Gap with America widens as British productivity shows surprise decline

The productivity of the British workforce has fallen for the first time in almost three years, taking the shine off a package of tax breaks for small businesses that was announced yesterday.

The productivity of the British workforce has fallen for the first time in almost three years, taking the shine off a package of tax breaks for small businesses that was announced yesterday.

The amount of work produced by the average worker fell by 0.1 per cent in the final three months of last year. This is the fifth quarter in a row that productivity has worsened but it is the first time since the start of 1999 it has actually gone negative, official figures showed. They will come as a blow to the Treasury's target of closing the productivity gap between the UK and its main economic rivals during this parliament.

"Productivity is improving, it is growing. It is the rate of productivity growth we want to improve," the Chancellor Gordon Brown said before the figures were published yesterday.

On an annual basis, productivity did grow – by 0.8 per cent – but at the slowest rate since 1999 and down from a recent peak of 2.3 per cent in 2000.

A recent study by the National Institute of Economic and Social Research (NIESR) showed productivity improvements had been modest. The average American worker is 26 per cent more productive than his British counterpart, a French worker 24 per cent and a German 11 per cent.

The Treasury put a brave face on the figures, saying productivity was driven by the economic cycle. "The fact that it has fallen in one quarter should not be seen as an indictment of our policies," said a spokesman.

He said part of the deterioration was explained by the dramatic fall in economic output at a time when employers had maintained high staffing levels. This was highlighted by a 1.1 per cent slump in the productivity of the industrial sector over the quarter.

Electrical and optical firms suffered a 2 per cent fall, meaning the sector is now more than 16 per cent less productive than it was a year ago.

"We are seeking to increase the trend over the long term and you would not expect supply- side measures brought through in the last parliament to impact overnight," the spokesman said.

Since taking office in 1997 the Treasury has produced a number of documents attempting to explain the UK's recent productivity performance.

The Government's strategy is built on five planks – strengthening competition policy, promoting enterprise and innovation, boosting skills, encouraging investment and focusing on public sector productivity.

Later yesterday the Chancellor promised to promote the small business sector, arguing it was central to his mission to improve productivity. He unveiled several tax breaks for small firms to build on the £500m of measures for big companies he published this week ahead of the 17 April Budget.

Among the measures, which confirmed moves proposed in the pre-Budget report, was a simplification of VAT returns for companies with an annual turnover of up to £100,000. Capital gains tax on assets held for more than two years by small companies will be cut to 10 per cent. A tax credit will be introduced for capital investment in inner cities to encourage small firms to set up in high-unemployment areas.

There was brighter news in the US, where new figures showed the economy ended 2001 with the fastest growth for a year. It grew 1.7 per cent in the fourth quarter of 2001, faster than the 1.4 per cent previously reported. It was also the strongest rate since the fourth quarter of 2000. However the ongoing pain in the corporate sector was highlighted by the first fall in profit levels for almost two decades. Post-tax profits dipped 15.9 per cent, the first decline since 1982's 17.1 per cent drop.