Category: Science policy

It’s not often that a UK Prime Minister devotes a whole speech to science, so Theresa May’s speech on Monday – PM speech on science and modern Industrial Strategy – was a significant signal by itself. It’s obvious that Brexit consumes a huge amount of political and government bandwidth at the moment, so its interesting that the Prime Minister wants to associate herself with the science and industrial strategy agenda, perhaps to emphasise that Brexit is not completely all-consuming, and there is some space left for domestic policy initiatives.

Beyond the signal, though, I thought there was quite a lot of substance as well. The speech comes at an important moment – the UK government’s science and innovation funding agencies have just been through a major reorganisation, with seven discipline-based research councils, the innovation agency Innovate UK, and a body responsible for the research environment in English universities, coming together in a single organisation, UK Research and Innovation. UKRI began life on 1 April, and it launched its first major strategy document on 14th May. This document isn’t a strategy, though – it’s a “Strategic Prospectus” – a statement of some fundamental principles, together with a commitment to develop a strategy over the months to come. The PM’s speech didn’t mention UKRI at all – somewhat curiously, I thought. Nonetheless, the speech is an important statement of the direction UKRI will be expected to take.

Perhaps the most important commitment was the PM’s stress on the 2.4% R&D intensity target, together with a recognition that this needs a substantial increase in private sector funding, catalysed by state investment. I’ve already written about how stretching this target will be. My estimate is that it will need a £7 billion increase in government spending by 2027 – going well beyond the £2.2 billion increase to 2021 already announced – and a £14 billion increase in private sector spending. These are big numbers; to achieve them will require a significant shifting of the UK’s economic landscape (for the better, I believe). My suspicion is that the attempt to achieve them will have a very big influence on the way UKRI operates, perhaps a bigger influence than people yet realise.

Another important departure from science and innovation policy up to now was the insistence that everywhere in the UK should benefit from it – “backing businesses and building infrastructure not just in London and the South East but across every part of our country”. This needs to include those cities that were pioneers of innovation in the 19th century, but which since have suffered the effects of deindustrialisation. This of course speaks to the profound regional imbalances in R&D expenditure that I highlighted in my recent blogpost Making UKRI work for the whole UK.

Can old cities find new economic tricks? The PM’s speech pointed to some examples – from jute to video games in Dundee, fish to offshore wind in Hull, coal to compound semiconductors in Cardiff. Cities and regions do need to specialise. The PM’s speech didn’t mention any specific mechanisms for encouraging and supporting this, but on the same day UKRI announced a new “place-based” funding competition – the “Strength in Places Fund”, which represents a valuable first step. The aim is to develop interventions on a scale to make a material difference to local and regional economies, and it’s great news that the very distinguished economist Dame Kate Barker – who chaired the Industrial Strategy Commission – has been persuaded to chair the assessment panel.

One interesting section of the speech went some way to sharpening up thinking about “Grand Challenges” and “Missions” as organising principles for research. Last November’s Industrial Strategy White Paper introduced four “Grand Challenges” for the UK – on AI and data, the future of mobility, clean growth, and the ageing society. Within these “Grand Challenges”, the intention is to define more specific “missions”. These are more concrete than the Grand Challenges, with some hard targets. Politicians like to announce targets, because they make good headlines – artificial intelligence is “to help prevent 22,000 cancer deaths a year by 2033”, according to the BBC’s (somewhat inaccurate) trail of the speech . I think targets are helpful because they focus policy-makers’ minds on scale. It’s been a besetting sin of UK innovation policy to identify the right things to do, but then to execute them on a scale wholly inadequate to the task.

The PM’s speech announced four such “missions”, and I thought these examples were quite good ones. Two of these missions – around better diagnostics, and support for independent living for older people – are good examples of putting innovation for health and social care at the centre of industrial strategy, as the Industrial Strategy Commission recommended in its final report. Some questions remain.

One simple question that there needs to be an answer for when we talk about “mission-led innovation” is this – who will be the customer for the products that the innovation produces? The government – or the NHS – is the obvious answer for this question in the context of health and social care – but obvious doesn’t mean straightforward. We’ve seen many years of people (including me) saying we should use government procurement much more to drive innovation, to depressingly little effect. What this highlights is that the problems and barriers are as much organisational and cultural as technological. I’m entirely prepared to believe that machine learning techniques could potentially be very helpful in speeding up cancer diagnoses, but realising their benefits will take changes in organisation and working practises.

The other outstanding issue is how these “Grand Challenges” and “missions” are chosen. Is it going to be on the basis of which businessman last caught the ear of a minister, or what a SPAD read in the back of the Economist this week? On the contrary, one would hope – these decisions would be made by aggregating the collective intelligence of a very diverse range of people. This should include scientists, technologists and people from industry, but also the people who see the problems that need to be overcome in their everyday working lives. The UKRI Strategic Prospectus talks warmly about the need for public engagement, including the need to “listen and respond to a diverse range of views and aspirations about what people want research and innovation to do for them”. This needs to be converted into real mechanisms for including these voices in the formulation of these grand challenges and missions.

