The locus of R&D is moving to the information and software industries

 From the technical appendix to Draghi report, p.234.

Tariff engineering

 Fascinating work by Flannen et al, here. Who Pays for Tariffs Along the Supply Chain? Evidence from European Wine Tariffs? 

"We exploit additional detailed product-level alcohol label data for all wines sold in the U.S. to document how changes in product composition reflect an intriguing case of tariff engineering.

 Because the initial tariffs only applied to wines defined by a threshold level of alcohol content (≤ 14% ABV), we document a systematic shift in new product offerings toward higher alcohol content exempt from these tariffs, as well as engineering of existing wines to modify the listed alcohol content for exemption from these tariffs"

They show an example of how wine was relabelled

 And make the comment:

Given the speed with which we observe the tariff-engineering behavior documented in Figure 5 above, it seems unlikely that the wines changing threshold levels to avoid the higher tariff involved actual changes in alcohol content. Rather, these adjustments likely reflected changes in what was reported on wine labels. Using testing data from the Liquor Control Board of Ontario for 1992-2009, Alston, Fuller, Lapsley, Soleas and Tumber (2015) document that alcohol content was underreported on average, and that, conditional on underreporting, the true alcohol content was understated by 0.42 percentage points

A fascinating example of adjustment by non-price dimensions. 

The IFS "Green" or Shadow Budget

 I'm asked to discuss the IFS Green budget (this means their budget analysis, nothing to do with the environment specifically). Here is their analysis and my comments, labelled "comment". 

1. Backdrop: growth decelerating, unemployment and inflation rising.  But near-term outlook: inflation falls to target and growth comes back a bit, from previous monetary loosening. 

2. Near term outlook depends on: what happens to current high savings, population./migration and productivity.

3. What matters? In the near-term, Bank of England easing, the budget.  in the medium term, TFP is expected to pick up.  

Activity

4. the key is the public sector and migration.  "with private domestic demand just 2% above its pre-COVID level compared with an increase of 16% in the rest of the economy over the same time frame. The public sector and net trade have instead played an outsized role in driving recent growth, alongside an expanding population, itself driven by net migration. Real GDP per capita grew just 0.1% year on year in 2024, followed by 0.7% in the first half of 2025." 

hence the key questions:

a. can the private sector fill the gap?

b. if migration falls, will productivity rise to drive growth?

They say yes: 

5. on disposable income, a target for the government, some progress is expected. 

6. on investment, the position is extraordinary.

a. revisions have raised investment. "Business investment is now estimated to have been 6.8% higher than its pre-COVID peak in Q2 2024, compared with just 0.4% above in the data that underpinned the OBR’s March forecast".

b. but the biz invest/GDP ratio is 11 in 2025Q2.  It's 16% in the US and 17% in Germany. 

c. margins have been squeezed, depressing investment. 

d. even stronger investment will not be enough to close the Allas and Zenghelis (2025 capital gap.  My comment: their estimates run from 50-12% less capital per hour than peers, with a central one of 33%.  I am closer to 12% then 33%. 

7. Trade.  

a. "the effective tariff rate on UK goods exports to the US, which make up 16% of total

UK goods exports, has increased 8 percentage points to 9%. Application of macroeconomic

multipliers would suggest that this reduces UK GDP via a direct trade channel by 0.1–0.2

percentage points by the end of 2026" 

b. "Yet, for a small, open economy such as the UK, and especially one whose activity is more

heavily focused in the service sector as opposed to goods production and manufacturing, it is the

increased uncertainty and the global trade slowdown, rather than the direct impact of tariffs

applied to the UK, that has the larger consequence" 

8. the labour market. 

a. "we judge the labour market to be loose. Vacancies in the economy continue to fall and the ratio of vacancies to unemployment is now comfortably below estimates of the equilibrium rate" 

b. "With inflation easing and a loose labour market, we expect nominal wage growth to slow to 3–3.5% in the coming 12 months and to settle around 2.5–3% from mid 2026 onward. We expect improving productivity to allow for 0.5% annual real wage growth with unit labour costs growing at a rate consistent with 2% inflation.

