How much are the UK R&D tax credit and Patent Box schemes costing? (Around 7.6 and 2.0 bn in 2023/4)

 1. There are some new figures just out, 30th Sept 2025 (next ones due in a year):  "

Research and Development Tax Credits Statistics: September 2025

here. 

2. "The total support claimed through both R&D schemes for the tax year 2023 to 2024 is estimated to be £7.6 billion (figure 2 and table RD2). This is a decrease of 2% from last year’s total of £7.7 billion."

3. Broadly, the green and purple are SMEs .  The lighter orange/red is large firms. 

4. There is some explaination of these schemes here. Broadly, the RDEC is aimed at large companies, but some small ones claim.  

5. One interesting point is that cloud computing and data expenses are now eligable, since April 2023. As usual ForrestBrown are on top of this.  This is an evolving area, but their broad view is, I think, that cloud computing and data licenceing costs, if they are used in R&D, qualify for relief.

6. it is interesting how. much R&D tax credits have grown, they were around 4bn in 2016.  

7. There is also the Patent Box This costs about £2bn, with 145 companies accounting for 92% of relief. It is very concentrated in manufacturing.  Some excerpts: 

"In financial year 2023 to 2024, it is estimated that the top 145 companies (by the value of the relief they receive each year) accounted for 92% of the relief." 

"

• in the financial year 2023 to 2024, it is provisionally estimated that 1,650 companies elected into the Patent Box regime. 

• the value of relief provided under the Patent Box is estimated to have increased to £1,977 million in the financial year 2023 to 2024 from £1,449 million in the financial year 2022 to 2023. This was driven by the change in the main rate of Corporation Tax from 19% to 25% on 1 April 2023

• of the companies that elected into Patent Box in financial year 2023 to 2024, it is estimated that 28% were classified as ‘Large’ and accounted for most of the relief provided (95%)"

• 
  
  
  

How important are intangibles in accounting for productivity growth?

1. I was asked today: if intangible capital deepening slows, is that a big effect on productivity growth?  This is part of a broader question; what's the relative importance of intangible assets in accounting for productivity growth (value added per hour growth)?

2. Growth accounting allows a decompositition of labour productivity growth into the contributions of:  

a. reallocation = workers moving between industries of different productivity levels 

b. labour composition = increased skills, age and experience

c.  ICT capital deepening = increased ICT capital (computers, comms equip) per hour 

d.  NonICT capital deepening = increased NonICT capital (buildings, vehicles, non-ICT plant) per hour 

e.  Intangible capital deepening = increased intangible capital (R&D, software, artistic originals, design, marketing, business process, training) per hour 

f. TFP = increased total factor productivity (what's left over, which increased efficiency plus mismeasurement etc.)

Here are some results from our EUKLEMS-INTANProd database, in hopefully obvious notation.  Countries are US, UK, EU (France, Germany, Spain, Italy, Denmark, Holland, Austria, Sweden, Finland). Industries are all ommiting A (agriculture), OPQ (defence, education, health), B (mining), D-E (gas, electricity, water), F (construction).  All these are not well measured, and/or mostly public sector. 

As the results show, intangible capital deepening is much the most important contributor to labour productivity growth in the 2011-19 period (tangible capital deepening contributions is the sum of ICT and NonICT, which is still lower than the intangible contribution).

Table:  of contributions

 

And a picture

As we saw in a recent blog the employment rights bill will very likely lower intangible investment. That will lower intangible capital deepening, other things equal.  This then is a policy measure lowering the major source of UK productivity growth.  Not a good policy if you want growth to increase. 

What has happened to R* recently?

 The 2025 Brookings Papers conference had a sesssion on this.  

The slides from Lukasz Rachel and the discussants are available. 

The discussant Adrien Auclert makes some very nice points. I picked up on some.

