industrial strategy essentially helps your competitors in entrenched companies who do have the ear of Government and have time to structure arguments for subsidies or other policies that can support them. Do you have any concerns about an industrial strategy and the way in which it would support or harm entrepreneurship?
Omar Farag: Being an entrepreneur is finding ways around things like that and not necessarily accepting barriers such as that. For instance, with our company, the loose‑leaf tea market is very saturated in the UK. In the US, it is not that saturated, so we went and started selling tea over there. It was just trying to find ways around a problem. That is a skill that entrepreneurs have. As entrepreneurs, we find ways around things like that.
Helen Wooldridge: I would back that completely and say that people who are operating in an enterprising way, whether it is running your own business or purely using the skills that enterprise encompasses, have what I would class as character skills. They are things like teamwork and communication, i.e. skills for management, but also softer skills like empathy. Confidence, for me, is the absolutely fundamental one. Skills like that are within someone who is an entrepreneur and can be bred into people.
I became an entrepreneur because, at the age of 15, I did take part in Young Enterprise. That, for me, is an absolutely clear, powerful and crystallised memory in my mind. There were two particular things. The first was being thrown into the position of a managing director, having to manage my own mates at school and learn immediately about management not being about making best friends but being about commanding respect. The second instance, which is so clear to me today, sitting here, talking to you and having the confidence to do it, is that I had to stand up at the age of 15 in front of a hall full of parents, shareholders, etc. and speak, with legs shaking. That moment—and I am not one to have a good memory—is so clear. I have done a lot of public speaking, television appearances, etc. since, and I attribute that confidence to starting at a very young age.
I feel very strongly, also as the mother of three young children, that the sorts of skills, confidence and resilience that Omar is talking about with entrepreneurs comes from a different type of education. I went to a state school that was known for being too focused on academia. There was no opportunity to expand your softer skills. Young Enterprise was something that gave me that at a very young age, and I think it was absolutely fundamental in who I am, in all the different jobs I have done and then subsequently in making the decision, whilst pregnant and in full employment, to start my own business, because I felt that was the right route for me.
Q48 Richard Fuller: Can I pick up on that comment, Helen, and address a question to Michael? I firmly believe that we need to create a generation of entrepreneurs if we are going to achieve some of the targets in this plan, and that, sometime between the ages of 16 and 26, a young person starts firing their engines. It might be in business; it might be in sport; or it might be in drama and acting—whatever. That age range seems to me to be critical. Is there anything in this Productivity Plan that addresses trying to encourage more people to be like Omar and Helen? If not, what would you like to see in this plan to accomplish that?
Michael Mercieca: There is too much of a focus, as you said yourself, on 16‑plus. We are great believers in early intervention; we start in primary schools. In fact, I think I am correct in saying that the Careers & Enterprise Company came about on the back of Lord Young’s “Enterprise for All” report. We launched the Fiver programme, which came from our Tenner programme, in primary schools. Lord Young and the Government were very firm that it should start in primary school.
As you know, early intervention is crucial whatever you are doing, whether it is health or sport. In terms of financial teaching, financial capability, people like MAS have said that spending habits are formed by the age of seven. We do not see enough in the report about joining up the core education system—primary and secondary—to feed that route to apprenticeships. There is this battle between vocational and academic. Vocational, it was said in the earlier panels, is like the underdog or the poor relation. They are not mutually exclusive; they are complementary. To answer the question, we would like to see more about how you join up the education system to feed entrepreneurship and productive employees. Start early.
Q49 Chair: Mike, would that work?
Mike Cherry: I would agree entirely that we need to be starting at a much earlier age. In repeated quarterly surveys, our members continue to raise the issue of skills problems, and fundamental to this is to make sure that the education system works in making sure that young people are ready for the world of work. What we have seen, to the detriment of businesses and young people, is the removal of work experience from the curriculum as a set piece.
As Michael has very clearly said, we also start at primary school age so that young people have a better understanding of what is out there, particularly in their local communities. We need to be seeing business more engaged with schools, but also schools need to be better incentivised to reach out and recognise the breadth that small businesses in their local communities have and what they can offer. We need to be making sure that further education delivers what business needs and our younger people need.
I question who is actually responsible for identifying the need in the first place. I do not necessarily believe it is always down to business. They need to be working much more closely with others so that we can deliver a holistic approach and get those young people to have the ability to make that choice when they are ready to do so. By the time of 16, it is almost too late if they want to go down that vocational route.
We must be making sure that, as a country, we treat vocational as being absolutely equal to academia. As I have said repeatedly, I do believe that, certainly with apprenticeships and higher‑degree apprenticeships, they can be a much better route into that higher education at a later stage in your career development, if that is more appropriate for you. Many people learn by seeing or doing, not by being taught at.
