Chapter 5: Raising productivity and sustainable growth

This Government is committed to closing the productivity gap with our major competitors. Building on a platform of economic stability this Review:

more than doubles net public investment in our infrastructure over the next three years to £19 billion, delivering integrated transport and modern schools and hospitals;
delivers a major boost for the science base including a £1 billion Science Research Investment Fund over two years (2002-04);
increases funding for the Regional Development Agencies to £1.7 billion by 2003-04 with new flexibilities to pursue regional economic development;
provides for a more skilled, healthy and motivated workforce; and
introduces measures to improve competition, enhance enterprise and make it accessible to all.

Raising productivity

5.1 Since 1997, the Government has been developing a strategy to increase productivity in the UK to help meet its central economic objective of achieving high and stable levels of growth and employment. The prerequisite for this strategy is the macroeconomic stability which the Government has put in place. The strategy starts from a recognition of the UK's productivity gap compared to other major economies, and an understanding of its weaknesses: a lack of domestic competition, insufficient incentives and opportunities for enterprise and innovation, poor skills and a history of under-investment. At the same time, the Government has made clear through its strategy for sustainable development that economic progress should take account of the needs of everyone while ensuring effective protection of the environment and prudent use of natural resources.

The role of public expenditure in raising productivity

5.2 Individual spending programmes also have a considerable contribution to the Government's productivity goal. Government spending has important effects on productivity and sustainable economic growth by enabling markets to function effectively in the public interest.

5.3 The contribution of spending programmes takes place at four levels:

improving the basic resources of the economy: the infrastructure and the skills of the labour force;
improving the way technology brings together those resources to create products and services;
enhancing the enterprise and competition that drives the markets in which those products and services are sold; and
in addition, public services themselves account for about a fifth of the real resources of the economy. Programmes for more efficient public services therefore also have a direct and significant impact on the productivity of the economy as a whole.

Box 5.1: Key PSA Targets - Raising productivity and sustainable growth raising productivity

Improve UK competitiveness by narrowing the productivity gap with the US, Germany, France and Japan over the economic cycle.

Enhancing science and technology

Increase the level of exploitation of technological knowledge derived from the science and engineering base, as demonstrated by a significant rise in the proportion of innovating businesses citing such sources.

Enterprise and competition

Help build an enterprise society in which small firms of all kinds thrive and achieve their potential, with an increase in the number of people considering going into business, an improvement in the overall productivity of small firms, and more enterprise in disadvantaged communities.
Have the most effective competition regime in the OECD, as measured by peer review, and achieve a fairer deal for consumers, as measured by the level of consumer knowledge and understanding of rights and sources of information.
Improve the economic performance of all regions, measured by the trend growth of each region's GDP per capita.

Efficient public services

Ensure key public services have set in place strategies and targets for measuring and responding to users' views.
Ensure departments meet the Prime Minister's targets for electronic service delivery by government: 25 per cent capability by 2002 and 100 per cent capability by 2005.

5.4 Many spending programmes will operate at a number of these levels - for example, Government support for science builds the skills of the labour force, enhances the technology which creates products and services and also helps markets work more efficiently by encouraging innovation and hence competition. Spending programmes also help ensure that economic development is sustainable.

Investing in our infrastructure

5.5 Public investment complements and enhances private sector investment. In addition, high quality public services, many of which help raise productivity, require capital investment as well as resource spending.

5.6 The Government is committed to the renewal and modernisation of the capital stock, reversing years of under-investment by delivering rapid growth in public investment over the next three years. The Government's prudent approach to management of the public finances means that a falling debt ratio can be combined with rising public sector investment. Public sector net investment will more than double over the next three years to £19 billion a year by 2003-04.

5.7 This will be accompanied by continued use of Public Private Partnerships and the Private Finance Initiative (PFI) to deliver significantly improved public services by increasing the quality of investment and by releasing the full potential of public sector assets. It is anticipated that PFI deals to the value of around £12 billion will be signed over the three years from 2000-01, as well as two major Public Private Partnerships for the National Air Traffic Service (NATS) and London Underground, totalling £9 billion.

5.8 The Ten Year Plan for Transport, to be announced shortly, will set out a balanced package of investment in high quality public transport and targeted improvements to the road network. Public capital investment in transport will rise to over £6 billion per year by 2003-04, more than doubling in real terms over the next three years. This will bring improvements in the quality and capacity of public transport and tackle congestion on the busiest roads and in large urban areas. Journey time savings and increased reliability directly reduce costs for business, while by expanding catchment areas and market size, investment in transport can also stimulate competition and productivity and facilitate a more efficient use of resources.