One risk to this outlook is that workers look to catch-up perceived past real income losses (Haskel, Martin and Brandt, 2023; Bernanke and Blanchard, 2025). We judge this to be a limited risk. Extrapolating a trend for real earnings growth up to the start of the pandemic and then playing it forward would suggest that this process is already complete and historical losses have been regained (Figure 1.9)." 

Comment. this is interesting, but it depends on stable inflation expectations.  There is some evidence this is rising.  So I think there may be more wage pressure.  My reading of the Bank work is that there is is still unexplained upward wage pressure.

9. inflation

A graph of CPI 

a. this is mostly driven by energy prices, administered prices (e.g. VAT on schools, Vehicle excise duty). 

b. stripping them out give inflation looking much closer to 2.5% and likely to fall. 

c. inflation expectations have risen, but to the extent this is due to food etc. they willl when the base effects fall away. 

Policy

1. Monetary policy. 

"the neutral rate, the appropriate path to follow has become even more unclear.

Despite the recent cuts to interest rates, monetary policy remains restrictive in an absolute sense and is weighing on economic output (Bank of England, 2025, box A). We view the nominal neutral interest rate as between 3% and 3.5% and so, without further easing, monetary policy is likely to continue to act as a headwind to growth and will weigh on inflation. What is more, the economy continues to be haunted by the ghost of tightening past. The lags between monetary policy decisions being taken and them affecting the economy mean that, even though the extent of restriction has been reduced, we are still feeling the effects of more restrictive rates from two years ago. This point can be illustrated by using granular mortgage data from UK Finance which show we are in the midst of a wave of remortgaging (Figure 1.18). People dropping off five-year deals will be moving to a rate that could be more than 2 percentage points higher than previously. This suggests that the cash-flow channel of monetary policy will bite for the foreseeable future."

"We continue to think that quarterly cuts to Bank Rate are the appropriate path for the MPC to take until the rate is closer to the neutral rate. If not, the risk is that the Bank ultimately has to cut faster and further, with a then-unavoidable undershoot of inflation in the interim. Current market pricing implies that Bank Rate will hit 3.6% in Q3 2026, roughly 0.2 percentage points below the level the OBR had assumed in March." 

Comment. Much depends on what you think the neutral rate is. If U* has risen then policy needs to be tighter. 

 Fiscal.

1. "forecast assumes that this fiscal consolidation is achieved predominantly through a combination of extending the freeze on income tax thresholds beyond 2027–28 and a more frontloaded increase in the basic and higher income tax rates (1 percentage point on each). While this would contravene a government manifesto pledge, we judge this to be one of the few ways to raise sufficient funds credibly and reliably" 

2. A major risk for this Budget (discussed in more detail in Chapter 2) is that the consolidation is insufficient to satisfy markets that we will not be back in the same position next spring, or autumn. ...another fiscal consolidation in the future ...would act as a further drag on growth. This can become self-fulfilling.....The government needs to break out of this cycle.

Comment. This is absolutely right.

The supply side.

The potential growth data are nicely set out 

The population data are amazing.

"We calculate potential output growth has been under 1% in 2023 and 2024. This has been driven by growth in the population of the UK, which expanded 1.3% in 2023 and 1.1% in 2024. These were the highest annual growth rates since the series began in the 1940s. This population growth was almost exclusively a result of net migration flows, particularly from outside the EU. Net migration from the previous year to mid 2024 was 738,718," 

But the population growth figures are likely to fall "Lower net migration leads the working-age population to grow by an average of 0.7% per year" 

"These downward trends are offset over the medium term by rising trend (and realised) total factor productivity growth, which we assume moves from –0.3% currently to 0.4% year on year by 2030. The latter effect dominates and the UK’s potential growth rate increases from around 1% in 2026 to around 1.5% by 2030 (Figure 1.23)."