The Prime Minister may have wanted to give a speech about science to get away from Brexit for a few minutes, but of course there’s no escape, and the consequences of Brexit on our science and innovation system are uncertain and likely to be serious. So it was important and welcome that the PM – particularly this Prime Minister, and former Home Secretary – spelt out the importance of international collaboration, the huge contribution of the many overseas scientists who have chosen to base their careers and lives in the UK, and the value that overseas students bring to our universities. But warm words are not enough, and there needs to be a change in climate and culture in the Home Office on this issue.

One place where we have heard many warm words, but as yet little concrete action, has been in the question of the future relationship between the UK and the EU’s research and innovation programmes. Here it was enormously welcome to hear the Prime Minister state unequivocally that the UK wishes to be fully associated with the successor to Horizon 2020, and is prepared to pay for that. Stating a wish doesn’t make it happen, of course, but it is huge progress to hear that this is now a negotiating goal for the UK government. This is one goal that should be politically unproblematic, and should benefit both sides, so we must hope it can be realised.

I have a longish piece in the Winter issue of the US science policy journal “Issues in Science and Technology”, which aims to place our current debates about industrial strategy in the UK in a longer historical context. This is now online here: The Second Coming of UK Industrial Strategy. Here is the introduction to the article:

The United Kingdom dismantled industrial policies in the 1980s; today it must rebuild them to create a social-industrial complex.

Industrial strategy, as a strand of economic management, was killed forever by the turn to market liberalism in the 1980s. At least, that’s how it seemed in the United Kingdom, where the government of Margaret Thatcher regarded industrial strategy as a central part of the failed post-war consensus that its mission was to overturn. The rhetoric was about uncompetitive industries producing poor-quality products, kept afloat by oceans of taxpayers’ cash. The British automobile industry was the leading exhibit, not at all implausibly, for those of us who remember those dreadful vehicles, perhaps most notoriously exemplified by the Austin Allegro.

Meanwhile, such things as the Anglo-French supersonic passenger aircraft Concorde and the Advanced Gas-cooled Reactor program (the flagship of the state-controlled and -owned civil nuclear industry) were subjected to serious academic critique and deemed technical successes but economic disasters. They exemplified, it was argued, the outcomes of technical overreach in the absence of market discipline. With these grim examples in mind, over the next three decades the British state consciously withdrew from direct sponsorship of technological innovation.

In this new consensus, which coincided with a rapid shift in the shape of the British economy away from manufacturing and toward services, technological innovation was to be left to the market. The role of the state was to support “basic science,” carried out largely in academic contexts. Rather than an industrial strategy, there was a science policy. This focused on the supply side—given a strong academic research base, a supply of trained people, and some support for technology transfer, good science, it was thought, would translate automatically into economic growth and prosperity.

And yet today, the term industrial strategy has once again become speakable. The current Conservative government has published a white paper—a major policy statement—on industrial strategy, and the opposition Labour Party presses it to go further and faster.

This new mood has been a while developing. It began with the 2007-8 financial crisis. The economic recovery following that crisis has been the slowest in a century; a decade on, with historically low productivity growth, stagnant wage growth, and no change to profound regional economic inequalities, coupled with souring politics and the dislocation of the United Kingdom’s withdrawal from the European Union, many people now sense that the UK economic model is broken.

Given this picture, several questions are worth asking. How did we get here? How have views about industrial strategy and science and innovation policy changed, and to what effect? Going forward, what might a modern UK industrial strategy look like? And what might other industrialized nations experiencing similar political and economic challenges learn from these experiences?

Read the rest of the article here.

The first of April saw the formal launch of UK Research and Innovation, the new body which will be responsible for the bulk of public science and innovation funding in the UK. All seven research councils, the innovation funding agency InnovateUK, and the research arm of the body formerly responsible for university funding in England, to be renamed Research England, have been folded into this single body, with a budget of more than £6 billion a year.

Expectations for this new body are very high. Its formation has been linked to the government’s decision to increase research funding substantially, with extra funding rising to £2.3 billion by 2021/2. This new money is explicitly linked to the need to increase the productivity of the UK economy. The government has also committed to a 10-year target of raising the overall R&D intensity of the economy from its current 1.7% to 2.4% of GDP. As I’ve discussed earlier, this is a very challenging target that will require a major change in behaviour from the UK”s private sector, as well as substantial increases in public sector R&D. UKRI has the task of ensuring that the extra public sector investment is made in ways that maximise increases in private sector R&D. All of this, of course, takes place with the background of Brexit, and the need for the UK to rebuild its business model.

There’s one factor that, unless urgently addressed, will hold UKRI back from its mission of making a significant difference to the UK’s overall productivity problems and raising the economy’s R&D intensity. That is the extraordinary and unhealthy concentration of publicly funded R&D in a relatively small part of the country – London, the Southeast, and East Anglia. Entirely uncoincidentally, these are the parts of the country with the most productive economies already. As the Industrial Strategy Commission (of which I was a member) stressed in its final report last year, unless the UK fixes its gross regional economic disparities it will never be able to prosper.

