One of the biggest economic challenges facing the UK is our stubbornly low levels of productivity. GDP per hour in the UK increased by just 1.1% between 2008 and 2016 compared with 8.5% in the United States, 7.4% in Japan and 6.5% in Germany.
Investment is crucial to improving UK manufacturing’s productivity, and it is particularly significant now given the need for manufacturers to embrace the fourth industrial revolution (4IR) and their digital transformation.
Disappointingly, the Q2 Manufacturing Outlook report shows manufacturers’ investment intentions have contracted for four quarters in a row for the first time since the global financial crisis in 2008.
With ongoing uncertainty, manufacturers have seen it safer to hire labour than invest in machinery and technology. This may have helped solve a short-term problem but means the sector’s progress towards becoming digitally-focused for the long term has stalled.
So how to resolve the UK’s productivity puzzle?
In BDO’s recently published Manufacturing Digital Transformation survey, 83% of UK manufacturers saw productivity as the main positive impact of digital transformation.
As a key sector for the economy, manufacturing can help drive significant productivity gains in the UK but only with the right government support.
1- The right investment in skills and education is vital and increased support for apprenticeships and vocational training will have a big impact. But 84% of UK manufacturers in our recent survey said the Government must do more, with 78% stating the education system is failing to deliver the right STEM skills for the future. In addition, 81% said there needs to be more education on 4IR and digitalisation.
2 – Further investment in carefully selected government-supported infrastructure is another way to boost efficiency and productivity. There should be greater focus on projects and improvements in existing infrastructure. For example, 48% of UK manufacturers think that the Government needs to invest in a full fibre digital infrastructure to enable better digital connectivity. We also need genuine government support for more powerful regional centres such as the Northern Powerhouse and the Midlands Engine.
3 – In our New Economy Report we called for a simplification of the tax system to encourage productivity growth and 52% of manufacturers agreed. We proposed that the government places a moratorium on UK corporate tax changes until 2022 or when the Brexit transition period is over (whichever comes first) to give businesses some certainty in difficult times.
But before this freeze is implemented, we would like to see one significant change: an increase in the annual investment allowance (AIA). If the Chancellor could find it in his coffers, an increase to £5m for the next five years would provide a major incentive for manufacturers to invest in capital assets and boost their efforts towards greater digitalisation.
Our recent research demonstrates that increasing the AIA to £5m would more than double projected business investment growth and could increase labour productivity almost five-fold by the end of 2023.
Companies need to prepare for a more digitally-fluent, productive future both in terms of the people they employ and the technologies they deploy. Clear government action is needed or UK manufacturing will be at risk of investment paralysis as the uncertainty of Brexit drags on.
For more information, download our Digital Transformation Report.
Tom Lawton is National Head of Manufacturing at BDO.