Some issues with this

1. how does this compare with OBR? 

"In March, the OBR forecast that output per hour worked, which had fallen

by 1.0% in 2024, would increase by 0.2% in 2025 and 1.1% in 2026, and by 1.3% in 2029–30. Outside

of the pandemic, the UK has not seen such rates of productivity growth on a sustained period in the

past 20 years. Our own forecast embodies an increase in output per hour worked of 0.8% in the

medium term. We condition it on the same population projections used by the OBR in March, and

broadly similar expectations for declining average hours and participation. Our forecast is actually a

little more optimistic than the OBR’s on capital deepening. The biggest difference derives from our

differing views of total factor productivity (TFP). The OBR assumes this will average 0.8% annually

over the forecast and reach 1% by 2029–30. This is roughly 0.6 percentage points higher than the path

in our forecast by 2029–30." 

2. what might affect productivity?

"Faster adoption of AI. We have seen significant global investment in the infrastructure required for

AI, and plans for this to accelerate in the UK (Department for Science, Innovation and Technology,

2025; Pabst and Marioni, 2025). There are signs that UK firms are increasingly adopting AI, with

55% of firms answering the Bank of England’s Decision Maker Panel already using it in some form

and an expectation this could increase 10–20 percentage points in the next three years.

▪ Realigning trade with the EU and greater openness. Evidence suggests that more open economies

are more productive, with better generation and diffusion of innovation (D’Aguanno et al., 2021). The

UK has seen the negative consequences of this since Brexit, with estimates suggesting it has reduced

productivity by 4% (Office for Budget Responsibility, 2020; Dhingra et al., 2016). Current government discussions with the EU could reverse some of this trend if they can lead to a more flexible labour market (e.g. the Youth Mobility Scheme), sharing of R&D resources and reductions in the costs of doing trade. That said, as discussed above, the trend globally is for less openness to trade, not more.

▪ Fiscal and political stability crowding in productivity. There is an established link between political, fiscal and economic uncertainty and productivity and growth (Hong, Ke and Nguyen, 2024; Bloom, 2007). The UK government currently has a large parliamentary majority and no requirement to call an election for four more years, and if it can maintain stability of both policy direction and tenure then there could be a dividend in the form of better productivity performance.

▪ Public sector productivity increases. Partly as a consequence of the above, public sector productivity increases may be able to leverage the developments above (AI, openness, stability) to improve. However, even the current plans may seem optimistic, as discussed in Chapter 6."

Some overall comments.

1. The fiscal problems must be solved.  We cannot have another year of minimal headroom and higher taxes that might or might not raise money. The attendant uncertainty will be terrible for investment and confidence.

2. I am less hopeful about interest rate cuts.  Current rates are 4%.  "Current market pricing implies that Bank Rate will hit 3.6% in Q3 2026," says the report.  "Our relatively benign economic outlook is predicated on the Bank of England continuing the trajectory it has been on since August 2024 and removing further policy restraint over the coming months, taking Bank Rate to 3.5% – which we judge is within the plausible range of estimates of the UK’s neutral rate, the short-term interest rate that neither adds to nor subtracts from inflationary pressure – by the end of Q1 2026."  Thus they are more hopeful than the market about rate cuts.  I am pessimistic.  I think the labour market has deterioriated and the natural unemployment rate has risen: I note that the Bank still has unexplained wage pressure in its wage equations.  Thus I would not expect so many cuts.

Why has U* risen?  The extension of NI contributions to the lower paid would have been bourne by workers  but it cannot be with the surprise rise in the NLW.  An additional rise to U* will come from the so-called Employment Rights Bill.