5.9 Other important areas of investment include:

the Department for Education and Employment where capital spend will increase by over £1.5 billion by 2003-04 enabling, amongst other things, several thousand extra schools a year to have major renovation; and
for regeneration, a step change in Regional Development Agencies' (RDA) funding to raise regional productivity, with over 17 per cent of derelict and contaminated land reclaimed by 2010. The National Strategy for Neighbourhood Renewal will be supported by the New Deal for Communities and the Neighbourhood Renewal Fund.

5.10 Table A6 in Annex A shows the breakdown of the capital budget and Table A3 shows allocations made to each department. In addition a £2.5 billion Capital Modernisation Fund (CMF) over the next three years will be overseen by HM Treasury and allocated to departments on a competitive basis.

5.11 Departments will produce Departmental Investment Strategies in the autumn to show how they will use the extra finance most effectively. Resource accounting and budgeting and the National Asset Register create new incentives for good management of assets by charging departments for their value.

A skilled labour force

5.12 The Government has undertaken an ambitious set of active labour market measures to reattach people to the labour market. This has been combined with reforms to taxes and benefits to help improve the rewards to work.

5.13 The education system is the main route through which the Government can help to boost the skills of the future workforce. It is vitally important that all school leavers are provided with the bedrock of knowledge and basic skills on which to build a lifetime of learning. The extra funds committed to education in this Review will raise attainment in all areas and age groups, will increase the proportion of teenagers continuing with learning after they leave school and will fund a major programme to improve the basic skills of the adult workforce. More details are in Chapters 3 and 7.

Enhancing science and technology

5.14 The quantity and the quality of resources in the economy is only part of the productivity story. The way in which technology combines these resources to create products and services is increasingly important in a knowledge-based economy.

5.15 Government-funded research has an important role to play. The conclusions of the cross-departmental review on Science Research (details in Chapter 34) will ensure that the technology available in the UK is both world-class and relevant to the needs of business. Total spending on science and engineering will increase by an average of 5.4 per cent a year in real terms over the next three years, with measures including:

modernising UK science laboratories, and tackling a major investment backlog, with a £1 billion Science Research Investment Fund over two years, including £225 million from the Wellcome Trust;
new money to boost key research areas like the human genome; and
increasing funding to help universities to transfer expertise and technology to business to help create jobs and wealth from the science base.

5.16 The new technologies which underlie the development of the knowledge economy are driving revolutionary changes in industries and organisations. Government must adapt to these changes if it is to realise the potential efficiency gains on offer, deliver high quality services, and enable all citizens and businesses to benefit from this IT revolution. The cross-departmental review of the Knowledge Economy, details of which are in Chapter 35, was set up in order to address these challenges and has put in place a major programme of reform to be overseen by the Government's e-Envoy to ensure that all Government services are on-line by 2005.

Enterprise and competition

5.17 Continued innovation, of which new technology is one part, is driven by dynamic and enterprising firms operating in competitive and well-functioning markets. Government spending has a role to play in promoting enterprise and competition.

5.18 At the regional level, the Government is ensuring that there is a coherent business-led strategy for economic development and growth in every region of England, with the Regional Development Agencies (RDAs) as the main means of creating and implementing these strategies (see Box 5.2).

5.19 To advance the Government's goal of full employment and enterprise for all regions, RDAs will receive new funds with new flexibilities so that local people can promote local priorities and meet local needs they have themselves identified in their strategies.

5.20 The Government will guarantee funding for the European share of Objective 1, 2 and 3 projects within departmental allocations. This is estimated to total £4.2 billion for European Union Structural Funds in the UK over three years, including an estimated total of £600 million for new Objective 1 programmes in English regions and an extra allocation of £80 million in 2001-02, £90 million in 2002-03 and £100 million in 2003-04 to Wales to ensure funding of the European share of its Objective 1 needs, with resources for matching funds provided for within the total spending settlements.

Box 5.2: An enhanced role for the Regional Development Agencies

The Regional Development Agencies (RDAs) have a key strategic leadership role in raising all regions' economic performance, promoting social renewal of their regions through harnessing business-led growth. The Government is undertaking major enhancements to the role of the business-led RDAs. The RDAs will have an increase above their 2000-01 budgets of £250 million in 2001-02, £350 million in 2002-03 and £500 million in 2003-04 rising to a total of £1.7 billion by 2003-04. This is a major boost to the economic development of all the regions of England.

