Chris Coghlan

In February, Louise Holmes took me to her restaurant HolmeStores in Dorking, which was especially popular for brunch. It had fantastic food and a beautiful wood-panelled interior. Louise had 12 employees and was thinking about a second site, but she could not afford the employers’ national insurance increase, so today it is closed. Putting my constituents out of business through tax rises is no way to grow our economy. Americans are twice as rich as they were in 2008; why are we 10% poorer? This is called the productivity puzzle, but actually it is no puzzle at all. Decades of research, including by recent Nobel prize winner Philippe Aghion, show that productivity can be raised by policies that support innovation, such as public research and development. UK Government support for nuclear submarine technology has led to the development of Rolls-Royce’s small modular nuclear reactors for civilian use. The roadblock is that economic policymaking in this country is too often driven towards meeting the OBR’s fiscal rules, while the OBR uses flawed assumptions for growth, such as the assumption that public R&D has no impact on economic growth after five years. The Budget has been surrounded by controversy about the £16 billion productivity downgrade, but the more serious question is: why did the OBR downgrade productivity in the first place? In the 15 years since the OBR’s inception, it has consistently overestimated productivity, and has had to downgrade it when it has been wrong, which has created enormous volatility in economic policymaking. That is no way to run a G7 economy. The good news is that the Government have started to adopt some policies that raise productivity. London Business School’s Paolo Sirico—I introduced the Chancellor to his work last year—has quantified the stunning impact that public R&D can have on economic growth. Paolo has shown that from 1950 to 2015, US patents that had a publicly funded component generated 12 times the productivity of patents purely funded by the private sector. The most famous example of that is, of course, John F. Kennedy’s Apollo programme. Public funding of basic research in universities and laboratories is so powerful for economic growth because it de-risks the cost of developing new technology and generates the discoveries that attract private investment into start-ups and venture capital. In the spring statement, using Paolo’s model, the Chancellor was able to use £2.2 billion of extra defence R&D to upgrade long-term UK GDP growth by £11 billion a year. I therefore urge the Government to adopt a broad public R&D investment strategy for economic growth, like the US, Israel and South Korea. The investment needed is not actually that large—an extra £5 billion a year on public R&D would take us to US levels, as a share of GDP—and, if we borrowed to do that, debt-to-GDP would actually fall because GDP would rise faster than debt over the long run. I urge the Government to invest £5 billion in public R&D in our leading industries, such as finance, film, defence, healthcare and renewable energy. Then it might be possible to turn our country into one of the fastest-growing advanced economies in the world.