3. Regarding TFP, estimated at around -0.2 for 2025 but forecast to rise to 0.2%ps in 2030, with the OBR expecting 0.8% and 1% by 2029, we have the following.

a. market sector TFP was 0.8 and 1.9 1991-95 and 1995-00, falling to 0.2 2011-18 and -0.4 2019-23.  

b. but that is misleading. The "resource" sector, ag, mining, gas, elect, water, construction is very volatile, especially mining.  Without this sector, market sector TFPG is 0.5%pa 2011-18 and -0.1%pa 2019-23. 

c. the sector that's powering TFPG is ICT service, (sector J, info and comms services), contributing +0.4%pa 2019-23 (in the US 0.5).  What the US has seen is a rise in the use of those services, notably, software, with non-ICT services  contributing 0.4%pa.  In the UK, that sector is contributing -0.3%pa.  So an optimistic take is that sector starts to contribute, or at least not be negative. If not negative, the non-resource TFPG would be 0.2.  So one justification for an 0.2% rise, at least for the private sector is that.

d. Buts,  First, TFPG and intangible investment in services depends on many things, but in part on labour market regulation. This will tighten with the Employment Rights Bill and so lower intangible investment. 

e. But also we have negative TFPG in the public sector, particularly health.  What do we know about this? The ONS publish "public service productivity", see here for the latest.  This meaures "Public service productivity is measured differently to labour productivity and multi-factor productivity and is not directly comparable. It reflects the volume of services delivered to end users, relative to the volume of total inputs (which include labour, intermediate consumption, and capital). The measure is dominated by healthcare and education services because of their relative size. " 

So it is a sort of TFP measure and shows a lower level than 2019

Source: ONS. Notice that quarterly estimates differ from annual with no quality adjustments and less full breakdown of inputs via COFOG. 

More on how the ONS calculate outputs and inputs is here.  Broadly speaking, capital, labour and intermediate inputs are collected for different types of inputs. 

e. 

UK productivity growth history since 1997

 A very useful graph from the Resolution Foundation that I hope they don't mind my posting 

The latest IMF World Economic Outlook

 1. Launched in Washington on 14th October 2025. 

2. Some highlights that caught my eye

3. First, the growth projections

a. they are revised up a bit from April's outlook but that is because US tariffs have turned out to be not as bad as was previously thought.  IMF also remark that some of the bad effects of tariffs have been moderated as importers rush through imports in advance of tariff implementation, when they can.

b.  The UK has a target of being the fastest growing economy in the G7 (G7 is Canada, France, Germany, Italy, Japan, UK, US).  Well in 2025, we will be 2nd fastest and 2026, 3rd according to this forecast.

c. The big story is the US is a huge outlier (aside from Spain).  This is almost certainly driven by AI.  

d.  the IMF stress uncertainty.  Here is the economic policy uncertainty index for the UK up until September 2025 (source: .  Baker, Scott R., Bloom, Nick and Davis, October 15, 2025) 

Not as high as in Brexit, but still well above average levels. 

4. Inflation (the final columns)

a. here the news is not quite as good.  Euro Area inflation will be 2.2 and 2.0 in 2025 and 2026, with the UK at 3.4 and 2.5, much higher. 

b. the stickiness in inflation is likely due to the deteriorating labour market. 

What would the UK have to do to raise our growth rate to that in the US?

 1.  UK labour productivity growth is about 0.3%pa, 2019-2024. US labour productivity growth is at least 1 percentage point higher over a similar period (see OECD ).  So what would we have to do to get an extra 1%pa productivity growth?

2. Lets see this in terms of building more houses.  

3. The rate of return on capital is around 10%.  That tells you the extra output from one extra unit of capital.  Let's convert that into a percentage: since the capital output ratio is about 3, then the percentage change from a 1% change in capital is 0.3%. 

4. The UK has around 30m dwellings (25m in the England).  Dwellings are about 40% of the UK capital stock.   So to get 1 percentage point more growth we would need 12% more housing (0.3*0.4*12%=1%).  

5. On a stock of 30m, 12% is 3.6m new homes.  The government's target is 1.5 new homes over 5 years = 300,000 per year. Over the last decade we have been building around 0.8% of the stock  which is around 240,000.  So at previous rates, this objective would take us 15 years, at the new rate 12 years. That is, we would have to do 15 years worth of building in one year. 

