Rising R&D spending brings hope of higher living standards

SALVATION could be on the horizon for Britain’s stagnant living standards as investment in research and development rises to its highest level in almost 30 years.

Employees need to churn out more for every hour worked if wages are to rise significantly, but since the financial crisis productivity has barely budged. For years there has been little sign that R&D investment has been delivering extra output. However, officials hope the new higher spending will finally start generating cutting-edge technologies for the future, turning around the miserable performance of recent years.

R&D spending amounted to 1.15pc of GDP in 2017, the Bank of England found, the highest since 1990. It is up from a low of less than 1pc between 2003 and 2006.

Yet productivity growth has struggled, with output per hour worked increasing only very slowly. Ben Broadbent, the Bank of England’s deputy governor, suspects it did not grow at all last year, and the Bank has cut its 2019 forecasts for productivity growth to just 0.25pc.

This is a serious problem for the economy and for households as higher productivity – the ability to produce more output in every hour worked – is the foundation of greater prosperity. It has slowed almost to a halt since the financial crisis. Economists at the Bank hope this R&D spree may be at least laying the ground for future productivity growth. “New discoveries tend to take time to implement and evidence suggests it can take between two and six years on average to boost productivity growth within firms,” said the Bank’s Inflation Report.

There is also a risk that new developments and discoveries are not being acted on as companies hold back spending on investment, whether in physical capital or “intangibles” such as training and management. “While the pickup in R&D spending could boost productivity growth in coming years, many of the factors that have weighed on productivity growth over the past decade are expected to persist,” the Inflation Report said.

Despite the rise in R&D spending in the UK, it remains still relatively low by international standards. Jagjit Chadha, director of the National Institute for Economic and Social Research, said: “There has been an increase but it is still far below international comparators which are generally at 2pc or more, so the level of R&D spending is still low. Excluding Italy, the UK is far behind its G7 comparators.”

Companies have also cut back investment spending, citing political uncertainty as a key risk, as well as the slowing global economy.

“After doing the R&D, a level of investment is required at a firm in order to enact any action on it to boost productivity,” said economist Tej Parikh of the Institute of Directors.