06What needs to change

To build back better, the UK Government faces three related challenges:

• Encourage a new wave of job creation to offset the 1.3 million posts that have been lost across the country as a result of Covid-19.
• Tackle the productivity malaise that has affected a number of stronger cities and large towns in the Greater South East and is, most likely, behind the UK’s productivity puzzle.
• Address the longer-term productivity challenges of cities and large towns further north that define the levelling-up agenda.

In his March budget, the Chancellor has taken important measures to protect jobs from the direct impact of the pandemic, such as extending the JRS and the uplift in Universal Credit. The following policy recommendations target the next step, which is creating jobs and driving productivity growth in the recovery phase.

Support to create jobs

1. Support high street businesses and the hospitality sector with a ‘Spend out to help out’ voucher if consumer demand does not return post-lockdown. Many of these businesses have been forced to close under Covid-19 restrictions. However, some have seen strong job growth in recent years. When social restrictions are lifted and the economy reopens, if people do not return to high streets, the Government should build upon the ‘Eat out to help out scheme’ offered last summer. This could take the form of a £100 ‘Spend out to help out’ voucher for each adult to use at a broader range of businesses.
2. Support labour intensive industries particularly where they contribute to other government ambitions. One such example is construction. This sector played an important role in creating jobs across the country, and has a part to play in the Government’s green agenda. The Government should build on its existing scheme of retrofitting homes by rectifying its problems (such as a lack of suppliers and delays in paying companies, which are likely to be interlinked), further funding it (partly by rolling over underspend) and extending it to give greater certainty to construction businesses.
3. Increase skills to make it easier for people to move between jobs and industries. It is unlikely all current jobs will survive the pandemic, so policy will need to enable the reallocation of jobs between businesses and sectors. To do this, the Government should support retraining for those who have been placed on furlough or lost their jobs. It should raise those who have no, or low, skills to an intermediate level by supporting the Lifelong Learning Entitlement laid out in the Further Education White Paper, as well as the lifetime skills guarantee. The Government should focus on removing any other barriers to Further Education with better coordination at the local level to offer the courses that places need, as well as making sure that access to these courses is flexible for prospective attendees.

Targeted support to boost productivity

Another set of policies should specifically target productivity growth in cities and large towns across the country. This includes those where productivity has been persistently low, and higher-productivity places that have seen a recent slowdown.

Some of the above interventions would help to do this. For instance, relaxing planning restrictions would deal with the costs of growth in more successful places. Improving skills would be a vital requirement for many types of exporting, and particularly high-skilled exporting businesses that the UK must attract if it is to improve its poor productivity. This will also be key in attracting and retaining foreign investment.

Other interventions must support cities and large towns to become more attractive places to do business. The focus needs to be on helping exporting firms and creating the conditions for their success.

1. Support R&D, particularly in the private sector. The UK lags behind many of its international counterparts – in the G20, it is the seventh lowest for R&D spending as a share of GDP, more than a percentage point less than the US. The Government has committed to increase this to the OECD average. Given that, by international comparisons, the UK has a very low R&D intensity of the private sector, incentives for business innovation in particular should be increased.²⁸ The What Works Centre for Local Economic Growth identified positive effects of R&D grants and tax credits on investment, especially for small- and medium-sized enterprises.²⁹ The Government should consider increasing the generosity of these credits. In addition, R&D tax credits are currently strongly concentrated in a few sectors such as manufacturing or IT. The Government should encourage and incentivise stronger uptake of R&D tax credits in other sectors, particularly those that create intangible assets.
2. Create a £5 billion City Centre Productivity Fund. Previous work by Centre for Cities has shown the importance of city centres to the national economy, particularly for high-skilled, service exporting businesses. Clustering the activities of these businesses together in city centres is likely to foster collaboration, spill-overs and, ultimately, innovation, all of which boost productivity. These benefits are likely to continue in spite of Covid-19 and is why the Government should establish a £5 billion City Centre Productivity Fund, so councils can bid to make their city centres more attractive places to do business.
3. Remove plant and machinery from the business rates valuation process. When a business invests in new plant and machinery, the valuation of the property storing these machines (which is used for business rates calculations) is pushed up. This, in effect, is a tax on investment. It discourages innovation that is needed to improve the productivity and efficiency of production processes in Britain, especially if it is to reach its carbon neutrality targets by upgrading old and inefficient machinery. The recently announced temporary super-deduction will go some way to incentivise these types of investment in the short term, but the permanent exemption of plant and machinery from the valuation process for business rates would give businesses greater long-term certainty.³⁰
4. Ensure the newly created Office for Investment helps to improve national productivity by attracting investment from international companies in exporting sectors. This will be an important part of improving UK productivity. The Office for Investment, which aims to drive ‘inward investment into all corners of the UK through a single front door’, is welcome. However, the Government must now specify what this office will do, and how it plans to interact with local government and the existing investment promotion agencies in the UK.

Institutional reform

1. Empower local government, through reorganisation and devolution, to level up to London powers. Different places face different challenges and the knowledge of how best to address these is often found at the local level. The Government should push on with devolution by passing down powers related to economic growth to local areas, as well as giving them the opportunity to raise their own taxes.
2. The Government should continue with its planning reforms to help create jobs and make places more affordable. In its Planning White Paper, the Government published a first set of possible solutions to address the housing shortage. But to bring down costs, the planning system needs further sweeping reforms. This means removing the current discretionary and uncertain granting of planning permissions and moving towards a flexible yet rules-based system, where proposals that comply with the local plan must be approved. Such a reform would remove a major barrier to building new homes, allowing many more jobs to be created in this sector. It would increase housing affordability for those who wish to move into an area for work. It would also mean that a smaller share of wages would go on housing, enabling this to be spent on consumption or invested in the wider economy.