6. a passing note. Why do we care about these seemingly small numbers, changes from 0.3% to 1.3% to 2.3%?  The answer is compounding. By the rule of 72, we can double output in 72/2.3 = 31 years with growth at 2.3%.  With growth at 1.3% and 0.3% it takes 55 years and 240 years.  

UK TFP relative to other countries

 1. The Fernald/Inklaar paper is important.  It argues that the UK TFP levels problem not in manufacturing or market services.  It is  mining and utilities.

2. First they look at overall TFP levels

The key here is that they take comparative level data from 1997 and extrapolate it forward using national data.  This means that an awful lot depends on the accuracy of that 1997 level data.

As they say, the UK coverged towards the US pre-2007 but then has been in a consistent gap. "althought the US has been pulling ahead in terms of labour productivity in the left panel..., TFP levels in the right panel are much more stable. For example, the EU-5 level of TFP was 90% of the U.S. level in 1985, 91% in 1995, and 91% in 2019."

3. where do these TFP level differences come from?  Using the same method they can break levels out by industry

Some definitions:EU-5 (Germany, France, Netherlands, Belgium, Finland). Market services is G, H, I, J, K, N, S.  Other is A agriculture, B Mining, DE Utilities, F construction).  Other is 17% share of UK  market sector value added, manufacturing about the 20%, services the remainder. 63%.  

4. so what explains the differences in the overall TFP levels?  

"But as Figure 2 showed, the overall UK level of TFP remains well below the US or EU-5. If it is not manufacturing or market services, then it must be in the remaining 17% of the market economy that we labelled “other” (agriculture, mining, utilities, and construction). Indeed, a third takeaway from Figure 6 is that he level of TFP in other industries has collapsed since the early 2000s, dropping from approximately two-thirds of the US level to only one-third."

5. They have a good discussion of falling TFP in mining 

"Consider the accessibility of an oil deposit as the “quality” of the natural resource as an input. Holding fixed that natural resource quality, suppose that the same quantity of other capital and labor leads to the same output. Then technology and TFP are both unchanged. But if the quality of the natural resource gets worse (e.g., the North Sea runs out of oil), then the same observed inputs, with unchanged technology, leads to lower output. Although technology has not changed, measured TFP falls.

From this perspective, the observed decline in UK TFP in mining (oil extraction) presumably reflects the declining quality of North Sea deposits. " (My italics).

They continue: " In the U.S., fracking is a technological innovation that substantially lowers the cost of extraction at a given location. Because of that, new locations that were previously uneconomic are now worth drilling. In other words, fracking allowed a given quantity of observed inputs to lead to increasing amounts of oil and gas extraction, despite a shift to lower-quality deposits. Hence, measured TFP (which does not account for the shift to high cost, ‘low quality’ deposits) also understates the true technology gains."

6, the PWT data. The latest PWT data shows comparative TFP levels (this uses the CTFP measure). 

This seems to show Britain ahead of the US.  Looking at the data appendix to the PWT, see here, appendix C, we have this calculation is relative PPP outputs over relative PPP inputs

which is writtne

where j is the country.  

How do they get internationally comparable capital stocks?  For each country Changes in capital stock of assets are calculated by a PIM for each asset.  This change is then aggregated over the assets.  To get an internationally comparable total capital stock level, the level of this is deflated by an investment price for each asset 

where i is the coutnry and a the asset, with the relative prices of the capital stock as 

In turn the "The prices for each asset are based on PPP benchmark surveys: the six ICP surveys since 1970 and the more frequent surveys by the OECD and Eurostat since 1995. The prices from these surveys do not directly map into the six assets we use. "

Given these issues, the meaurement of the comparative levels might be different to the 1997 method used in the Fernald/Inklaar work above. 

Is Britain an low investment country?

