The economist Paul Krugman said ‘A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” Since 2011 the UK’s productivity has  grown on average 0.6% per annum, whilst in the decade after 1997 it was growing at about 2% per annum. This is shown in the graph below.

One of the reasons productivity has stagnated is a lack of investment . The UK’s investment in equipment and machinery (including ICT equipment) has fallen sharply from 8% of GDP during the Blair era to under 4%. Overall Business investment has dropped from 12% of GDP to 9%.  Furthermore currently the UK government has set a maximum investment rule that limits public sector investment to 3%, which makes the problem worse. Such investment is important as it increases productivity, while also expanding businesses and therefore growing the economy. Often Brexit is blamed for the lack of British investment, but it is generally considered to have had a minimal effect on the UK’s long-term productivity growth trend. To create the ideal situation to maximise investment the UK’s political and economic state should be more stable, the interest rates should be lower, there should be more confidence in the economy and government policy should reward increased investment. Furthermore, a combination of these factors would do the job even better. The role interest rates had in boosting investment on both graphs can be seen between 2010 and 2018 when the UK had near 0% interest rates.

Another factor that could boost productivity is education and retraining. As shown above the UK has very low spending on CVT (continuous vocational training), one of the lowest in Europe, only above less economically active ex Soviet states. CVT’s are where employees go back to universities to enhance their skills, meaning labour market flexibility is hardly progressing, while productivity is not growing. Firms in the UK also seem to view university education as less valuable than firms in other countries. This shows that, other than London where the graduate premium has flatlined, firms are valuing a university degree less in comparison to no degree/apprenticeship. Furthermore, graduate wages are hardly growing in the UK. The number of Graduates has also been increasing and are now at their highest level, yet this additional education has not seemed to boost the UK’s flagging productivity.

To conclude, productivity growth is stalling, and this matters since it is one of the ways to safeguard an economy against inflation by lowering costs of production. This lack of productivity growth is not due to external factors, it is due to a lack of job training (which is compounded by UK degrees being less workforce based) as well as a lack of investment in capital goods by firms. This could be achieved by removing regulations and lowering taxes. Moreover, if universities no longer received government funding and student debt was no longer publicly funded, there would be more career focused degrees. So a free market for university courses might be the best solution.