15.We welcome the Government’s attention to productivity, although the Plan itself is more a collection of existing policies than a new blueprint for the future. In reaction to what we consider to be a vague and expansive document, we have deliberately produced a short and succinct Report addressing those policies where we received thorough evidence and divided into three themes that emerged through our evidence: ‘skills’, ‘innovation’ and ‘infrastructure’. We have carefully considered all of the evidence submitted to us, both oral and written and are grateful to those who took the time to assist with our inquiry.
16.The Productivity Plan highlighted the UK’s mixed record on investment, stating that “despite strengths in higher level skills, problems remain at basic and intermediate levels”. We heard that improving basic skills is fundamental to solving the productivity puzzle. We are concerned that the Productivity Plan does not provide specific or measurable actions to solve the problem of the lack of basic skills in the economy. The Government appears to understand that this is a problem and we support the general aim of the Government to raise basic skills in the economy. However we consider this to be a persistent weakness of the Plan: that it contains good analysis but little constructive and tangible action.
17.Given the raft of existing metrics on basic skills, we recommend that the Government outlines what policies particularly in terms of improving productivity it will introduce to improve the basic skills of the workforce and clearly states how it will measure the success of these policies, which will also assist Parliament’s scrutiny of this crucial area.
18.We took evidence on the lack of ‘employability skills’ in new workers. Industry argued that addressing this would increase productivity because firms would not have to spend time and resources inducting new entrants to industry. We do not believe that it is entirely the role of Government to prepare students for the world of work. While having work-ready entrants to the labour market directly out of education would have a positive impact on productivity, there is a wider purpose to education than employability. There is clearly a line to be drawn between the Government providing skills through education and businesses providing skills through training.
19.There are differing views on where the line should be as well as a lack of clarity between ‘basic’ and ‘employability’ skills but it is clear that the Government should be involved. We therefore recommend that the BIS Department works across the Government to enhance the employability skills that are acquired by school pupils, college and university students by looking to give work experience greater prominence in schools as part of a proper policy on information, advice and guidance. We particularly note and support the positive impact that enterprise initiatives can have in schools, such as the activities of the charity Young Enterprise. Again, it should publish a clear and quantifiable measure of success for this policy, against which it can be held to account.
20.The Productivity Plan stated that “apprenticeships are a key part of some of the most successful skills systems across the world”. As such the Government appears to have placed apprenticeships at the heart of achieving productivity growth through improving the skills base of the economy. The Plan reiterated the Government’s commitment to increase the number of apprenticeship starts over the course of the Parliament:
The Government has therefore committed to significantly increasing the quantity and quality of apprenticeships in England to three million starts this Parliament, putting control of funding in the hands of employers.
21.The Government has indicated that it is for businesses—not Government—to drive skills policy through demand. It is counterintuitive for the Government to set a quantitative target on the industry to provide three million apprenticeships while suggesting that the provision of skills must be employer-led. We support the principle of increasing the number of apprenticeships, but the target is something of a blunt and arbitrary tool. Given that apprentices are employed by firms, we recommend that the Government, in its response to this Report, sets out the rationale—and publishes the evidence base—for it setting a target of three million apprentice starts when that may run against what businesses actually require.
22.We agree that every apprenticeship, no matter what level, should be of the highest quality. We were therefore pleased when the BIS Minister assured us that apprenticeships would now be “be a minimum of 12 months, and they will be qualityassured by virtue of the Enterprise Bill”. The Bill contains measures to “strengthen and protect the reputation of the apprenticeship brand for training providers, employers and apprentices”.
23.There could be a policy trade-off between the Government achieving the three million apprenticeships target and the maintenance of apprenticeship quality. We believe that the Government is right to resist this temptation and will continue to keep a close eye on this part of skills policy.
24.The Minister of State for Small Business, Industry and Enterprise, Anna Soubry MP, said that the Government wanted to give industry the flexibility to choose the level of difficulty of those three million apprenticeships. However, she did state that the Government expected businesses to use apprenticeships to fill higher positions:
We have set no target other than the overall three million target, since delivery is up to employers and they will set the level of their own apprenticeships.[…] Our expectation is that employers will see apprenticeships as a way of filling higher level positions and will set standards accordingly.
