Boost Britain’s productivity by investing more in workers’ skills, especially in vocational and technical training
Productivity is a boring economics word but – as the discerning readers of Progress have rightly understood – it is one of the most important concepts in economic policy today. That’s because the higher our productivity, the greater our prosperity, our standard of living and so our ability to raise the taxation we need to invest in public services. And so measures to raise productivity need to be at the heart of what we do in a third Labour term.
Simply put, productivity is the amount of stuff we produce for the effort we put in. It is output per hour worked (or person employed). In Britain, because – thanks to Labour – we now have a lot of people in work, the way to make us richer as a country is to focus on raising productivity: helping everyone to produce more for the hours they put in. That doesn’t necessarily mean us all working harder, but it does mean us working smarter.
The way to do it is to invest in the things that make us do our jobs better – particularly skills and training but also investment in science, research and technology and support for new businesses starting off. Regardless of whether we’re talking about the public or private sector, productivity can only rise when people are looking for better, smarter ways of working. Innovation needs to be part of everyday life.
For individuals, productivity is what makes the difference between just having a job and having a good job. That’s because, in a free market, people who produce more get paid more. So it’s a win-win for a third-term Labour government: by focusing on skills, training, science, research, innovation and investment, we not only help make our country richer but we give individuals the opportunity to realise their potential, transcend class barriers, and open up more choices for them and their families.
The problem for the politicians is that we are cornered by the technical nature of the language and so are unable to explain in any meaningful way what it is we are actually trying to achieve. Productivity is not a word that will ever win hearts and minds. So here’s my suggestion: let’s go out there and tell people that what we want to do in our third term is help them get better-paid jobs. Because that’s exactly what our policies to raise productivity are all about.
Create a more progressive income tax: taking more low earners out of tax, reduce the number of those on middle incomes paying top-rate tax, and introduce a new higher rate of tax
When Margaret Thatcher entered Downing Street in 1979, the poorest fifth of British households were paying 31 per cent of their disposable incomes to the Exchequer in direct and indirect taxation. The richest fifth were paying a slightly larger share at 37 per cent.
After eighteen years of Thatcherism and the first few years of a new Labour government, that picture was somewhat different. By 2001/2, the poorest 20 per cent were giving 42 per cent of their income to the Treasury and the richest fifth, 34 per cent. And those in the middle benefited little either: while the proportion of their income they paid in taxes fell from 38 per cent to 36 per cent, they were still paying a higher share than the rich.
So Britain’s tax system does not simply do little to redress inequality, it actually fuels it. This is the direct result of a shift from direct to indirect taxation and the ‘flattening out’ of the tax bands. In contrast, a progressive tax system would ensure people pay according to their ability to do so. Society acknowledges that people’s incomes are not solely the result of their own efforts, but of factors as diverse as luck and the operations of the market economy.
So, how can we make Britain’s tax system more progressive? There are a number of options, which would help to ease inequality, assist the poor and be popular with the middle classes. First, we could reduce the burden of highly regressive indirect taxation by reducing the rate of VAT. The first step would be to cut it from 17.5 per cent, to the level it was at – 15 per cent – until 1991. Over the long term, Labour could seek to reduce the rate of VAT still further. Until 1979, for instance, VAT was charged at 8 per cent.
Second, if direct taxation is to be more progressive, it cannot be fair that those on middle incomes – including teachers, policemen and other public sector workers – increasingly have to pay the top 40 pence rate. Creating a new 50p rate for those earning over £100,000 a year, and raising the thresholds on the 40p rate so it affects only higher-income earners, would instantly make the tax system fairer. We might also want to consider expanding the 10p rate and increasing the personal allowance to take more lower-income earners out of tax altogether.
Create a savings culture with government-matched savings accounts for low and medium earners so as to spread capital as well as income equality
In the recent pre-budget report, the chancellor announced an expansion of a little-known progressive asset-building policy – the Saving Gateway. While the Child Trust Fund is primarily about improving the life chances of young adults, the Saving Gateway, by offering a government match for low-income savers, aims to support poor adults to accumulate assets. Not only can these savings help them weather life’s difficult transitions, but they can also help open opportunities, like investment in lifelong learning.
Rightly, though, the Treasury realise that the Saving Gateway, as piloted to date with a high match rate (£1 for every £1 saved) and targeted at only those on very low incomes (under £11,000 for households without children) is only one model. The second round of pilots announced in the PBR will look at ‘different’ (for which read ‘lower’) match rates and at what ‘future role matching could play in government support for savings, both for those on low incomes and more generally.’ This hints at radical intent. It raises the enticing prospect of some form of lifetime matched savings product.
What we should be exploring is the development of a flexible saving vehicle, which would allow those on low incomes to access matched savings incentives, not just for a limited 18 month period (as is the case with the current Saving Gateway pilots), but at various stages over their lifetime. So someone may want to save for short- or medium-term needs just ahead of having their first child, but would then also like to access matched savings incentives a few years later, maybe to save for a holiday.
In a number of policy areas, government is seeking to articulate what a minimum level of resources or services should be – so they have sought to provide minimum incomes for pensioners and are building an income floor through tax credits for households with children. Likewise, the government wants all people to have access to a minimum level of training. What about a minimum lifetime pot of savings incentives? This could be a virtual pot of money available as matched payments across the lifecycle, for all those on moderate incomes.
Flexible, progressive and effective, developing the Saving Gateway in this way may herald the birth of a radical new approach to lifetime asset-building policy.