In this year’s Autumn Statement the Government pledged to create a National Productivity Investment Fund which will spend £23billion on innovations and infrastructure over five years. The funds will be allocated to areas that are deemed to be critical to productivity growth including transport, research, housing and digital communications. University of Essex academic Professor Vania Sena considers what this could mean for local economic growth.

Professor Vania Sena, Director of the Business and Local Government Data Research Centre, said, “This is welcome news as it suggests that the Government is now serious in its attempt to address the ‘productivity gap’ that the UK economy notoriously suffers from. The performance of the UK economy in terms of labour productivity has always appeared relatively low compared to its main competitors. According to the Office of National Statistics output per hour worked in the UK was 18 percentage points below the average for the remaining six members of the G7 group of industrial nations in 2014. Even worse, the gap was the widest since 1991 and showed a particularly marked deterioration since the onset of the financial crisis. While the countrywide figures are well known and are routinely reported by the press, it is often forgotten that the productivity gap has a regional dimension. London has the highest level of productivity of any region or country in the UK, 30% higher than the UK average in 2014. The only other region with productivity above the UK average in 2014 was the South East (9% above the UK) – although the figure hides a lot of variability across the counties. Between 2007 and 2014, productivity has actually fallen in Yorkshire & Humber, North West, South West and West Midlands.

“It’s interesting to consider what it is that drives the differences among regions. There is not a single factor but rather a variety of drivers: these include low skills, poor training, poor management practices at company level and limited investment in research and development at company level. Last but not the least I believe underinvestment in infrastructure (in particular transport infrastructure) has exacerbated the regional differentials.

“There is nothing new in recognising that poor infrastructure is a major UK problem. But to what extent can the measures announced in the Autumn Statement help rebalance the performance of the regions in terms of productivity? It is difficult to give a definite answers as it is not clear at the moment exactly what projects will be supported. However two important factors for success will be the split between public and private stock of capital and the extent to which regional economies are integrated economically.

“Research suggests that the effects of public investment could depend on the accumulated stock of public capital, with the effect being greater when the regional economy has smaller endowments of initial capital. The reason for this may be that providing a minimal level of infrastructure which guarantees a certain level of economic activity may have a greater impact on productivity than improvements or extensions above that level.

“The second success factor relates to infrastructural projects generating potential spillovers that may have a positive impact on productivity growth in areas where economic activities are sufficiently integrated. Cities and metropolitan areas have traditionally been privileged by previous infrastructural (mostly transport) projects. As economic activities become more and more decentralised over space, economic integration is not any longer defined by the physical boundaries of a city and this requires fresh thinking on the type of infrastructural projects which could have the biggest impact on the productivity growth of a region.”

The Business and Local Government Data Research Centre is funded by the Economic and Social Research Council. The Centre’s research includes a focus on the factors which contribute to, or hinder, local economic growth. The Centre also supports small to medium enterprises and local government with a view to further contributing to this growth.

To find out more about the work of the Centre and how it could support your business, organisation or local area call 01206 873859.

Published 12 December 2016