The RDAs will have increased regional economic development and regeneration funding, to help to bring derelict and contaminated land back into productive use, supporting jobs, and promoting enterprise and business-led growth as a means of tackling deprivation and disadvantage.

As a key contribution to strengthening the work of the RDAs, the Government will be significantly increasing the RDAs' flexibility - enabling the RDAs to better exploit their potential for innovative business-led working, and devolving decision-making to the regions. The RDAs' funding will be brought together in a single cross-departmental funding framework. Departments will be working together with the shared objective of releasing the energies of the RDAs to maximise the impact of their efforts. In return for greater flexibility, the RDAs will be required to deliver challenging outcome targets set collectively by Departments.

The RDAs also have a leading strategic role across a range of Government interventions.

They are working in strategic partnership with the Small Business Service to deliver the £1 billion Regional Venture Capital Funds.
They are taking on the lead strategic role in ensuring that the regional plans for the European Structural Funds are delivered.
They will be represented on the boards of the new national and all the local Learning and Skills Councils (LSCs); all LSCs will be required to consult their RDA in drawing up their plans.
They have an important role in transport decision-making to ensure regional factors are adequately reflected.
In drawing up local deprivation strategies for using the new Neighbourhood Renewal Fund, local authorities will work with new Local Strategic Partnerships. The RDAs should be key members of the partnerships in the areas in which they are investing.

5.21 Small businesses are a key engine of the process of economic development. They need targeted support and advocacy. The new spending plans allocate new funding of £54 million in 2001-02, £73 million in 2002-03 and £63 million in 2003-04 for the Small Business Service (SBS), to provide high quality information and advice to all businesses, both on-line and through a call centre. There are also measures to extend enterprise to all through free advice packages from the SBS, support for social venturing and encouragement for enterprise in schools.

5.22 Other areas of government activity can also have an important impact on the functioning of markets. Improving transport links, as the Government is doing through its Ten Year Plan for Transport, expands catchment areas and market size, cuts costs for business and encourages entry into new markets, stimulating competition and innovation.

Effective public services

5.23 With the public sector accounting for around a fifth of the economy's real resources, effective and efficient public services are essential to economic growth. This Government is committed to delivering the modern public services that meet the needs of the public and rooting out under-performance wherever it exists in the public services, as set out in Chapter 2. Each department has been set testing targets for improving efficiency and value for money in the next three years. The plans allow for a heavy investment in information technology which will bring greater efficiency and higher quality of service for the customer in most public services.

5.24 To support departments in their drive to deliver better public services, the Government is also renewing the Public Services Productivity Panel for a minimum of a further two years. This small team of business and public sector leaders acts as a resource for the whole of Government, working with individual departments to identify key areas for improvement and to develop innovative solutions that will increase productivity. Details of the Panel's work with individual departments are published to provide a source of practical ideas and techniques to stimulate productivity improvement right across the public sector.

5.25 The Invest to Save Budget has provided funding for innovative projects bringing together two or more public bodies to improve service delivery. The two bidding rounds held to date have supported 136 imaginative projects. A further £210 million for the next three years is being allocated to extend the programme.

5.26 The Modernising Government principles have been applied in the Spending Review, and the new spending plans and Public Service Agreements advance its five commitments.

Policy making - the 15 cross-departmental reviews were a radical innovation in policy making and brought outside expertise into the heart of the spending process. Many of their conclusions - for example on conflict prevention, deprived areas, drug abuse and crime - require new cross-departmental and open ways of making policy.
Responsive public services - NHS Direct, the new service to pensioners from DSS, and the new Care Direct pilots are three ways of improving access and responsiveness to public service customers. Departments are being set specific targets to improve customer satisfaction; for example, the Criminal Justice Service is committed to improving the treatment of witnesses and victims.
Quality public services - across departments there will be a concerted drive to spread best practice. To achieve the targets for the main public services all departments will have to ensure that the gap in health, education and crime between rich and poor areas is narrowed. As a result of the cross-departmental review of Local Government Finance (Chapter 33), the Public Service Agreement approach is being extended to local services, to strengthen the links between central and local government.
Information age government - additional funding has been provided to put all Government services on line by 2005 and to make the UK the best place to trade electronically, demonstrated by the percentage of business transactions carried out over e-commerce networks.
Valuing public service - targets have been set to ensure the creation of a more open, diverse and professional Civil Service. By 2004-05, at least 35 per cent of the Senior Civil Service should be women and at least 3.2 per cent should be from ethnic minority backgrounds.