1.  Giles Wilkes shows this graph, drawn in turn from OECD via ONS for total investment as a share of GDP.  The UK is resoundingly at the bottom 

2. Fernald and Inklaar, in an excellent piece, look over a longer period, including and excluding dwellings

(EU-5 are appropriate PPP-weighted Törnquist indices for Germany, France, the Netherlands, Belgium, and Finland).

Some points.

a. note that excluding dwellings is a big deal.  The EU lags the US in recent data when you do this (remember dwellings are around 20% of total GFCF in countries like the US, and UK, Germany, France: 30% in Spain, see Table 3 in ONS).

b. the very low UK story in the Wilkes table is a post 1990 story.  Before then the UK was with other countries.  So if we want to say why the UK is so low, we have to say why it was high before 1990.

3. What if we include intangibles Fernald and Inklaar then show, using  our EUKLEMS-INTANProd dataset this really matters

Some points.

a. note how the UK is more in line with others, though this is a shorter time span

b. Note the UK flatlining since 2016, the Brexit referendum. 

Notes on the UK Steel Industry

 1. the ever-brilliant House of Commons Library published British Steel and government special measures, June 23rd. Some notes.

On 12 April 2025, Parliament passed the Steel Industry (Special Measures) Act 2025, giving the Secretary of State powers to issue directions or take control of steel undertakings in England at risk of closure. This allowed the government to take control of British Steel’s operations, including securing raw materials, and maintaining blast furnace activity.

What is it costing

2.  On 20 June 2025, the Minister for Industry, Sarah Jones stated that the amount of working capital provided for British Steel since passing the emergency legislation on 12 April stood at £100 million.

On 27 March 2025, announcing its plans to consult on closing the two blast furnaces at Scunthorpe, British Steel said that despite Jingye’s investment of £1.2 billion since 2020, the operation of the blast furnaces caused losses of £700,000 a day. British Steel’s costs of building an electric arc furnace have previously been estimated to exceed £1 billion.

Comment. 0.7m per day is £255m per year.

Employment.

3. The company had opened a formal consultation on “the closure of the blast furnaces, steelmaking operations and a reduction of steel rolling mill capacity in Scunthorpe”, which means a consultation with its workforce on redundancies.14 The closure of blast furnaces at Scunthorpe would put 2,700 jobs at risk out of a workforce of 3,500, according to BBC News

in UK Steel Industry: Statistics and policy we learn 

"According to the latest (May 2024) UK Steel estimates, the industry employs 33,700 people and a further 42,000 in the wider supply chain." 

Comment.  2,700 jobs is 8% of the whole workforce.  A payment of £255m per year is £94,000 per job.  There is more or less full employment in the UK at the moment. It's not clear those individuals wouldn't get another job.

Green.

4. From  in UK Steel Industry: Statistics and policy we learn:

"The steel industry is a significant contributor to greenhouse gas emissions. It is responsible for 13.4% of greenhouse gas emissions from manufacturing, and 2.2% of total UK greenhouse gas emissions, while it contributes 0.1% of the UK economy and 1.0% of UK’s manufacturing output." 

"Two main methods dominate steelmaking in the UK: the blast furnace and electric arc furnace method" 

Tata Steel has closed its blast furnaces at Port Talbot and is investing in EAFs, as set out in more detail in section 6. Also British Steel had plans to decarbonise steelmaking at Scunthorpe by closing its blast furnaces. This together was estimated to reduce the UK’s territorial greenhouse gas emissions by 2%

However, the extent to which an EAF is green will depend on the electricity that powers it. For example, if the electricity is produced from fossil fuels, the EAF will have limited emissions savings, whereas if the electricity is produced from a mixture of technologies including some that are low carbon (as the electricity grid in the UK is) then the EAF does provide emissions reductions to the steel making process.

Comment.  So if we are to decarbonise then we will have to spend on an EAF. This is estimated to be £1bn. 

Energy costs

5. UK electricity prices for very large industrial consumers in the second half of 2023 were higher than for any EU member state. They were 23.04 pence per kWh which was 71% above the median price in the EU.

