Joined up thinking is the key to improving UK productivity

Gordon Brown's prudent image is about to be tested to the limit with tomorrow's Budget. But his focus on productivity is right - as long as UK industry starts to think long-term and looks at the bigger picture. By Will Hutton, Chief executive, The Work Foundation.

The chancellor of the exchequer Gordon Brown's Budget options, always narrow, have closed down completely with the war in Iraq. The £3bn he has earmarked for the war already looks too low; if the UK is spending at the same rate as the US then the allocation should be close to £10bn.

With government borrowing set to rise significantly above £30bn in the next financial year and the year afterwards, Brown has no room for manoeuvre to raise spending further or cut taxes. He therefore risks breaking his own-self imposed rules for spending and borrowing.

Only if he can present the Iraq war and reconstruction as a one-off additional spending increase with the wider global downturn undermining his receipts, will he escape being tagged as fiscally imprudent. He may rob Peter to pay Paul, lifting taxes stealthily to pay for worthy spending increases so leaving the overall economic impact broadly neutral, but even that strategy is unappealing.

You can write the headlines about stealth taxes yourself. Rather this promises to be a sober budget in keeping with the times - with the main preoccupation being delivering on productivity.

The trouble is that while the chancellor vowed to improve the UK's productivity performance six years ago, which he has attempted to do through a range of macro- and micro-economic tinkering, productivity stubbornly refuses to rise.

Rather than catching up with productivity levels in other major economies, the UK has fallen further behind. This is partly about mismanaged expectations - having presented himself as having the cure for UK productivity malaise, Brown was always going to fall short of the hype. The UK also has a long-term problem of under investment in physical and human capital that cannot be reversed overnight.

But even if he succeeds in redressing some of that under investment, the open question is whether there is anything the Government can do to influence such a long-standing problem.

Brown's focus on 'bottom-up productivity' - which looks set to be a theme of the Budget - has been a real step forward in focusing attention on the long tail of under-achieving firms and individuals at the bottom of the labour market. According to the Treasury, the UK's best firms in every sector are up to five and a half times more productive than the weakest.

Equipping universities to network in local economies, new targets for workforce skill levels, measures to address deprivation as well as to stimulate enterprise, and new ideas to eradicate joblessness in particular neighbourhoods have all been features of a regional, bottom-up approach to productivity that looks set to reap longer-term productivity rewards.

But there are two vital weaknesses. The first is that the policies need to connect in a way that makes sense on the ground, so the various initiatives are part of a coherent bigger picture and not seen as another standalone initiative. The problem here is that, historically, the educational, technological, commercial and employment agendas - all productivity focused - have run in parallel, almost oblivious of each other. Instead there needs to be a far better micro-economic strategy that really joins up the drive to improve skills and innovation.

But that means addressing the second deficiency: the UK lacks a business-building culture, so we have too few businesses that want to grow organically through being great high-performance organisations. Too many are driven by short-term financial priorities - what matters is not long-term productivity growth, but the next half-year's numbers. Brown has tried to do something about this with his Myners Review on pension fund management and incentives to hold shares for a longer term with tapered capital gains tax, but he has abstained from substantial reform of corporate governance and financial structures.

If he's to leave any worthwhile legacy, Brown needs to address both deficiencies and inject some humanity into productivity. He won't be chancellor forever, and time is running out. Maybe he will surprise us.