25.Within the three million new apprenticeships there are no numerical targets for apprenticeships at particular levels but only on the total quantity. Much of the evidence that we received suggested that there remained a skills gap in the UK, which advanced and higher (level 3 and 4) apprenticeships could contribute to fill. We recommend that the Government works with businesses and individual sectors to make a preliminary assessment of how the three million apprenticeships will be broken down by level and publishes the result of this work. While we accept that the Secretary of State did not want to be too prescriptive, the lack of this analysis reinforces the view that Ministers have not given enough thought to how different types of apprenticeships can best fill the skills gaps that exist.
26.One of the most significant announcements, in terms of skills, of the Summer Budget 2015 was the proposed introduction of an apprenticeship levy. This was explained further in the Productivity Plan:
The levy will apply to large employers and will support all post-16 apprenticeships. In England, any firm will be able get back more than it puts in by training sufficient apprentices. The government will put control of the funding in the hands of employers via the digital voucher scheme to ensure that it delivers the training they need.
27.The 2015 Spending Review gave further details about the implementation of the levy:
The apprenticeship levy on larger employers announced in the Summer Budget will be introduced in April 2017. It will be set at a rate of 0.5 per cent of an employer’s paybill. Each employer will receive an allowance of £15,000 to offset against their levy payment. This means that the levy will only be paid on any paybill in excess of £3 million and that less than 2 per cent of UK employers will pay it.
The Government’s 2020 Vision for English apprenticeships document, published on 7 December 2015 confirmed the rationale for introducing the apprenticeship levy, concluding that businesses needed a long-term incentive to invest in its workforce.
28.The design of the apprenticeship levy must recognise that some businesses invest heavily in training and development but have a smaller proportion of apprentices because of a smaller need in that business. It is for each employer to determine what is required, based upon their assessment of their sector. We recommend that the Government consults with industry to ensure that the apprenticeship levy is implemented in such a way as to allow sectors to invest in skills through different qualifications and training methods applicable to their specific needs. We further recommend that the Government publishes the result of these consultations.
29.The Productivity Plan stated that there was evidence of insufficient or ineffective investment in developing and improving the basic and intermediate skills of the workforce, stating that this was particularly true in “technical and vocational skills” which was restricting productivity growth. During our inquiry, we heard that there remains an imbalance between vocational and academic training. To that end, we welcome the measures in the Enterprise Bill that give apprenticeships the same legal protection and status as university degrees. However, there remains a mismatch in the level and types of skills required by the economy which could be narrowed by addressing the perceived distinction between ‘formal’ Higher Education and ‘vocational’ Further Education.
30.The Government’s funding of Further Education and Higher Education does not indicate a parity of esteem. We recommend that the Government does more to balance the perception of the benefits of College and vocational education against those of higher education, and should do more to promote both as attractive career paths and as good drivers of productivity. Vocational education is key to improving productivity and we recommend that the Government clearly outlines how it will ensure that this is recognised in terms of policy priority and funding streams. Achieving this will help to close the skills gap and the Government should publish a clear business-plan to achieve this. This plan should include tangible policies and measurable indicators of success.
31.We received evidence about the issue of students and visas. This is relevant to productivity growth because, as we heard, it may be the case that the most suitable graduate for a job could be prevented from working because he or she is not able to meet the stringent visa requirements within the time-frame required. It is also likely to be the case that a number of small and medium-sized businesses either lack the expertise of getting a sponsor licence or cannot pay the basic ‘entrant’ salary required in order to secure the most productive candidate for a vacancy, if that candidate happens to be a foreign graduate. It is therefore regrettable that the Productivity Plan makes no mention of this issue. This is not a question of foreign labour ‘crowding out’ domestic workers or suppressing local wages in certain areas or sectors. It is a matter of the business opportunities that this country might miss and the skills, improved productivity and wealth creation foregone by this country and transferred instead to our economic competitors.
32.We recommend that the Government does not allow migration pressures to influence student or post-study visa decisions. Specifically, it should relax the post-study visa restrictions. It is illogical to educate foreign students to one of the highest standards in the world only for them to leave before they have had an opportunity to contribute to the UK economy.
33.A key section of the Productivity Plan was around the area of long-term investment to drive productivity growth, particularly focussing on “high-quality science and innovation, spreading fast”. This was followed up on 25 November when the Comprehensive Spending Review confirmed that the Government would protect the resource budget for science in real terms. We note that Science and Technology Committee recently reported on the Science Budget. Its Report noted that in 2002 the European Council “adopted a target of spending three per cent of GDP on public and private sector R&D”. It further stated that:
Publicly funded R&D creates a strong ‘multiplier effect’ and ‘crowds-in’ private sector, charitable and inward investment, stimulating around 30 per cent more self-investment from industry.
