UK GDP could receive £83bn boost if productivity gaps are halved, PwC

UK GDP could be boosted by £83 billion if local areas with below-average productivity levels could make up half of the gap, according to PwC’s latest UK Economic Outlook.

The report examines UK regional productivity, revealing wide variations in domestic productivity per job, as well as from an international perspective.

Regional productivity gaps are larger, PwC said, with output per job in London around 40 per cent above the UK average, but around 18 per cent below the national average in Wales.

In addition, the gap between the best and worst performing local enterprise partnerships (LEPs) in England is widening, with productivity in the highest-ranking LEP being around 2.1 times more than the lowest-productivity LEP in 2017, as compared with 1.8 in 2002.

“Places that are better connected physically and have access to skilled workers tend to have higher productivity levels,” said John Hawksworth, chief economist at PwC.

“We find, for example, that a 1 per cent increase in skills is associated with a 2 per cent increase in productivity in a local area. Similarly, physical connectivity also matters, which reinforces the case for increased investment in transport infrastructure for areas that tend to lag behind, whether in the north of England or the far south-west such as Cornwall.”

The report suggested a number of strategies that could be employed to help boost productivity across the regions, including a push for businesses to promote workplace training and upskilling.

UK lags behind other advanced economies

PwC concluded that UK output per worker is around 10-15 per cent behind Germany, France and Sweden and more than 30 per cent behind the US. 

“Evidence suggests that this productivity shortfall is due to low levels of investment and R&D spending and a longer tail of companies and workers with relatively low productivity and skills. The UK has the third lowest investment rate in the entire OECD and low R&D spending – at just 1.7 per cent of GDP it is below the EU average of 2.1 per cent, behind France and Germany and barely half the level of Sweden," said Alex Tuckett, senior economist at PwC.

“The economic prize would be significant if the UK were to close the per-worker gap to German levels, for example. This could see the UK economy grow £180 billion per year larger – £5,800 for each worker in the UK.”

PwC pointed to a horizontal strategy to improve productivity performance across a range of sectors, such as higher standards in the formal education system and a lifelong upskilling strategy that enables workers to acquire new skills, particularly digital skills, as well as a better investment environment, modern infrastructure, and a financial system that supports investment by firms of all sizes.