Business leaders have urged the Government to introduce a new ‘Productivity Allowance’ to help drag the UK out of a ‘lost decade’ of economic performance. The suggestion, which takes the form of a new tax allowance for productivity-raising technologies and support, features in a new report from the Institute of Directors, Lifting the Long Tail: The productivity challenge through the eyes of small businesses.

The IoD puts forward a range of other measures predominantly aimed at SMEs, including developing a more formalised national business support framework, expanding the Apprenticeship Levy into a wider training Levy, and improving the transfer of knowledge between academia and businesses. The proposals are described in a foreword by Andrew Haldane, Chief Economist at the Bank of England, as “useful food for thought for government, as it begins to put in place the next stages of its important and ambitious Industrial Strategy”.

Tej Parikh, author of the report & Senior Economist at the Institute of Directors, said:

“Solving the productivity puzzle has been a defining challenge for the UK over the past decade. The success of our post-Brexit economy hinges on our ability to unlock the vast untapped potential among UK small businesses.

“For too long, the debate has revolved around broad prescriptions and sweeping trends, but there is no silver bullet. We must now move the discussion out of the ivory tower and onto the office floor if we are to solve the productivity puzzle.

“To lift itself, the long tail will first need to twitch into action. This means shifting mind-sets and a series of small steps. Directors of smaller firms need the support and encouragement to spend more time working ‘on’ and not just ‘in’ their organisation, and to confidently adopt new management techniques and technology. We also need to retool our currently patchy national architecture for business advice, and there is no time to waste.

“As our leading innovators push the economic frontier, we must ensure new ideas, practices and technologies are diffused throughout the business community. The Government is right to make closing the gap between our high performers and lagging firms a focal point of its Industrial Strategy. But delivery could not come sooner, otherwise anaemic wages and subdued economic growth will continue to anchor an economy that should have the wind in its sails.”

Commenting on the report, Tony Danker, CEO of Be the Business, said:

“We know that raising business productivity is one of the UK’s most pressing economic challenges. As automation continues to transform industry, it’s crucial that we find new and innovative ways to support businesses, large and small, to build management capability, adopt new technologies and spread knowledge across the economy. The IoD are right to focus on what can be done at the firm-level, and their proposals offer a new and timely view on how to improve business performance and, in turn, productivity.”

Further details on some of the proposals:

• Create a new ‘Productivity Allowance’: This new Enhanced Capital Allowance would provide a clear signpost and greater incentive for small business leaders to invest in defined best practice technologies, such as data analytics and cloud computing, by allowing them to cut their overall tax bill by more than what is already available under existing schemes.
• Develop a more formalised national business support framework: The UK needs to better coordinate and integrate LEPs/Growth Hubs with private institutions, including social enterprises and universities, to facilitate idea-sharing and best practice across the country.
• Broaden the Apprenticeship Levy into a wider training levy: In a world of fast-changing skills needs, firms across the board need flexible access to management, leadership, and digital skills courses emphasising practical application and on-the-job training so that learnings can be quickly embedded and applied.
• Support greater knowledge transfer between higher education institutions and small businesses: By connecting businesses with specific graduate skill-sets in research, data analysis, and technology, by expanding Knowledge Transfer Partnerships, the UK’s World Class university system can be utilised to raise the capacity of SMEs.

One of the key challenges identified in the report is the disconnect between the political focus on raising productivity and the ways in which smaller businesses think about their performance. While the UK has experienced weak productivity growth since the 2008 crash, and has a higher proportion of low-productivity firms than international competitors, less than half of SMEs were found to formally monitor productivity in their organisation.

The report outlines a fresh way to map productivity improvement in small firms. It identifies four distinct hurdles to the adoption of best practice – mindset, diagnosis, implementation, and absorption – and urges policymakers to go beyond the currently held ‘adopt or not’ binary view and support SMEs to jump each of these hurdles.

The report is built upon survey data from over 700 business leaders, 25 structured interviews with start-ups, small enterprises and business transformation specialists, and consultations with accredited IoD Professional Development course leads and industry representatives. Other findings include:

• Only around 6% of SMEs currently consider LEPs/growth hubs as a go-to for management and technology advice, while business membership organisations and networks are a considerably more popular source.
• Digital/technology investment incentives were viewed by small firms as the best initiative to boost their productivity, followed by mentoring programmes and management training support.
• Driving a mindset of continuous improvement is key, as over one in four small firms take an introspective look at their business only once every six months or less frequently.
• Skilled and experienced directors can play a crucial role in mentoring, expanding networks, importing best practice, and driving long-term thinking to boost productivity in small businesses.