The McKinsey Global Institute recently published a report on global debt, which pointed out that it has risen by $57 trillion since 2007 representing an annualized increase of 5.3 per cent. Between 2000 and 2007, global debt increased at an annualized rate of 7.3 per cent and that was seen as being unsustainably high. Since the credit crunch, none of the world's leading economies has managed to reduce its ratio of debt to GDP and fourteen nations have seen this ratio deteriorate by more than 50 per cent (excluding the financial sector). This in part reflects the fact that governments had to bail out local banks to avoid an even worse crisis.
Strong Growth But Flat Productivity was attributed to the laziness of the UK workforce
There has been much written in recent weeks about how well the UK economy has performed. It is true that growth was extraordinarily good last year given the fact that the European Union is our largest trading partner and that most of the major European economies had a torrid time. And yet, the UK budget deficit remained stubbornly high and the government has clearly failed to meet the promises it made in 2010 about deficit reduction.
The key reason for the lack of progress on the deficit is that wages have hardly increased and so tax revenues have not risen as predicted. One of the underlying causes of the lack of wage rises is Britain's poor performance on productivity. In the years before the credit crunch, Britain was making good progress on productivity and, if that momentum had been continued post the credit crunch, we would be producing 15 per cent more than in 2008. If we were produced 15 per cent more, wages would be higher and tax revenues too.
In early November, I was in a taxi in Beijing with a Chinese colleague and the taxi driver had the radio on. My colleague began to chuckle and I asked her what had amused her. She said that the newsreader had said that Britain's economy had grown strongly in the third quarter of 2014, but productivity was flat. This was attributed to the laziness of the British workforce. If only it was that easy.
Increasing productivity relies on a number of factors. The most important is to ensure that we have the right level of education and skills. It is apparent that we do not plan properly in this country and largely leave it to chance as to whether we have enough scientists and engineers. Some assessment of what we need for the long term and an attempt to ensure that enough young people take the necessary subjects would be sensible. We could use the university fee system to encourage students to study certain subjects.
The tax regime is another way of helping to improve productivity. We have a system of capital allowances and tax relief for research and development and these allowances could be improved further in order to encourage companies to invest. Infrastructure is also key to a country's success. A recent World Economic Forum report ranked the UK 24th in the world for the quality of its infrastructure and that simply is not good enough. Recent figures for the construction industry have been poor. By investing in infrastructure, the government could give the industry a boost and help businesses to achieve greater productivity. Trying to move goods around Britain is becoming increasingly difficult as our roads and railways suffer from high levels of congestion and more investment is essential.
Some of the fixes when an economy needs to become more productive are long term, but there are things that can be done in the short term. Businesses need to invest for the future and the government needs to provide more encouragement for them to do this. In addition, funding needs to be available and person-to-person business lending is one source which small and medium-sized enterprises can tap in order to do this. Before Christmas, Cambridge University and NESTA published a report, which estimated that £1.7 billion was provided to British companies by alternative finance companies in 2014 and that this figure would increase to £4.4 billion in the current year. If this happens, it will be a step towards helping the British economy to become more productive.