Q50 Chair: That collaboration is essential between schools and businesses. Does the Productivity Plan do enough to address those weaknesses?
Mike Cherry: No, I do not think it does.
Chair: What else would you suggest, then, Mike, in terms of what should happen?
Mike Cherry: You need to be incentivising schools, and you need to be helping teachers, and head teachers in particular, to reach out to the wider business community. It does work in some places where there are some very good initiatives, but we also need to be looking at how we measure schools. If you look at the requirement for many pupils—they are often the brightest pupils—to remain in school until sixth form, it means they are not even being given that vocational option, I suggest, at a younger age, when it may suit them better.
Michael Mercieca: I do not think it is a demand and supply thing. The supply, hopefully, through the Careers & Enterprise Company is showing people what is out there in terms of enterprise education but, on the demand side, schools, as we all know, are pretty hammered at the moment with the curriculum changes coming up, and they are focused on academic results. The major barrier to getting Young Enterprise into schools is not actually the money, because we do charge a subsidised price; it is the fact that they have to focus on academic results.
We would welcome some specific moves in the plan for how you get it to schools, without getting it on the curriculum, because we do not believe that is realistic. In terms of teacher training, ITT is being worked on by DfE. Something around character and skills could be built in. There could be something in there on continuous professional development to help. There needs to be some demand that schools say, “Yes, I should do this,” and make the space. The difficulty is the space in the curriculum; that is the barrier.
Q51 Peter Kyle: Following up on the very good point that Richard made, which was that we need a new generation of entrepreneurs, can I invite you to say that in your businesses—for the two people here who have set businesses up—you need the entrepreneurial skills not just to lead those organisations, but actually to work in a small business, because being entrepreneurial is not just the remit of the people who are leading small businesses? Actually, you need to be decisive, you need to be communicative and you need to be able to be a self‑starter. All the attributes you see of entrepreneurs are required for almost all the people who work in small businesses. The attributes of entrepreneurship are not just about us creating more businesses; they are for the growing number of people who work in the small business sector. If that is the case, do you think that the Productivity Plan covers that aspect of the skills challenge that we face?
Helen Wooldridge: I would broaden it out. You have referred only to small businesses but, on the point you make about entrepreneurial skills, “self‑starter” would be exactly the term I would use, because those would be the people I would look to employ. I think that applies to absolutely every sector and every size of business. It is not just a small business thing. In terms of recruitment, even within a massive firm, you are looking for an individual who is a self‑starter, not just an individual who has a list of academic qualifications, and an individual who can evidence that through experiences they have had or how they present themselves.
In terms of the Productivity Plan and whether it addresses that, I would defer to what Michael has said already about where those things can be fitted into education. They are fundamental, core skills in terms of how people present themselves and the choices they make as a result of experiential learning in school at a young age. From the experience I have had, I have been into primary and secondary schools; I have talked to very young children about starting their own enterprises. I have talked to older children who have been excluded about different approaches to work. The response is just overwhelming.
That needs to be broadened out so that all schoolchildren, primary and secondary, have some level of experiential learning, so that they have an understanding of the world they are going out into, rather than feeling that they just have to have an academic qualification to go down one certain path.
Omar Farag: Like Michael said, it does need to be integrated at an earlier age. I went to an international school in Cairo for primary school, and they were part of INJAZ, which is the Middle Eastern equivalent. That was run in lower sixth, but in primary school the people who run the lower sixth one would take control of mufti days, bake sales and things like that. They would come in and teach what they had learned from INJAZ to the primary school children. There were six or seven people involved in INJAZ when I was in primary school, and almost everybody would be involved in a company they had started up by the time our generation had got into that age group.
The soft skills that you learn are needed not only in small businesses, but now also in big corporations. I have a friend who just applied for a job at Aldi for a graduate programme. They ask in the application, “Are you an entrepreneur and, if so, why?” He asked me to give him a hand with the question; he was confused as to why they were asking it. It is because they see the skills that schemes like Young Enterprise can give people and students, and they are essential for businesses of any size.
Q52 Peter Kyle: I just want to rephrase or narrow down the question for Mike and Michael. You have both mentioned the challenges of the curriculum. Of course, there is a huge constraint on the curriculum. Is it not the case, though, that the attributes that have been identified and spoken about by the other two witnesses are already contained within the curriculum? Sport teaches decisiveness and communicative skills. Maths, clearly, has a role in future business, and particularly small business. There is English and so forth. Is it about not trying to cram more into the curriculum, but trying to focus the curriculum more explicitly to the different attributes of entrepreneurship? To finish the question, in terms of the productivity challenge, do you feel, therefore, that the Productivity Plan and any future amendments to the plan should be more closely linked to the Department for Education and any other Departments that have an impact on young people?