The main support measure for energy intensive industries’ electricity costs is a series of exemptions and compensation. The government provides compensation or exemptions to energy intensive industrial users for the indirect costs (higher electricity prices) associated with funding certain decarbonisation policies. The policies include the climate change levy, contracts for difference mechanism, renewables obligation and feed-in tariffs. The government said in November 2023 it had provided the steel sector with more than £730 million of relief since 2013 to make energy costs more competitive

Comment.  So additional support comes from these exemptions. 

Security

6. "With the closure of the blast furnaces at Port Talbot, and the possible closure of British Steel’s blast furnaces in Scunthorpe, and the transition to solely electric arc steelmaking, the UK would lose its primary steelmaking capacity. 150 Should that happen, the UK would be the only G20 country that does not produce its own virgin steel. This has led to some questions around national security and whether virgin steel production should be retained as a sovereign capabiliy". 

"According to the Royal United Services Institute for defence and security studies, prime contractors supplying the MoD have a mixed record on the use of UK steel. The Financial Times reported the facilities at Port Talbot were not used to produce steel used in defence" 

"In the Opposition Day Debate on 23 January 2024, the Secretary of State for Wales acknowledged that historically there was an issue with the quality of the steel produced in an arc furnace. Experts had reassured him, however, that it was steadily improving. He said: Tata expects an electric arc furnace to be able to supply about 90% of the products that it currently supplies through the blast furnace"

the Business and Trade committee take the view " The committee refers to evidence that blast furnaces still play a critical role in strategic and high-grade steel production, including for infrastructure construction. Keeping the Scunthorpe blast furnace open would maintain supply chains" 

Comment.  It's a bit obscure to me whether this steel is security necessary.  And if it needs blast furnaces then it won't be very green. 

Updates.

1. the New York Times reports, August 22nd 2025, "for the second time this year, the British government is set to take control of a large, ailing steel business.

The move comes after a court approved on Thursday the liquidation of the unit, called Speciality Steel UK, which is part of Liberty Steel, a metals business started by the industrials entrepreneur Sanjeev Gupta. The government is expected to guarantee pay for the nearly 1,500 employees there" 

2. speaking in Parliament, we have the minister: it's not clear, but I think she is supporting the workforce on furlough. 

But she then advances a new argument regarding Scunthorpe:

"It is worth noting that Liberty Speciality Steels uses electric arc furnace technology that can be powered up or down as needed" 

"The circumstances in Scunthorpe were fundamentally different. British Steel operates the UK’s last remaining blast furnaces—assets that, once shut down, cannot simply be restarted. Allowing those blast furnaces to be closed pre-emptively would have removed our ability to make strategic choices about the future of steelmaking in Scunthorpe, and that was not a position this Government were prepared to accept. Scunthorpe was therefore a truly exceptional situation and that is why we took the unprecedented step of implementing the Steel Industry (Special Measures) Act 2025 to maintain the safe operation of the blast furnaces."

As for Liberty, the support seems to be for the workforce:

"The situation with Liberty Speciality Steels is not comparable. The company was issued with a winding-up order by the High Court due to longstanding financial issues. Spending taxpayers’ money on a company operating in such a way would have exposed taxpayers to hundreds of millions—potentially billions—of pounds in hidden costs." 

R&D and productivity: some notes

I'm kindly invited to the British Academy to discuss a report https://www.thebritishacademy.ac.uk/publications/mapping-the-economic-returns-of-r-and-d-in-the-uk/  Mapping the Economic Returns to R&D.

Here are some notes.

1. A puzzle. “changes to the Office for National Statistics (ONS) Business Enterprise R&D (BERD) survey methodology suggests that business investment in R&D is higher than previously thought. However, the UK is still seeing stagnating productivity and economic growth.” 

