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8.38 pm

Jon Cruddas (Dagenham): Like my hon. Friend the Member for Wolverhampton, South-West (Rob Marris), I want to concentrate on the debate on productivity, which the Chancellor developed in his pre-Budget report and in the Budget itself.

Historically, our economy's productivity performance has been weak. In the post-war period, there was a trend shortfall between the UK and many of our competitor industrial economies. I am pleased that the Government have acknowledged that productivity improvements are the key to long-term growth and sustained increases in living standards, and I wish briefly to consider some of the elements that account for this deficit with our competitors. For example, why are our productivity rates so weak that, despite comparatively low labour costs, relative unit labour costs are uncompetitive? Before considering such issues, I wish briefly to consider the Government's general economic strategy since 1997.

There are four core pillars of Government strategy, the first of which is economic stability. Long-term interest rates are at their lowest for 35 years. Inflation is at its lowest for 30 years, and is expected to remain close to our 2.5 per cent. target. We have the lowest mortgage rates since the early 1960s, and debt estimates stand at a healthy 31 per cent. through to 2004. That is partly

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because Labour's first term witnessed a fiscal transfer to the Exchequer through the effects of growth, and because tax receipts were hoarded as we retained inherited expenditure plans. At the same time, last year Britain was the fastest growing economy in the G7. This year, growth is forecast at a range between 2 per cent. and 2.5 per cent.

The second pillar is reinvestment in public services. Owing to the mixture of caution and growth, we are now in the middle of a spending cycle characterised by sustained investment in public services. Through this spending cycle, spending on health will rise in real terms by an average of more than 6 per cent. a year; on education, by 5.6 per cent; on transport, by 14 per cent; and on police in England and Wales, by 3.9 per cent. In that period, expenditure on health will rise in cash terms by some £17.2 billion; on education, by £12.2 billion; on transport, by £5.1 billion; and on the police, by £1.6 billion. In total, that is £36.1 billion extra annual cash expenditure on the public services by 2003–04. Moreover, the Budget also announced a further £33.5 billion investment in health between 2003–04 and 2007–8.

The third pillar is attacking poverty here and abroad. That will mean £5 billion of extra help for pensioners, especially poorer pensioners through the minimum income guarantee. As we saw in the Budget, the new pension credit builds on that by rewarding thrift. We have introduced the national minimum wage and more help for families through record rises in child benefit and a new tax credit regime. The new working tax credit and the child tax credit will develop that strategy further. Internationally, we have increased Britain's aid budget by some 45 per cent.

The fourth pillar is full employment. Countless economists have had to alter their assumptions about the trade-off between unemployment and inflation—the so-called non-accelerating inflation rate of unemployment. We have seen more than 1 million extra jobs and the new deal has confronted long-term unemployment among young people. Unemployment is at its lowest since 1975 and full employment is once again a core aspect of public policy.

In terms of general economic management and growth, public service reinvestment, confronting poverty and tackling unemployment, the Government have established a robust platform. It is against that general background that the issue of productivity should be considered. I welcome initiatives announced in the Budget such as changes in corporation tax, including the reduction in the starting rate and the small firms rate cut; the new research and development tax credit; stamp duty exemptions to promote enterprise and investment in disadvantaged areas; and direct cash help to small firms that file tax returns on line. All are welcome stimulants to improve productivity, given the link between it and entrepreneurship.

I wish to focus on another element of our weak comparative productivity—the human capital side of the equation. According to OECD comparative statistics, Britain had become a centre for relatively cheap labour as early as the 1960s. For total hourly labour costs, which are the sum of total hourly earnings and social charges, we are well down the international league tables. After the second world war, Britain remained a relatively high-wage economy, but by 1970, of our leading

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competitors, only Japan had lower labour costs. Since then the gap has narrowed between Britain and the US, but not with France, Japan and Germany.

The cost of labour is one part of the equation: the other is the efficiency of its utilisation, or labour productivity as gross domestic product per man hour. The evidence reveals a substantial and enduring shortfall in productivity levels in Britain compared with the US, Japan and other leading western market economies. The differential with the US opened up earlier in the century. The gap with workers in Europe developed during the 1950s and 1960s, following post-war reconstruction. By the 1970s, the pattern had become entrenched.

