Solving the UK's productivity puzzle: is a higher public science budget alone sufficient?

The UK’s lagging productivity has been a significant, long-term economic challenge that the government has attempted to tackle since the 1960s. Although hourly productivity recently recently increased as the fastest rate in six years, productivity is still 16% lower than the pre-2008 trend. This is damaging to the economy as it translates into a lack of competitiveness against other countries, resulting in fewer exports and ultimately a balance of payment deficit. A recent estimate finds that if the UK raised its productivity by one percentage point every year, then it would add approximately £240 billion to the the economy within a decade, illustrating the degree of urgency of this problem.

(Source: The Guardian)

One important determinant of productivity is the improvement of physical capital, such as the quality and efficiency of machinery and infrastructure; this in turns depends critically on the progress of scientific innovation. In the digital age, encouraging scientific innovation is increasingly important in improving productivity growth. A research by the British government found that 51% of productivity growth between 2000 and 2008 was due to innovation, and that the firms who consistently invested in R&D were 13% more productive that those who did not. Given the apparent importance of R&D, there are increasing calls for the UK government to raise the public science budget as a means increasing productivity. Although raising the public science budget can help boost flagging productivity, it is insufficient on its own. Rather, pursuing other complementary reforms have the potential to maximise the benefits of raising public science budget on productivity.

How a higher public science budget can help boost productivity

Essentially, through a higher public science budget, more capital will be allocated into R&D, allowing the development of new physical capital and improvements in the efficiency of production methods. Increasing the science budget could take the form of higher tax credits for research centres, which reduces the overall cost of capital and therefore encourage research centres and start-ups to devote more capital towards capital expenditure. These tax credits could also attract new firms from abroad to start their business in the UK and encourage more private investment, allowing firms to improve the quality of their capital goods. An example of this is when Rolls-Royce adopted methods developed by Sheffield University in 2001, which reduced the time it took to produce turbine discs in jet engines by 50%. It could also help improve scientific, network and communication infrastructure; the 2016 budget has devoted £614 million to World-Class Laboratories, which renews existing scientific infrastructure. These schemes benefit productivity as it improves the efficiency of the existing stock of capital and infrastructure, thus allowing firms to maximise the number of goods they produce at cheaper prices.

Jo Johnson (Science Minister) announcing major UK-India Newton Fund research investments at the UK-India TECH Summit (Source: Newton Fund)