How can this be?  There is a confusion here on levels and growth.  Remember that the level of productivity depends on the level of the capital/labour ratio.  The level of capital this year depends on the net of deprecation last year capital plus investment.  If we have discovered more investment then 

a. The level of GDP rises since there is less intermediate and more investment 

b. The level of capital rises with more investment.  

c. What about growth? proportional capital growth is I/K – deprecation.  So discovering more I only raises capital growth if there is no more K, but the more I means more K.  So in the steady state, capital growth is the same. 

2. Is the “UK good at research but bad at commercialisiation”.  Commercialisation costs money.  So if we were bad at it, then the returns to UK investment would be very low.   Below is a picture of the return on UK market sector capital. 

 

The UK is the thick black line. No sign that it’s particularly low. 

3. The report rightly points out that there are many pathways to innovation.   Using the latest ONS data on intangible investment, https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/bulletins/investmentinintangibleassetsintheuk/latest#investment-by-industry-section-in-2022, we have the following

a. R&D GFCF as a proportion of GVA is largest in manufacturing

 

b. But viewed besides other intangibles, it’s relatively small: notice the investment in software.  

 

c. There’s an important point here: in the national accounts, ESA10, software made in the process of conducting R&D is counted as GFCF in software and not R&D.  

4. The report has an interesting take on government innovation around it’s discussion of “moats”.  I think the idea is this

a. There is a wedge between the private value of spending on innovation and social value if spenders cannot appropriate returns from spending e.g. rivals copy their ideas.  

b. The usual economics answer is that if returns can be appropriated = a “wide moat” e.g. watertight IP, then firms need no support and vice versa for a “narrow moat”. 

c. They then distinguish between “tradeable” and “non-tradeable” technologies and processes.  They say “For non-tradeable technologies and processes, or those that primarily operate in a domestic market, research, commercialisation, and adoption tend to occur in domestic pathways, with commercialisation and adoption more tightly bound, often with a single actor or firm. There is a high proportion of process-led innovation and direct implementation within firms.”  I think the terms are unfortunate since tradeable and non-tradeable mean something specific in economics, but I think what is implied is whether commercialisation occurs, for reasons of technology, secrecy etc., either largely within firms or could also occur outside.  

d. Their examples are in their Table 1: 

 

Where for example mRNA is tradable, by which I think they mean potentially developed anywhere, but has patent protection.  Innovative galleries, are, non-tradable ie. Found in a particular country, but have a wide moat, which means they are hard to duplicate.  

e. This leads to policy proposals

 

5. Some thoughts on this

a. The point that knowledge is non-rival is often used to justify that innovation will not earn returns.  But this depends if the knowledge is also excludable, which is the moat point.  This is valuable.  The UK Patent box costs £2bn with 145 companies accounting for 92% of relief. They probably have IP protection, so this feels like money that can be reassigned (https://haskelecon.blogspot.com/2025/10/how-much-is-uk-r-tax-credit-scheme.html). 

b. The R&D tax credit costs not £7.6bn, with around 40% going to large firms.  Perhaps we have to live with this since we have a relatively high corporate tax rate (https://obr.uk/box/corporation-tax-in-historical-and-international-context/) , 2020 data from OBR below.

 

c. What is the problem we want to solve here?  In my work with Hans Neilson we have some of the following: a.       

                                                              i.      The UK post GFC slowdown is mostly a slowdown in TFP in non-ICT service industries. 

                                                            ii.      The UK productivity growth story since the pandemic is this. Excluding sector L, GVA per hour grew 0.34pppa 2011-18 and 0.24pppa 2019-24.  (Notice how important sector L is, Whole econ data are 0.50 and 0.35).

                                                          iii.      The Marimekko diagram is this 

Where notice that health and education have growth and shares of -3.5%pa and 1.8%pa and 10% and 7% (pre-pandemic, 2011-18 growth rates were 0.4%pa and -0.3%pa).  Thus the 2019-24 contributions to labour productivity growth were -0.31%pa and 0.12%pa. 

So to a first approximation, the answer to the question " we are doing all this R&D and what is happening to labour productivity growth" is, since 2019, the drag from the health service. 

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%)"

•