Productivity policy

Productivity policy Rupert Harrison

Productivity policy • R&D tax credits • The National Employer Training Programme • The Barker review of land use planning

R&D tax credits • July 2005 consultation • ‘Enhancing the R&D tax credit’ • PBR 2005 • Initial response and administrative changes • Budget 2006 • Further structural enhancements?

R&D tax credits • Largest single policy initiative aimed at increasing private sector innovation • SME tax credit (since 2000): £264m in 2004-05 • Large companies credit (since 2002): £440m p.a. ? • Both allow companies to deduct more than 100% of current R&D expenditure from taxable profits • SME credit is more generous and includes payable credit for firms with no taxable profits

Business Enterprise R&D spending

Changes to the SME tax credit? • Additional support for smaller and growing innovative companies? • Options for change: • Increase the SME credit rate • Raise the SME size threshold • Extend the transition period from SME to large company • Introduce an additional incremental element • (Provide more generous relief for first time claimants)

Changes to the SME tax credit? • None of the options is without potential drawbacks • Any change is likely to increase uncertainty and/or complexity • Given the long-term nature of R&D investment decisions, policy stability is particularly desirable • No change may well be the best option

Employer-Provided Training • PBR 2005 confirmed the launch of the National Employer Training Programme (“Train to Gain”) • Training for low-skill employees: • Free training to basic skill qualification or Level 2 • Paid time off for training during working hours • Employers with <50 employees get wage compensation • £268m in 2006-07 and £437m in 2007-08

Employer-Provided Training • Why intervene in employer-provided training? • Transferable skills (if employees unable to pay) • Information failures • Firms (especially small ones) may be credit constrained • Equity considerations • But little evidence that Level 2’s lead to higher wages (some evidence for employer-provided)

Employer-Provided Training • Evaluation of first year of Employer Training Pilots • Small positive effect on take-up of training • Proportion of eligible employers providing training increased from around 8% to around 8½% • Suggests 85-90% ‘deadweight’ and 10-15% additional • High deadweight possibly to be expected • Only focused on first year effects – participation has increased over time

Employer-Provided Training • Evidence for effectiveness in improving the UK’s productivity performance is not very strong so far • Some limited evidence of positive returns to Level 2’s • Evaluation of first year of Employer Training Pilots found small effects on take-up of training • National roll-out will make it difficult to evaluate the impact of NETP on take-up of training

Conclusions • R&D tax credits may provide value for money, but impact on total R&D is likely to be relatively small • Effectiveness of NETP will depend on both increasing training and returns to that training • The impact of both schemes on productivity is likely to be small compared to: • Overall education and skill levels • The general investment climate • Other factors, e.g. regulation, competition

Productivity policy