The £100 Billion Idea: A Simple Fix to Supercharge Britain’s Stagnant Economy

For over a decade, the British economy has been haunted by a persistent ghost: the productivity puzzle. Despite being a global hub for finance, technology, and innovation, the UK’s economic output per hour worked has flatlined since the 2008 financial crisis. This isn’t just an abstract problem for economists; it’s the root cause of stagnant wages, strained public services, and a pervasive feeling that the country is running just to stand still. While politicians have proposed grand industrial strategies and complex interventions, a Professor of Economics at London Business School has suggested a solution of remarkable simplicity and power, one that could unlock billions in private sector investment and fundamentally rewire the UK’s approach to innovation.

In a concise letter to the Financial Times, Professor Paolo Surico argues that the key lies not in creating new schemes, but in fixing a crucial existing one: Research and Development (R&D) tax credits. His proposal? Make all R&D expenditure immediately and fully deductible against tax liabilities, with any excess credit being paid back in cash, instantly. It’s a subtle shift in accounting and fiscal policy that could have a seismic impact on everything from the stock market to the next generation of financial technology.

Diagnosing the UK’s Productivity Malaise

Before exploring the cure, it’s essential to understand the disease. Productivity—essentially, how efficiently we turn inputs like labour and capital into outputs like goods and services—is the single most important driver of long-term prosperity. When it grows, so do wages and living standards. When it stagnates, the entire economy feels the squeeze.

Since 2008, the UK’s productivity growth has been abysmal compared to its historical performance and its international peers. According to the Office for National Statistics (ONS), UK productivity is significantly lower than that of economic powerhouses like Germany and the United States. This “lost decade” of growth has cost the average worker thousands of pounds in potential earnings.

To illustrate the scale of the challenge, let’s compare the UK’s productivity gap with other major economies.

Source: ONS, International comparisons of productivity, final estimates: 2021. This data highlights the tangible gap in economic efficiency the UK needs to close.

The causes are complex and fiercely debated, ranging from chronic underinvestment in infrastructure and skills to the economic scarring from Brexit and the global financial crisis. However, one of the most critical factors is a persistent weakness in business investment, particularly in the high-risk, high-reward area of R&D.

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The Proposed Cure: Unleashing R&D with a Cash-Flow Revolution

This is where Professor Surico’s idea comes in. The UK already has an R&D tax credit system, but it’s often complex and, crucially, its benefits are often delayed. Currently, many companies can only use R&D credits to offset profits. For a pre-profit startup—the very engine of disruptive innovation—a tax credit against future, uncertain profits is far less valuable than cash in the bank today.

Surico’s proposal is to treat R&D spending like any other legitimate business expense, such as salaries or rent, but with an immediate cash-back incentive. Here’s how it would transform the landscape:

• From Deferred Promise to Immediate Capital: A young fintech company spending £500,000 on developing a new blockchain-based payment system might currently have to wait years to see the full tax benefit. Under the proposed system, if their tax credit exceeded their liability, they would receive a cash payment from HMRC. This turns a future promise into immediate, non-dilutive funding.
• De-risking Innovation: For business leaders and investors, this dramatically changes the calculus of R&D. The immediate cash refund acts as a government co-investment, lowering the financial risk of ambitious projects and encouraging bolder bets on breakthrough technologies.
• Supercharging Key Sectors: Industries like financial technology, biotech, and AI are incredibly R&D-intensive. An immediate cash-flow injection would pour fuel on the fire of the UK’s most promising economic sectors, solidifying its position as a global leader.

This isn’t just about helping small startups. For established firms in banking and finance, it incentivizes the creation of dedicated innovation labs to explore next-generation trading algorithms, AI-driven risk management, or new digital banking platforms. It shifts R&D from a cost centre to be managed, to a strategic investment with an immediate financial backstop.

The Ripple Effect: From Venture Capital to the Stock Market

The true power of this policy lies in its cascading effects across the entire financial ecosystem. It’s not just a tax tweak; it’s a fundamental change to the incentive structure of the UK economy.

A Magnet for Investing and Venture Capital

For the venture capital and private equity industries, this policy would make the UK an even more attractive destination for investment. Companies would become more capital-efficient, meaning an investor’s money goes further. A startup’s “runway”—the amount of time it has before it runs out of cash—is instantly extended, giving it more time to achieve critical milestones. This lower-risk environment would likely attract more international capital and encourage more domestic finance to flow into early-stage ventures.

Revitalizing the UK Stock Market

A healthier pipeline of innovative, well-funded private companies eventually leads to a more dynamic public market. For years, there have been concerns about the London Stock Exchange losing ground to New York and other financial centres. By nurturing a new generation of high-growth tech and science companies, this policy could create a wave of future IPOs, adding depth and excitement to the UK stock market. This benefits everyone from institutional investors to individuals with pensions, increasing opportunities for long-term wealth creation through trading and investing.

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Strengthening the UK’s Fintech Dominance

London is a world leader in financial technology. However, competition is fierce. A cash-refundable R&D credit would be a strategic advantage, helping UK fintech firms out-innovate global rivals. Whether it’s developing more secure digital identity solutions using blockchain or creating fairer AI-based lending models, this policy would provide the financial firepower needed to stay at the cutting edge. This, in turn, strengthens the entire banking and finance sector, which relies on this constant stream of innovation.

A Global Perspective on R&D Incentives

The UK is not alone in using tax policy to encourage innovation. Many countries offer R&D incentives, but their design and generosity vary significantly. A move towards a fully cash-refundable system would place the UK at the forefront of pro-innovation fiscal policy.

Let’s look at how different systems compare in their approach.

This comparison shows that while the UK has a system, adopting a simpler, fully cash-refundable model, similar in spirit to France’s successful CIR, could be a powerful competitive differentiator.

Conclusion: A Simple Lever for a Monumental Shift

The UK’s productivity problem is a complex, multi-faceted challenge with no single silver bullet. Yet, Professor Paolo Surico’s proposal offers something rare: a simple, understandable, and powerful lever that could trigger a chain reaction of positive economic change. By transforming R&D tax credits from a complicated accounting exercise into a direct injection of capital for innovators, the government could unleash a wave of private sector investment far greater than any state-led program.

For business leaders, it’s a call to re-imagine R&D as a core, government-backed engine of growth. For those in finance and investing, it signals a potential golden age for UK venture capital and a revitalized stock market. And for the public, it offers a credible path towards the high-wage, high-growth economy that has felt out of reach for too long. It is a bold investment in the country’s future, and one that policymakers should be giving their most serious consideration.

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