That Committee reported that the United Kingdom’s “level of public and private R&D investment has been internationally low and falling”, stating that in 2012, it only invested 1.72 per cent of GDP into R&D.
34.We have heard strong evidence throughout our inquiry into the Productivity Plan that public spending on R&D draws in private spending on R&D. This is a model operated around the world by the UK’s major competitors. We fully agree with the Science and Technology Committee’s recommendations on maintaining good R&D investment in the UK and echo that, if the Government is serious about productivity and competitiveness, it needs to commit to a total level of public and private R&D investment in the United Kingdom of three per cent of Gross Domestic Product. We therefore recommend that the Government produces a ‘roadmap’ for increasing the total level of public and private R&D investment in the United Kingdom to three per cent of Gross Domestic Product.
35.On 25 November 2015, the Government announced that a shift from the previous system of R&D grants to one of loans:
The Government will introduce new finance products to support companies to innovate following best practice in countries such as France, Finland and the Netherlands. These will replace some existing Innovate UK grants, and reach £165 million per year by 2019–20, so that total Innovate UK support is maintained in cash terms.
36.The Government has announced a clear shift from R&D grants for private investors from a system of ‘R&D grants’ to a system of ‘R&D loans’. We heard anecdotal testimony of the Minister that businesses she had spoken to had stated that they would prefer to take out a loan (that they have to pay back) rather than be given a grant (that they do not). We struggle to accept that the majority of rational businesses in the UK share that view. We therefore recommend that the Government provides:
(1)The clear rationale for moving R&D grants to loans.
(2)The modelling done with a clear statement that the Government expects this to result in more/same/less private investment in R&D.
(3)What proportion of current public investment in R&D it will convert to R&D loans from previous R&D grants.
(4)What proportion of R&D loans it expects to be repaid (i.e. the equivalent RAB charge in relation to student loans).
37.The Comprehensive Spending Review did select two sectors for protected funding. The Government said that it was:
Prioritising key growth and productivity objectives by protecting science resource funding in real terms, and maintaining Innovate UK support for businesses and funding for aerospace and automotive technologies in cash terms.
The Government confirmed that it would commit to “funding aerospace and automotive technologies for 10 years. This will provide over £1 billion additional funding for innovation in these sectors”. We note the Secretary of State’s comments that he did not want to be “in a position where it looks like the Government has favourites and therefore we do not care about other industries”. It is important that businesses and sectors understand the regulatory and government support landscape in which they operate. If the objective is to raise productivity then the Government should be clear why it is protecting certain industries from the shift from R&D grants to loans and not others.
38.We welcome the certainty provided for aerospace and automotive sectors in maintaining grants and pushing them out until 2025. This will create certainty for the long-term which is likely to consolidate the United Kingdom’s competitive advantage in these important sectors. However, we look to the Government to provide such certainty across the economy and we recommend that the Government provides the rationale behind selecting these two sectors and explains why not others.
39.The Productivity Plan states that “entrepreneurs can be vital sources of competition and disruptive innovation, driving productivity by ensuring that firms continually strive to improve their efficiency and better meet customers’ needs”. It is important, therefore, that the UK has an economy where successful small businesses can scale-up into successful larger businesses. Only by doing so will the economy experience sustainable GDP growth, employment and higher exports. Helping small businesses to improve their productivity will benefit the whole economy.
40.A recent Report, produced jointly by Goldman Sachs and the British Business Bank found that small businesses should be encouraged to grow, as there was some hesitancy in ambition which served as a warning that policies should avoid dampening that ambition further. We also note the 2015 Report published by Octopus Investments which stated that “high growth small businesses have common needs: finance, talent and connectivity. These are readily available in London and the South East.” That Report stated that such needs were not provided for in other UK regions and nations.
Figure 3: Number of SME loan facilities approved, Q2 2015
Furthermore, Small businesses continue to experience difficultly accessing capital because many of our most entrepreneurial businesses are operating in a part of the economy in which traditional financial intermediaries are not able to price risk effectively. Professor Haskel explained that:
In the current banking system, [companies that want to grow] are really up against it in terms of trying to borrow in order to enter, because they often cannot secure loans against these intangible assets.