First, the framework.  R* is the price that balances demand for capital for use in production by firms with the supply of savings by consumers.  But terminology is hard here: the savings by consumers causes them to build up wealth, which is in part demand for durable assets (e.g. a house).  So wealth accumulation is asset demand which is capital supply.   And the demand for the use of capital is by firms and governments to produce goods/svcs, and they issue claims on the owernship of such assets e.g. shares (and for government, government debt).  So the value of assets issued by firms and government is asset supply or capital demand.  This is nicely illustrated by his graph which highlights the demand/supply nomenclature 

Thus he talks nicely about forces that raise asset supply which raise r*

And forces that raise asset demand, which lower r* 

He summarises the main finding of the paper as being that asset demand has won

with the main drivers falling productivity, rising aging and rising risk

Here is the prediction for the future

most of these are putting upward pressure on r*, but intangibles are lowering. why? this is because in his model more intangibles offset competition and innovation and so lower productivity.  

Thus we have

1. business as usual, small and gentle fall in r*

2. more productivity growth, r* rises. 

Will the Employment Rights Bill help or hurt growth?

 

  

1.      The Employment Rights Bill is making its way through the UK Parliament at the moment. There are a lot of details, set out in, for example, the Impact Assessment,  here.  Among the provisions quoted there are unfair dismissal, paternity and sick pay rights from the first day of employment, repealing laws that require minimum service levels in some industries during strikes, strengthening union rights etc.

2.      What will the effects be on growth? Since the government says its entire policy is about growth this is an important question.

3.      To understand the effect on growth it will be helpful to understand the effect on investment. The graph below makes dismal reading. Using the OECD index of employment regulation, there's a negative relationship which is that more employment regulation means less intangible investment. To the extent that intangible investment is important for growth, this is bad news for the policy.

 

 

Source: own calculations. 

 

4.      This graph might seem obvious. But a moment's reflection raises a few puzzles. First, if the cost of employing workers goes up firms would presumably substitute towards capital. That should tell you that more employment regulation would give you more investment, not less.  Second, the proponents of this bill argue that it will make workers happier and productivity will go up for that reason.

5.      So what's going on?

6.      Let's start by thinking about investment. There are two important effects of costs on investment.

a.      The first is the cost of capital effect. Once the firm has decided to invest, other things equal, a fall in the cost of capital, say from a tax break, will make the firm invest more. By this logic, a rise in the price of labour, due to this bill, lowers the relative cost of capital relative to labour, thereby potentially raising investment. This logic gives rise to the first part of the puzzle above.

b.     But there is an important second effect on investment. The outcome of investment is uncertain. Further, much investment is sunk, which is to say that it is often difficult to get that investment back once you have made it.  Think for example about Nokia's investment in software which became Windows Mobile. When the market for Nokia's mobile phones collapsed, around $5 billion worth of software investment had to be just written off. This is important because the cost of capital effect applies once the firm is actually decided to invest. But the uncertainty effect means that a rise in uncertainty makes the firm postpone its decision to invest. With uncertainty and sunk capital, there is an additional cost of investment, which is that investing today costs the firm the value of waiting.  That waiting has value (formally an option value), since underlying uncertainty might be resolved in the future.

7.      So the Bill has potentially two effects. The cost of capital effect is good for investment, because it raises the relative price of labour. The uncertainty effect is bad for investment, because firms will postpone investment until the uncertain costs are clearer.

8.      What then will we expect? My best prediction is that the employment rights bill is a rise in uncertainty for firms. The reason is that these employment rights are set out in broad outline in the bill, but then end up being interpreted by the courts.. The backlog of court cases is now over a year. It will in practise take a long time for the full implications of these employment rights to become clear to firms.  Look for example at the avalanche of cases around equal pay, the Next case for example ((https://assets.publishing.service.gov.uk/media/66d190b2bdecebe01a183399/Miss_M_Thandi___Others_V__Next_Retail_Limited_-1302019-2018-Resreved_Judgment.pdf). .  These cases have taken years, and in the case of retailers precede retailer by retailer.

9.      In case this might seem a matter of theoretical curiosity it is worth remembering the effects of Brexit are precisely this uncertainty effect. As Josh Martin and I showed, after the Brexit referendum investment literally stopped in its tracks for many years. A significant slowdown in growth thereby followed.

