According to Financial Times News, Britain’s productivity crisis has become a defining economic challenge, with output per worker barely growing since the financial crisis and total factor productivity actually declining. Despite billions in R&D tax credits, patent box reliefs, and full expensing for capital investment, productivity has flatlined. The core issue identified is not innovation shortage but diffusion failure – Britain’s policy rewards businesses creating new ideas rather than adopting existing ones. The tax system compounds this by allowing full R&D expense deduction while requiring intellectual property purchases to be amortized over decades, effectively subsidizing reinvention over adoption. Research estimates that allowing full expensing of IP purchases could raise GDP by 0.3% within five years at just a tenth of the fiscal cost of capital expensing. This analysis reveals deeper structural flaws in innovation policy.
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The Diffusion Gap in Modern Economies
The concept of productivity growth has always depended on both frontier innovation and widespread adoption, yet most policy frameworks obsess over the former while neglecting the latter. What makes Britain’s situation particularly concerning is that we’re witnessing a classic case of policy misalignment with economic reality. The largest 5% of companies capturing nearly 80% of R&D benefits and 94% of patent box reliefs indicates a system designed for scale rather than diffusion. This creates what economists call a “dual economy” – where cutting-edge firms race ahead while the majority stagnate with outdated technologies and practices. The irony is that many productivity gains come not from breakthrough inventions but from adapting proven methods across sectors.
How Tax Policy Creates Perverse Incentives
The current tax treatment creates what behavioral economists call a “status quo bias” toward internal development. When companies can immediately deduct R&D expenses but must amortize external IP purchases over decades, the accounting treatment alone makes buying established technology appear less attractive than reinventing wheels. This isn’t just about R&D tax credits – it’s about the fundamental mismatch between how we value different forms of innovation. The patent box regime further entrenches this by rewarding patent ownership rather than technology utilization. What’s missing from the current debate is recognition that many of the most productive companies aren’t necessarily the most innovative – they’re often the best at implementing others’ innovations.
The Implementation Hurdles Ahead
While the proposed fix seems straightforward, implementation would face significant challenges. Defining what qualifies as “IP purchases” could become a regulatory minefield, potentially creating new loopholes for creative accounting. There’s also the risk that companies might overpay for mediocre IP simply to gain tax advantages, similar to what happened with R&D tax credit abuse. The transition period could create market distortions as companies rush to restructure their innovation strategies. Most importantly, tax policy alone cannot solve the underlying skills gap and management capability issues that often prevent technology adoption in the first place. As Martin Wolf and other economists have noted, Britain’s productivity problem is multidimensional.
Beyond Tax Reform: The Bigger Picture
The fundamental issue extends beyond tax treatment to how we measure and reward economic progress. Our obsession with total factor productivity as an abstract concept often obscures the practical reality that most productivity gains come from incremental improvements rather than revolutionary breakthroughs. The regional implications are particularly significant – when innovation policy favors large, established companies concentrated in specific geographic areas, it naturally exacerbates regional inequalities. The proposed reform represents a shift from innovation exceptionalism to innovation pragmatism, recognizing that economic growth depends as much on spreading existing knowledge as creating new knowledge.
Realistic Outlook and Predictions
Given the current political and economic climate, the likelihood of such reform remains uncertain despite its apparent benefits. The 0.3% GDP boost estimate, while significant, depends on widespread uptake and assumes companies have both the capability and willingness to change their innovation strategies. In practice, we might see initial resistance from large corporations that benefit from the current system, along with implementation delays as the treasury assesses revenue impacts. However, the growing recognition that Britain’s productivity crisis requires structural rather than incremental solutions makes this type of bold reform increasingly plausible. The real test will be whether policymakers can look beyond traditional innovation metrics and embrace diffusion as equally valuable to invention.
