Philip Hammond is right to urge the NHS to increase productivity – it could start a business revolution

As Hammond put it last year: 'In the real world, it takes a German worker four days to produce what we make in five; which means, in turn, that too many British workers work longer hours for lower pay than their counterparts'

Philip Hammond has told Jeremy Hunt that the NHS needs to increase its productivity (Getty)

Philip Hammond, the Chancellor of the Exchequer, has told the Health Secretary, Jeremy Hunt, that he will only fund a pay rise for doctors and nurses if the NHS becomes more productive.

In other words, cut through the tedious discussions of whether a particular pay rise can be “afforded” or not. Instead say: If you improve productivity, then you can have a pay rise paid for by greater efficiency.

If this rule were generalised throughout the economy, it would have a wholly beneficial impact. For productivity, which in Britain is notoriously low, determines prosperity.

As Hammond put it with exemplary clarity in his Autumn Statement last year: “In the real world, it takes a German worker four days to produce what we make in five; which means, in turn, that too many British workers work longer hours for lower pay than their counterparts.”

Now there has been much discussion of possible reasons for Britain’s poor productivity and what can be done about it. Is it poor training? The UK has suffered a drop in training four times greater than any other European country during the recession, leading to a skills deficiency. Have companies invested too little? “The fall in business investment during the financial crisis – in both intellectual property and physical assets – has… depressed productivity growth,” said Robert Chote, chair of the Office for Budget Responsibility, this month.

Have we been neglecting innovation? The UK spends less than Germany, Sweden or South Korea on research and development and UK businesses exhibit a lower take-up of new generation technologies, including robotics and the “internet of things”. Is it deficiencies in our educational system? A recent report showed that the education system is failing a majority of disadvantaged students, many of whom are not reaching the basic level of attainment at GCSE level, and that there are too few alternative routes through education and into employment for school leavers today.

Or is it all these things? That is the most plausible conclusion. Andrew Haldane, an executive director of the Bank of England, has put the matter clearly: “There is a cohort of firms out there who are flying high. They are very productive. Even more so than in the past. Interestingly this is not sector specific. It is not even region specific… Sitting alongside [is] a long tail of companies – low skills, low productivity, and low profitability… And, boy, that tail is long. I am talking of between 75 per cent and 90 per cent of all companies. These aren’t failing companies, their productivity has been stuck for the better part of two or three decades… and as their productivity has flat-lined, so too has the income prospects of those that work for those companies.”

In response to these findings there have been some important initiatives. In recent months, for instance, a group of senior business leaders, led by Sir Charlie Mayfield, chair of the John Lewis Partnership, have come together to form the Productivity Leadership Group, to galvanise businesses working together to raise business productivity in the UK. The spearhead is an organisation called Be The Business, which aims to increase the number of well-run UK businesses.

All well and good. But something simpler is required as the cutting edge. And this is where Philip Hammond’s conversation with Jeremy Hunt comes in. For the slogan: “If you want a pay rise, improve your productivity” is clear and effective. Suppose the Government, whose public services account for over 40 per cent of national output, were to apply the principle throughout the public sector. This would put pressure on the private sector to follow suit. So that, in the fullness of time, productivity would become the key measure of not only national success but also of each of the units that make up the whole.

Not only of the National Health Service but also the key measure of the performance of my local hospitals, separately measured. And of my local Marks and Spencer and my local Waitrose – and of the firms that supply them. If we could elevate the importance of productivity in this way, we would be in the midst of a business revolution.