10. This uncertainty effect explains why the bill would likely particularly affect intangible investment. Intangible investment is likely to be more sunk, more company and market specific than tangible investment: British Airways can always sell its planes, but much harder to sell its brand name. This in turn is why the cross country evidence sometimes finds employment market regulation is negatively correlated with investment and sometimes positively correlated: It depends upon whether the underlying investment considered is both sunk and if the regulation is uncertain.

11. Finally, moving outside investment, some remarks. 

12. First, my baseline model of the labour market is a simple one: there are wage and non-wage attributes of every job.  The non-wage attributes are, for example, paid tea-breaks, effort on the job and contractual form (employees v freelancers for example).

13. Second, the CMA has done an extensive study of the presence of “monoposony” power in labour markets (Competition and market power in UK labour markets, CMA Microeconomics Unit 25 January 2024 Report no. 1).  This is hard to do, since we don’t really know what the labour market is, especially in the era of working from home.  Taking the “labour” market as the Travel to Work Area, they find

a.      87% of workers work in “low-concentration” labour markets (in 2019, that fell to 80% in the unusual conditions of the pandemic), see p.104

 

b.     The effect of moving between concentrations is not large.  (para 5.14, see also the notes to figure 21),  “…an increase in concentration …by 10% …would be associated with just a 0.1% fall in wages.”.  This means that going from medium concentration, 2,500 to low, 1,500 which is a 51 log point change would change wages by ½ a percent.

14. Further work by the CMA, on my reading at least, has not found widespread product market monopoly power either (except in some cases).  It seems unlikely to me then that monopoly and monoposony power is widespread.  Thus the first-order effect of a rise in costs on firms will be adjustment of wage and non-wage margins, or, if this is not possible (due to wage floors for example), adjustment of quantities.  Thus the assumption that workers will be “happier” and so more productive after the  passing of the bill seems questionable; we don’t know what other margins will adjust.  For example, the Next case found that following the minimum wage, Next abolished paid rest breaks (unpaid rest breaks were the industry norm so this was reverting to the industry standard).

A portrait of UK R&D

 Getting a handle on innovation support is hard with many schemes, funding etc.  Just looking at R&D, here is some data from Cambridge UK Innovation Report, 2025, using the latest 2022 data.

1.  Spending on R&D, excluding tax credits looks like this: where the Sankey diagram nicely shows the potential difference between an intangible asset that can be financed in one area and have the performed investment be in another place: 

(btw, within UKRI are a number of other institutions; research councils (competitive grants allocation, about 50% of the money: innovateUK(working with companies to derisk innovation, catapult centres etc. about 20% of the money).  HEFCE/Research England give out REF-based money to universities.  See here,). 

.  

2.  What does business spend the R&D money on (notice these are products and not industries)?  Notice the massive figure on software development; and notice too the seperate line for computer programming and info services.  The days of R&D being mostly pharma and transport are over. 

3. Finally, notice too that government support for R&D can also be tax credits.  They are much more than direct funding as the below shows:

4. and the figures for tax credits are very large; £7.5bn in 2022-3 "For the 2022–23 tax year, UK businesses claimed a total of £7.5 billion in R&D tax relief support. This figure is more than twice the £2.6 billion of direct support to business R&D provided by the government and UKRI in 2022" 

By size "In terms of R&D tax credit claims by firm size in the UK, in the 2022–23 tax year:[2] • 67% (US$5 billion) were claimed by small and medium enterprises • 33% (£2.5 billion) were claimed by large firms." 

 

Did persisently low interest rates post GFC lower productivity growth?

Many allege that the long run of low interest rates post global financial crisis lowered productivity growth via zombie firms.  These low productivity firms survived more than they should have done and hence productivity growth stalled.  

An alternative view is that low productivity growth, for other reasons, lowered r* and hence interest rates.  

A paper "Aggregate productivity decompositions using structural business surveys: Evidence from the UK by Russell Black, Rebecca Riley and Garry Young", available here sheds a bit of light on this for the UK.

It uses UK company data to decompose productivity growth into that 

a. within surviving companies

b. reallocation of market share between surviving companies

c. the net effect of exit and entry.