A decade of poor, often negative, annual rates of productivity growth through the 1970s was followed by more rapid advances during the 1980s. That is often taken as evidence by the Conservative party that the supply-side reforms of the 1980s amounted to some form of economic transformation. The cornerstone of the strategy was the attack on individual and collective rights of people at work and, more specifically, an assault on the institutions held responsible for delivering those rights—the trade union movement. Alongside that, we saw the removal of sector-based training provision and the institutions that sought to put a floor under wages—the wages councils. Compared with the 1970s there was an improvement, but the argument that that produced an economic turnround in our fortunes is unconvincing.

The actual improvements in our productivity record averaged some 2.3 per cent. between 1979 and 1988, which was broadly in line with our leading competitors. The result is that in terms of our general economic performance we remain disadvantaged.

Rob Marris: Does my hon. Friend agree that the statistical productivity gains in the 1980s were bought at the expense of 3 million unemployed? While productivity per person hour may have increased, for the economy as a whole—taking into account the 3 million, if not 4 million, unemployed—productivity did not really increase between 1979 and 1988.

Jon Cruddas: I concede that productivity increased, but only because shedding 2 million in hoarded jobs and creating an army of nearly 3 million unemployed people will show up as productivity gains when one divides aggregate output by man hours, across the whole economy. However, the 1980s entrenched certain long-term patterns of low wages and low skills in the country's industrial organisation. Instead of turning our economic fortunes around, the 1980s tended to compound rather than resolve our long-term structural problems.

The result is that, in terms of general economic performance, we remain disadvantaged. Unit labour costs—total labour costs divided by the productivity of labour—remain relatively high, despite the low cost of labour in this country. In short, since the post-war period we have witnessed a general and sustained era of low comparative productivity, based on a history of low wages and weak systems of skill formation.

Some commentators in the 1990s argued that we were embarking on the so-called new economy—a new period of productive prosperity, driven by expanding production of knowledge and new technology and the erosion of traditional work in manufacturing and industry. Indeed,

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paragraph 20 of the Treasury Committee report refers to the new economy, and my hon. Friend the Member for Dumbarton (Mr. McFall) spoke earlier about the respective productivity gains to be engineered through the so-called new economy revolution. If those gains are real, we should expect improvements in the structure of the labour market and in our productivity record. However, none seems to be being registered in the statistics.

The UK has a record of continuous employment growth since 1992. That provides a good test for the argument that paid employment is moving decisively away from low-value production and service activities to new knowledge-intensive sectors, and leading to a schism with our low-wage, low-productivity past.

The labour force survey data collected by Professor Peter Nolan, the director of the Economic and Social Research Council's "Future of Work" programme, permits an analysis of whether a more productive industrial research structure is developing. As I did on Third Reading of the Tax Credits Bill, I shall refer briefly to some of Professor Nolan's findings, as they are germane to both debates.

The ESRC data show that, between 1992 and 1999, the category "White Collar Professionals" accounted for 1.5 million of the 2.3 million increase in employment. Yet the "Traditional Services" category—covering clerical and secretarial, personal and protective, sales, postal and cleaning jobs—and the category "Manual, Manufacturing and Construction Workers" still account for nearly two out of three jobs in the British economy.

When we inspect this analysis closely, we find that the fastest-growing occupations have been four long- established services—sales assistants, data input clerks, storekeepers and receptionists. The second-fastest growing group comprised people in the state-dominated education and health service sectors, and the third fastest group was the caring occupations—care assistants, welfare and community workers, and nursery nurses. In the 1990s, the fastest-growing occupation was hairdressing.

Those occupations could scarcely be said to be at the cutting edge of the new economy. The fastest-growing manual occupation since 1992 is housekeeping, which has grown by 368 per cent.

In short, key areas of growth through the 1990s, in terms of the demand for labour, have been in traditional low-paid, unskilled and routine employment, much of it carried out by women. At the same time, there has been no overall improvement in our comparative productivity shortfall.

We might conclude that a key long-term structural problem of the British economy is our weak productivity record, and an over-reliance on relatively low-skill, low value-added products and services. That pattern appears to have been consolidated through the deregulatory 1980s, and it is reflected in the contemporary structure of the labour market and a large part of its growth sectors. The Government's strategy of putting issues to do with productivity at the centre of our future economic strategy is therefore absolutely correct.

Boosting education and skills provision is critical in overcoming those entrenched structural problems. The key measures in the Budget in this area must therefore be welcomed—the pilot schemes allowing time off for training, and the £30 million set aside for the Investors in People scheme.

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The skills agenda is key to boosting the productive capacity of the economy. It will work alongside the other recent reforms to the vocational system, which include innovations such as the learning and skills councils, the sector skills councils and modern apprenticeships.

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