41.The changing nature of the economy means that the new generation of entrepreneurs are still struggling with appropriate access to finance. We have heard that investors still struggle to understand the development of new business models and intangible assets. This means that too little capital is provided, often at too high a price. The United Kingdom is at the centre of global financial markets and is well placed to ensure that this failure is addressed. We are concerned that competing financial markets around the world have the potential to steal the march on us with the subsequent detrimental impact upon this country’s growth and productivity potential. The Government should provide more clarity than is in its Productivity Plan as to how it plans to address this market failure helping to match growth funding to firms with high growth and productivity potential.
42.The Productivity Plan discusses the role of Catapult Centres and how it envisages them improving UK productivity in the future. We agree with the Government that “a Catapult might be the right way to ensure the UK is at the forefront of commercialising technologies which offer global opportunities”. We were pleased when, on the 25 November, the Chancellor of the Exchequer announced in the Comprehensive Spending Review that funding for Catapult centres would increase:
The Spending Review and Autumn Statement increases investment in catapult centres and protects and extends funding for the Aerospace Technology Institute (ATI) and the Advanced Propulsion Centre (APC).
43.We recommend that the Government provides more specific detail on that increased funding and outlines how it will support them to maximise the benefits to businesses and the engagement with research centres and the collaborative benefits that catapult centres can have.
44.One specific area where we heard that the United Kingdom was weak in terms of productivity was in management and leadership skills. The Productivity Plan commented that:
The UK has a thriving entrepreneurial culture relative to the rest of Europe, but lags behind the US. In particular, many businesses recognise that their management and leadership capabilities need to improve. According to some academics, one quarter of the productivity gap between the UK and the US is associated with such capabilities.
The Government has announced a specific employer-led degree-level apprenticeships in leadership and management. Lord Young, the Prime Minister’s Enterprise Adviser, was reported as saying that the Government had supported the “development of a degree-level management apprenticeship, which will bring together the very best of higher education and work-based learning”. He described the apprenticeship as “a new route for ensuring [businesses] have highly skilled managers to help grow their businesses and boost the economy”.
45.Given that one quarter of the productivity gap between the UK and the US is associated with poor management we recommend that the Government does much more to address the management gaps in the economy among companies. To that extent, we welcome the new degree-level apprenticeship in professional management and we recommend that the Government provides detail about the content and expected number of apprenticeships that will be provided. However, this is such a significant issue that the solution will not be found in one new course and we recommend that the Government, in its response to this Report, outlines what further steps it will take to raise the management capability within the economy.
46.Policies encouraging long-term investment are key to the Productivity Plan and to productivity growth. The Productivity Plan states that “investment is an essential part of raising productivity. In today’s economy that is not simply a matter of increasing the stock of machines, equipment and essential physical infrastructure but also, crucially, the development of human and intellectual capital”. As such, the Chancellor of the Exchequer announced that many decisions around infrastructure would be distanced from the political sphere via the creation of the National Infrastructure Commission. He said that:
The Commission will calmly and dispassionately assess the future infrastructure needs of the country and it will hold any government’s feet to the fire if it fails to deliver.
The Government said that the Commission will be an “independent body that enables long term strategic decision making to build effective and efficient infrastructure for the UK”. The Government is currently seeking views on the governance, structure and operation of the National Infrastructure Commission, with its consultations closing on 17 March 2016. The consultation document states that:
The commission will analyse the UK’s strategic infrastructure needs and priorities over a long-term horizon (generally expected to be around 10 to 30 years), and then articulate those needs in a National Infrastructure Assessment.
Assessments produced by the commission will be laid before Parliament and HM Treasury will be required to respond on behalf of the government, detailing how the government will take the recommendations forward. Where the government disagrees with a recommendation on how to meet identified needs, its response will set out the reasons for this disagreement, and outline what other measures it proposes or what its alternative assessment is.
47.We broadly welcome the introduction of the National Infrastructure Commission and believe that transparency is crucial for it to be effective at attracting private investment, especially for the long-term. The National Infrastructure Commission is independent and must therefore be accountable to Parliament. We will monitor the work of the Commission. In particular, successful interaction between the Commission and Government is crucial to ensuring infrastructure projects are properly resourced and effectively implemented to the benefit of the UK economy.