Michael Mercieca: As I have said, I firmly believe that the education system has to be plugged into whatever comes out of the Productivity Plan. If you have roughly 14 million students in the system, from primary to higher, who are there for 14 years or so, you have to leverage that. There is the figure of a 0.1% increase in the growth rate leading to £35 billion more GDP by 2030. If you leverage a bit of the education system to get people to be 2% more productive, that has to have an effect.
I refer to FSB research a while back that a third of their members saw that the skills gap was hampering their growth. There are figures that show the skills gap. We heard from Allan that there is a huge figure—half a million or so—for the shortage in engineering. There are very specific sector shortages, but there is a wider, general skills‑gap shortage that must have an effect on productivity.
I use the software analogy. If you get a job and your job is to write reports for someone, if you go in and you do not know how to use Word, you are going to spend a week or so being taught that, with money being spent. That analogy means that if you go in without the basic skills—communication, teamwork, problem solving—you are going to cost that employer money and reduce productivity. Something has to be done from early on to change the culture, in a way.
Q53 Chair: I am conscious of time. We do not have very long left, but I want to mention, particularly with Helen and Omar here, that one of the things mentioned already this morning was that the reason we are lagging in productivity is because of a lack of innovation, and that lack of innovation is because of a lack of finance to innovative firms. Did you have a problem with gaining access to finance and what would you suggest we need to do as a country in order to make sure that that entrepreneurial spirit is financed appropriately?
Omar Farag: There are a lot of finance streams, grants and things that are available from local authorities, but what we saw as a major issue in terms of growth for us was not getting financial support but things like business rates and other barriers. We had the capital to start up, but the overheads then became a lot higher moving forward. As we wanted to grow, that became more of an issue.
Helen Wooldridge: Yes, I would back that and say it is not necessarily an issue of start‑up capital. It is that, as a business progresses, there are other issues that you face. I am trying to think of specific examples. It even comes down to something—it seems minor, but it is fundamental in any business now—like changing your website as your business grows. At an international level, you have to adapt. Everybody has had to adapt websites in recent years to be responsive to mobiles and tablets, etc. Those are major costs for a small business. It is about support as you go, albeit at quite small levels. These do not need to be massive grants, but contributions to developments as you go—with projects such as that or team development—are the things that have become important for us as our business has developed and our needs have changed.
Mike Cherry: You all know that the FSB has focused very heavily on access to finance and making sure that challenger banks and other lenders in the field like the peer‑to‑peers and crowd‑funders have a greater role and that is communicated out to business far more widely. That still continues to be an issue. Alongside that, we have had the issue of late payment, which, as we know, is holding back growth and job creation.
There are, though, other areas that play into this, and I sometimes wonder whether or not we load our up‑front costs on to business before they are able to make a sale or a profit far too much in relation to our competitors, which will undoubtedly affect productivity. If you are paying the money out in business rates, for instance, before you open the doors, you are at a disadvantage, because that does not happen anywhere else across Europe or in other parts of the global economy. Also, our business‑support schemes are not focused enough; there are far too many of them. Business cannot access them easily and we need to consolidate those and measure them properly. Alongside that, we need to be simplifying the tax system. It is just not incentivising businesses on R and D, as we heard to some extent in the previous panel.
Overall, we really have to deliver long‑term consistent support—be that on our education and skills agenda, be it on tax simplification, or be it on business support—over at least two to three Parliaments to deliver what we need as an economy to fill those skills gaps, and to make sure that businesses can grow and provide the jobs and exports that we desperately need.
Alongside that, as you know, again, we have been strong advocates of reducing the cost of doing business, which includes a plethora of issues, particularly around tax simplification and business rates.
Chair: Colleagues, thank you very much for coming. That was very helpful. I have to say, Omar and Helen, that I am very disappointed that we do not have tea with us and we do not have baby towels in order to promote your brands, but can I just say that I wish you the very best of success in your businesses? If there is anything that we in Parliament can do to assist, that is the whole purpose of this Committee. Thank you for your time. It has been really valuable.
Oral evidence: The Productivity Plan, HC 466-i 2
[1] The figure is taken from the report High Value Manufacturing Catapult: Pathways to impact by Warwick Economics and Development, June 2015, https://hvm.catapult.org.uk/wp-content/uploads/2015/08/Impact-Evaluation-full-report.pdf
[2] Engineering UK’s report The state of engineering 2015, http://www.engineeringuk.com/EngineeringUK2015/EngUK_Report_2015_Interactive.pdf
This report finds a shortfall of 25,000 per year of people qualified with engineering skills at level 4+ and a shortfall of 30,000 per year at level 3 for the years between 2012-2022 (totalling 550,000).
[3] The Academy’s Engineering for Growth, http://engineeringforgrowth.org.uk/growth_area/explore-engineering-for-growth