Gordon Brown's pre-Budget report last week was greeted with a blizzard of critical commentary, questioning the extra borrowing which comes with economic slowdown and consequent lower tax revenues. But the real question is not whether increased borrowing is prudent - it would certainly be imprudent to cut spending when the economy is already faltering - but what can be done about the slowdown. How can economic growth - and hence tax revenues - be restored?
For the chancellor, the answer lies in Britain's productivity gap with other leading industrialised countries. Closing this gap has become the government's key economic goal. The Labour government has not done too badly since 1997 in keeping the economy growing, allowing employment to rise and unemployment figures to fall. But Britain's relative productivity performance has not improved at all. The government has commissioned consultancy reports on the productivity gap and the funding councils have promised research programmes on the state of British management, yet none of this has as yet produced any advice worth acting upon.
But the chancellor has, over successive Budgets, taken a series of measures to try to boost productivity, including to encourage employee share ownership. His latest pre-Budget statement unveiled an additional tax break for companies introducing such schemes. Brown's rationale has been to increase employee commitment to the company and motivation at work, with the expectation that this will lead to improved productivity. Recent academic research suggests that he is on the right track. Management practices that succeed in creating a sense of commitment do indeed appear to improve performance. But will the government's employee share ownership policies deliver the necessary motivational effects? Do the tax breaks to companies represent good value for money?
The latest research suggests that public money may be being wasted and that the opportunity to mobilise employee commitment at work is being squandered. A report this week by the Work Foundation and Birkbeck, University of London, suggests that employee share ownership schemes are being introduced, with tax subsidies, that will do little or nothing to enhance commitment or boost productivity.
My colleagues and I surveyed companies that had introduced such schemes, taking advantage of the current tax breaks, interviewing both managers and employees. The message was consistent. Ownership by itself makes little difference. The theory may be that as a shareholder, an employee may work harder to make the company more profitable and so enjoy increased dividends. But the effort of any one employee can hardly be expected to alter corporate profitability. The effort needs to be collective.
The good news for the chancellor is that where the employee share ownership was seen to represent a collective voice, so that the employees thought they really did have a say, and where that ownership was combined with consultation and participation, then employees and employers reported both improved motivation and productivity. Yet this "collective voice" is not encouraged by the Inland Revenue, which administers the schemes. Nor does it attempt to combine employee share ownership with a participatory management style.
Under the approved schemes, employee shares are initially held in trust. So should it not be the job of the trustees to ensure that this collective holding is used to promote participatory practices within the company, if necessary by voting at the company AGM? Indeed, such employee shareholder activism would not only improve motivation, it could also help help tackle Britain's longstanding problems of corporate governance, that most shareholders literally take no interest in the company. Unlike in other coun tries, in Britain most shares are not even voted at AGMs.
The problem is that while under the employee share ownership schemes introduced by the Thatcher governments, employees elected half the trustees, under New Labour's legislation the employees elect none. The trustees are nominated by management. The chances of them pressing management to introduce more participatory practices, if necessary by asking awkward questions at the company AGM, are limited by the fact that the Inland Revenue approves schemes which allow management to remove these trustees "at any time" and "for any reason". The Inland Revenue even gives tax breaks to schemes where the employee shares are deemed to be non-voting - making the employees entirely voiceless.
All this suggests that if the chancellor wants his tax-subsidised employee share scheme to deliver employee motivation and commitment, and hence improved productivity, reform is needed. Responsibility for approving these schemes could be taken out of the hands of the Inland Revenue, for example. A dedicated unit that understands the links between participation, motivation and productivity could instead be charged with the responsibility of approving and administering schemes in a way that could deliver real benefits. Such reform would cost peanuts. The productivity rewards could be huge.
· Employee ownership, motivation and productivity: A research report for Employees Direct from Birkbeck and The Work Foundation, by Jonathan Michie, Christine Oughton and Yvonne Bennion is published this week. Jonathan Michie is the Sainsbury Professor of Management, Birkbeck, University of London.