48.We heard that one of the best ways to enabling long-term private investment was to provide consistency and certainty when making policies. The Summer Budget 2015 confirmed a specific policy designed to encourage private investment. The Chancellor of the Exchequer announced that he would reverse a proposed reduction in the Annual Investment Allowance because:
That would especially hit middle-sized companies in areas like manufacturing and agriculture that we want to do more to build up in Britain.
The Productivity Plan confirmed that “from January next year the government will increase the permanent level of the Annual Investment Allowance to £200,000, its highest ever permanent level”.
49.We strongly welcome the certainty created by securing the Annual Investment Allowance and praise the Government for introducing this measure. This is an example of a specific and tangible policy that provides the certainty that allows and encourages investment for the long term which we believe will have a positive impact on boosting productivity. We will continue to monitor government policies designed to encourage and incentivise a healthy balance between public and private investment in the economy.
50.A good deal of the evidence that we received focussed on the role of ‘digital infrastructure’. For example the Federation of Small Businesses described how “the internet has fundamentally changed the world of business”.
51.While we have not reported in detail on this topic here, the evidence that we received will feed into our parallel inquiry into the ‘Digital Economy’. We are also aware that our inquiry complements the Culture, Media and Sport Committee’s inquiry into ‘establishing world-class connectivity throughout the UK’ and we have published all evidence received so that it may be used to inform Parliament more widely.
23 HM Treasury, Fixing the foundations: Creating a more prosperous nation, , July 2015, p 15
24 For example Workers Educational Association () section 8
25 For example: Universities UK () & Workers Educational Association ()
26 HM Treasury, Fixing the foundations: Creating a more prosperous nation, , July 2015, p 24
27 HM Treasury, Fixing the foundations: Creating a more prosperous nation, , July 2015, p 24
29 Department of Business, Innovation and Skills, Enterprise Bill: summary factsheet, , accessed 30 November 2015
30 Letter from the Minister of State for Small Business, Industry and Enterprise to the Chair of the Business, Innovation and Skills Committee, 6 December 2015
31 HM Treasury, Fixing the foundations: Creating a more prosperous nation, , July 2015, p 25
32 HM Treasury, (November 2015), p 45
33 Department for Business, Innovation and Skills, English Apprenticeships: Our 2020 Vision, , December 2015, p6
34 HM Treasury, Fixing the foundations: Creating a more prosperous nation, , July 2015, p 80
35 HM Treasury, Fixing the foundations: Creating a more prosperous nation, , July 2015, p 37
36 HM Treasury, (November 2015), p 47
37 Science and Technology Committee, First Report of Session 2015–16, , HC 340, para 30
38 Science and Technology Committee, First Report of Session 2015–16, , HC 340, para 32
39 Science and Technology Committee, First Report of Session 2015–16, , HC 340, para 23
40 HM Treasury, (November 2015), p 93
42 The Resource Accounting and Budgeting () charge is the estimated cost to Government of borrowing to support the student finance system. It is based on future loan write-offs and interest subsidies in net present value terms.
43 HM Treasury, (November 2015), p 92
44 HM Treasury, (November 2015), p 92
46 HM Treasury, Fixing the foundations: Creating a more prosperous nation, , July 2015, p 61
47 Goldman Sachs, (November 2015)
48 Octopus Investments, (2015)
49 Q28 [Professor Haskel]
50 HM Treasury, Fixing the foundations: Creating a more prosperous nation, , July 2015, p 39
51 HM Treasury, (November 2015), p 53
52 HM Treasury, Fixing the foundations: Creating a more prosperous nation, , July 2015, p 62
53 Chartered Management Institute, ‘,’ accessed 1 December 2015
54 Chartered Management Institute, ‘,’ accessed 1 December 2015
55 HM Treasury, Fixing the foundations: Creating a more prosperous nation, , July 2015, p 15
56 National Infrastructure Commission, ‘,’ accessed 1 December 2015
57 National Infrastructure Commission, ‘,’ accessed 1 December 2015
58 National Infrastructure Commission, (November 2015)
59 For example British Chambers of Commerce (), Rolls-Royce plc (), Creative Skillset () & Federation of Small Businesses ()
60 HM Treasury, ‘,’ accessed 1 December 2015
61 HM Treasury, Fixing the foundations: Creating a more prosperous nation, , July 2015, page 19
62 Federation of Small businesses ()
Prepared 28 January 2016