My suspicions on UK productivity

The UK has a productivity challenge: workers don’t appear to be producing as much in an hour as they could, compared with workers in other developed nations like US, Germany and France. This is not an easy problem to unravel because there are many inter-dependencies and indeed many approaches to measure true economic output. The question is why is a relatively modern country not generating more output per capita?

One answer could be that the average UK employer retains more manpower than it needs, possibly to avoid loosing people it has invested in in the past and possibly to avoid future re-hiring costs. However, this situation usually makes a business quickly uncompetitive, and so unlikely to be a sustainable trend.

Another possible answer is that UK businesses are slow at investing in new technology such as production line machinery, computer controlled systems and advanced processes. Again, this might well be the case in specific cases, but the UK’s population are pretty early adopters of technology and don’t seem to be adverse to buying tech, and so I’m fairly sure this filters down into the organisations in which they work too.

The UK has an interesting business demographic: according to the Federation of Small Businesses, at the start of 2017 99.9% of UK businesses were small or medium-sized (SMEs), employing 16.1 million people which is 60% of all private sector employment in the UK. SMEs accounted for 51% of the UK’s private sector turnover.

And as a small business owner myself, I think I may have an inkling as to where the UK’s productivity falls short. SME’s that, as we have seen, make up the majority of the UK’s economy, have to do so much more than simply run their business of producing stuff (products or services) to generate revenue.  There really is lots of paperwork and compliance that eats into time that could otherwise be more productively spent. The very fact they are small or medium in size means that they don’t have the scale to absorb or distribute these mundane tasks and many don’t have the resource to outsource either.

By way of example, I dread the monthly payroll because I just know it will take several hours to prepare. Calculating gross staff pay based on hours worked is fine, and a necessary task in employing someone, as indeed is the work of instructing the bank to make the payments. However, dealing with the complexities of PAYE in which tax code notices arrive (sometimes by post, sometimes within the maze that is the Government Gateway), National Insurance letters change due to employee age or starting / leaving an apprenticeship, and ensuring student loans, sick pay, maternity leave and paternity leave are all complied with is much more time consuming. Also, if someone is on a minimum wage, their age and entitlement changes as time passes and this too needs to be monitored. PAYE then needs to be filed in realtime and payments to HMRC setup. Then there is auto-enrolment, and the need to monitor staff age and eligibility, calculate pension contributions, and ensure that these payments are made correctly. On top of this, each financial year the tax codes change, pension thresholds change, minimum wages change, and end of year payroll data needs to be submitted. Even if your business doesn’t pay anyone but still has a payroll (for example because directors may be being paid occasionally or have some expenses paid), then nil returns also need to be filed each month.

Imagine if all this was taken away from the business owner: what if the gross pay for each employer was calculated and sent to an intermediary bank account from where HMRC applied the individual tax codes, national insurance letters and pension requirements?  HMRC could then accurately deduct tax and national insurance, redirect auto-enrolment pension payments, and send on the net pay to the employee’s own bank account. Realtime reporting would be inherent in the system, and HMRC could then calculate and bill the employer for their contribution and deduct it by direct debit around the 20th of the month, taking tax, national insurance, and pension contributions in one go.

In this scenario, the leg work is being completed by one organisation on behalf of all the many SMEs, fewer calculation errors would be made (which also require huge efforts for an SME to retrospectively correct) and the business will have a few more hours each month to be more productive.

And then we could tackle VAT, corporation tax, business licensing, annual returns, business rates, waste duty of care, import/export licensing, and so forth in a similar way so as to free up even more time to get on with the job at hand and produce useful things that contribute to the UK economy.