One might think that the zombie firms view would say that the net entry/exit effect would be less as fewer low productivity firms exit.  

Their chart shows this isn't the case.

1. Using various different methods the change in the net entry effect, see middle panel is very small, a slight fall.

2. instead, the fall in productivity growth is due more or less equally to falling within firm growth and falling between firm reallocation.  The latter might be a zombie phenominon, but it isn't clearly so.

Thinking on the margin, or economic thinking as a system, again

 As we often say in class, economics is about thinking on the margin.  Statement "tobacco taxes rose, but my friend carried on smoking, so economics is rubbish". No.  Your friend might be inframarginal.  It's very likely that for a person on the margin, they will stop smoking.

Another way to say this is that economic thinking is systems thinking. Don't just think about the consequences for your friend, but for the system as a whole.  And the system as a whole will be influenced by marginal smokers. 

Here's an application of that.  

1. The Earned Income Tax Credit subsides workers on a low wage and is much more generous for workers with children.  See the discussion in Leigh, https://docs.iza.org/dp4960.pdf. 

2. What happens when it is introduced? One non-marginal model is to say: well, if more workers with children work, that raises supply and lowers the wage of low paid workers with children.

3. The marginal argument is different.  If the supply of labour rises, then wages will fall for all marginal workers, those with and without children.  

4. what does the paper find? 

"Although the EITC has a much larger effect on the labor force participation of workers with children than those without, the wage effect appears to be similar for workers with and without children. This suggests that what matters is the average EITC rate in a labor market, not an employee’s own EITC rate."

So when someone tells you how beneficial tax credits are, think of the system.  Subsidising firms to pay low wages has systemmatic effects.

Rates of return, net present values and cost-benefit ratios

 1. suppose the government spends £x on some investment, say a road or R&D.  What is the rate of eturn/ 

2. Following some excellent notes from the OBR, we have that the IRR of that spend is the discount rates that solves the equation

 

 that, is the rate of return that sets this number to zero.

3. the Benefit from spending on some investment is more GDP.   That increase in GDP is dY/dK.=alphaY/K where alpha is the elasticity of output with respect to capital.  If Y/K is constant and we imagine spending £1 investment we have 

which says that the IRR is the marginal product of the project less the depreciation rate.  Or, the marginal product of the product is the gross rate of return. 

AI and productivity

Martin Baily, Erik Brynjolfsson and Anton Korinek offer a calculation that is more subtle than you might think.  They say 

"The first channel is the increased efficiency of output production. By making cognitive workers engaged in production more efficient, the level of output increases. Economic theory tells us that the effect of a productivity boost in a given sector on aggregate productivity and output is equal to the size of the productivity boost multiplied by the size of the sector (Hulten’s theorem). For instance, if generative AI makes cognitive workers on average 30% more productive and cognitive work makes up about 60% of all value added in the economy (as measured by the wage bill attributable to cognitive tasks), this amounts to a 18% increase in aggregate productivity and output."

The second channel?

"The second channel is the acceleration of innovation and thus future productivity growth. Cognitive workers not only produce current output but also invent new things, engage in discoveries, and generate the technological progress that boosts future productivity. This includes R&D—what scientists do—and perhaps more importantly, the process of rolling out new innovations into production activities throughout the economy—what managers do. If cognitive workers are more efficient, they will accelerate technological progress and thereby boost the rate of productivity growth—in perpetuity. For example, if productivity growth was 2% and the cognitive labor that underpins productivity growth is 20% more productive, this would raise the growth rate of productivity by 20% to 2.4%. In a given year, such a change is barely noticeable and is usually swamped by cyclical fluctuations, but productivity growth compounds. After a decade, the described tiny increase in productivity growth would leave the economy 5% larger, and the growth would compound thereafter. If the acceleration applied to the growth rate of the growth rate as well, then of course, growth would accelerate even more over time."

Let me focus on the first channel.  What is Hulten's theorem?  This is an obvious point, but solved by a brilliant piece of economics.  Quoting from Hulten's paper, Growth Accounting with Intermediate Inputs, Charles R. Hulten, The Review of Economic Studies, Volume 45, Issue 3, October 1978, Pages 511–518, https://doi.org/10.2307/2297252.  

