The Budget is the UK Government’s annual fiscal set piece. It is no surprise that it dominates media headlines in the days before and after. Organisations will, quite naturally, pick over the contents relevant to their area of interest.
We’ve done exactly that over the last week, providing a brief overview immediately after the announcement, followed by more detailed analysis of three topics close to our hearts: house building, tax efficient investing. and regional business angel networks.
The Budget also provides an assessment of recent trends across the UK economy. These trends are typically more abstract and command less immediate media attention, but they can nonetheless be important indicators of future Government economic priorities.
Productivity very much falls into this category.
Economic commentators have, for some time, lamented the failure of the UK’s economy to maintain the steady annual increases in productivity exhibited before the financial crash of 2008. ONS data presented in the chart below places this in sharp focus. This concern is starting to permeate through policy, and I want to capture the essence of why this is the case and explores emerging Government proposals that seek to reverse this.
Chart 1: Whole economy increase in output per hour since Q1 1997
What is productivity?
“Productivity isn’t everything, but in the long run it is almost everything”
So said Nobel laureate Prof Paul Krugman in 1994.
In simple terms, productivity is the amount of output produced per hour worked. If productivity increases it benefits companies, who become more profitable, and individuals, who can command higher wages.
Particularly in advanced economies like the UK, where labour costs struggle to retain global competitiveness, productivity remains a vital determinant of economic output.
In this context, relying on employment growth to drive output would represent a high-risk strategy for the UK. This underlines the importance of policy initiatives that seek to re-establish productivity growth, which have appeared on the UK Government’s economic agenda in recent times.
What did the 2017 Budget say?
The Budget acknowledged that flatlining productivity represents a genuine concern. A chapter within the Budget was devoted to productivity and how it might be improved. Focus within the chapter was the National Productivity Investment Fund (NPIF), originally announced as a £23 billion fund in November 2016, but boosted by over a third in the most recent Budget to reach £31 billion. These investments will be delivered in the five financial years 2017 through 2022.
So where does housing feature in productivity growth?
To understand this in more detail, we need to refer instead to a more recent Government publication: the Industrial Strategy, published on Monday of this week.
Infrastructure and productivity
Studies of productivity have, in the past, tended to focus on economic drivers: investment, innovation, enterprise, and competition. The recent Industrial Strategy marks a departure from this, with the five foundations of productivity identified as ideas, people, infrastructure, business environment, and places.
These are more relatable and can more obviously benefit directly from government investment. Of these five, infrastructure makes strong references to the importance of housing.
“[Investment in infrastructure is] one of the most significant ways the government can influence the economy – from our transport and housing through to the roll-out of digital networks.”
The Industrial strategy continues:
“We must make sure our infrastructure choices not only provide the basics for the economy, they must actively support our long-term productivity, providing greater certainty and clear strategic direction.”
The allocations from the National Productivity Investment Fund (NPIF) set out below demonstrate the cash commitments that the Government is making to back this up.
Figure 2: National Productivity Investment Fund (NPIF)
In qualitative terms, the allocation of the NPIF also contains a commitment to rebalance the UK’s economic geography and address persistent regional inequalities.
Hot on the heels of the recent Savills Autumn 2017 Property report that forecast house price growth in Northern England will outperform the more traditional property hotspots of the South East, this provides further encouragement for property investors considering investing in the North.
For this to work, housebuilders in the North need to have property investment opportunities ready to capitalise. In the interim, the most enterprising housebuilders are developing innovative financial solutions of their own. These include embracing and establishing special purpose vehicles (SPVs) to secure equity investment – either institutional or through crowdfunding platforms – and loan finance - be that from corporations or through peer-to-peer lending platforms.
Download our free guide to integrating property investments into your portfolio to find a worked example of investing in this way.
This investment proposition is growth focussed and is unlikely to offer the opportunity to generate income (although if the SPV operated for long enough, it is possible that it might offer a dividend). Its appeal is the speed at which it can deliver growth. Achieving growth is typically a longer-term ambition; rapid capital growth is an elusive goal.