1. ...Productivity change is conventionally defined as the residual growth of real product not

accounted for by the growth of real factor input.

2. but, some inputs are themselves outputs of the productive process: capital and intermediate input. Increased factor efficiency will, in general, lead to increased output, and thus to increases in the quantity of produced inputs available for production.

3. In any post-mortem assessment of the sources of growth, this induced expansionin produced inputs must be recognized as having been the result of productivity change. That is, the growth rate of total factor productivity must be adjusted for the additional input available as a result of the increased factor efficiency. 

4.The present paper studies the interaction of productivity change and intermediate input

What he shows is the link between industry TFP growth in an industry, j, and overall TFP growth, taking account of the induced extra intermediates from TFP in the industry. This is 

TFPG, agg = (PgG)j/(PvV) * TFPGj, industry of gross output

where the TFPGj is the gross output of industry j. The multiple is ratio of gross output in industry j, divided by total value added in the economy.  This multiple adds to something greater than one, but that makes sense, since TFPG in j "spreads out to other industries". 

Finally, what of the above calculation?  If AI is labour augmenting, then it raises the productivity of labour in industry j.  Thus it raises TFPG in j by the share of labour payments in gross output of industry j.  Thus the overall effect, for AI that is labour augmenting, is the labour payments in industry j over total value added, times the labour-augmenting technical progress.  This is how they end up with 60% times 30% over the years it will take to realise the gains.

Who is working class?

 The UK government has announced civil service internships will only be available to those who are working class.  What does this really mean? According to the BBC, applicants will be judged by what jobs their parents did when they were 14.

So what jobs are working class? Again, according to the BBC  this definition is being sorted by the Comission on Social Mobility.  I found this table from The State of the Nation 2024. Table 1, page 25. 

with an interesting footnote "10 Some routine occupations can count as intermediate if the worker is self-employed." 

As an economist, I don't really know how to think about what class someone is. So the following comments in the document interested me.

First, as with many of these indicators wages differ more within the divisions than between the. Page 26 : Sometimes people in lower occupational classes earn more than those in higher occupational classes. For example, speech and language therapists count as higher professionals, NS-SEC 1, because their job requires a first degree for entry and experience-related training, and the practical application of a body of knowledge to instruct others. Yet, their average salary is lower than that of many working-class

occupations, including some  routine manual occupations.

There can also be great variation in earnings within a class. For example,

teaching assistants earn an average of £19,033, and rail travel assistants

earn an average of £36,080, yet both occupations are classified as

‘intermediate’.11 Apart from different salaries, these jobs may also have

very different working conditions.

Second, the treatment of the self-employed.  

And, finally, 2 people doing the same type of work can be in different classes if one is an employee and the other is self-employed since the self-employed tend to be classed as intermediate. For example, a bricklayer who is an employee would be in NS-SEC 7, lower working class, while a self-employed bricklayer would be in NS-SEC 4, intermediate class."

I find it odd that being self-employed means you cannot be working class (the document is unclear to me about tending to be classified, I think this means occupations are classified by the ONS into the headings that this commission then choose to be working class).

So what do the ONS do?  They have 8 "analytic" classes, https://www.ons.gov.uk/methodology/classificationsandstandards/otherclassifications/thenationalstatisticssocioeconomicclassificationnssecrebasedonsoc2010, of which one, the self-employed, class 4 are defined by the social mobility people as intermediate and hence not "working class". 

Source: table 2, here. . ONS, ‘The national statistics socio-economic classification (NS-SEC)’, 2021. 

Other interesting information from the Mobility report

1. the education premium has declined

2. those with the same education, sex and age but coming from different backgrounds have different wage premia

3. in the conclusion they again state the heterogeneity within groups

"For example, children eligible for free school meals (FSM) of Chinese

background perform better than the national average for non-FSM children at key stage

(KS) 2 and KS4 (age 11 and 16 years)."

Which comes from a very striking graph 

Blanket classifications e.g. "working class" don't seem very useful to me.