No-one has done more to bring attention to the UK’s unbalanced R&D geography than Tom Forth; everyone should read his recent article on how we should use the increase in funding to redress the balance. One key point that Tom has stressed is the geographical relationship – or lack of it – between public and private sector research. Industry spends roughly twice as much as the government on research, so reaching the 2.4% R&D intensity target will not be possible without major increases in private sector spending – roughly £14 billion a year, by my estimate. Yet classical economics tells us that firms will always underinvest in R&D, because they are unable to capture the full economic benefit of their spending, much of which “spills over” to benefit the rest of the economy. That’s the logic which convinces even HM Treasury that the state ought to support R&D.

Yet Tom Forth’s work – especially his plots of of public against private R&D spending – shows how badly government spending on R&D is matched to the demand of industry, as measured by where industry actually invests its own money.

R&D funding in the business and non-business sectors (government, higher education and charity), by NUTS2 regions. 2014 figures, by sector of performance, from Eurostat.

My first graph shows how unbalanced the UK’s research landscape is. This shows R&D spending – both private and public – broken down sub-regionally. The first thing that’s obvious is the dominance of three sub-regions – Oxford and its environs, Cambridge and its sub-region, and (part of) London – inner West London. These three subregions – out of a total of 40 in the UK – account for 31% of total UK R&D spending, and an even higher fraction of spending in the government, HE and charity sectors – 41%.

There is a striking difference between these three sub-regions, though, and that is their split between public and private R&D (taking public R&D here to mean R&D carried out in government-owned laboratories, universities and the non-profit sector). Overall in the UK, the value of business R&D stands at 1.89 times the value of public R&D. East Anglia – dominated by Cambridge – does even better than this, with private sector R&D coming in at more than twice public sector R&D. This is a science-based cluster that works, with high levels of public R&D being rewarded at above average rates by private sector R&D.

The Oxford, Berks and Bucks sub-region does slightly less well in converting its very large public investment into private R&D, with a multiplier a little below the national average at 1.72.

The real anomaly, though, is Inner London (West). This single region receives by far the largest amount of public R&D spending of any single region – nearly 20% of the entire public funding for R&D. Yet the rate of return on this, in terms of private sector R&D, is only 0.46, far below the national average.

Working down the list, we find 9 sub-regions with respectable levels of total R&D. These include Bristol, Hampshire, Derby, Bedford, Surrey and the West Midlands, Worcestershire and Cheshire. With the exception of East Scotland, all these sub-regions are characterised by above average ratios of private to public sector R&D. Two sub-regions stand out for significant private sector R&D and almost no public sector activity – Cheshire, with its historic concentration of chemical and pharmaceutical industries, and Warwickshire, Herefordshire and Worcestershire.

Then we come to the long tail, with much lower investment in R&D, either public or private. All of Wales, Northern Ireland, the North of Engand, Southwest England beyond Bristol, outer east and southeast London and Kent, Lincolnshire – this is pretty much a map of left-behind Britain.

This brings us to the question: why should we worry about regional disparities in R&D? Let’s put aside for the moment any question of fairness – what it comes back to is productivity. If we plot R&D intensity against regional GDP, we find quite a respectable correlation. (Slightly to my surprise, the correlation is strongest if you plot total R&D – both public and private, rather than just business R&D. I’ve ommitted London entirely as it is such an outlier on both measures).

Sub-regional GDP per capita against total R&D (public and private) per capita. 2014 data, from Eurostat.

Of course, the relationship is not a straightforward one: higher R&D intensities are associated with the presence of high-productivity firms at the technology frontier, there may be a more general effect of higher skill levels associated with regions with higher R&D, and there may well be other factors, direct and indirect, at play too. We can also see outliers. NE Scotland has very high productivity but mid-level R&D investment, not doubt because of the importance of the oil industry, while East Anglia has relatively low productivity given the very high levels of R&D. I suspect the latter is associated with the relatively concentrated nature of the Cambridge cluster, whose effect doesn’t really penetrate far into a large and relatively poor rural and coastal hinterland.

As the Industrial Strategy Commission argued, just as a matter of arithmetic averages, we cannot expect the productivity of the country as a whole to grow if such a large fraction is structurally lagging. So what should we do? Different places demand different approaches, and Tom Forth has some suggestions.

On London, I agree with Tom – the over-investment of public R&D in London is a grotesque misallocation of public resources, but the realities of political economy mean it’s likely to stay that way. At the least, we certainly need to stop building new institutions there. One thing the data does highlight, though, is how concentrated even within London the investment is, so initiatives like UCL East, aiming to spread the benefits of the investment to less favoured parts of the capital, are to be welcomed.

The eight sub-regions with high private sector R&D and public underinvestment offer a clear rationale for further public investment. One needs to be aware of the arbitrary nature of these sub-regional boundaries – the strength of the Cheshire cluster is a very good reason to have a strong Chemistry department in the University of Liverpool, for example – but these regions are likely to provide some very strong investment cases for following the private sector money to support existing clusters.

I somewhat disagree with Tom on the case of Oxford and Cambridge (and here of course my biases may be showing). Tom believes that funding should be frozen in these places until they agree to allow more growth. As far as Cambridge is concerned, I’m not sure this is quite right – there seems to be a huge amount of growth happening in that city at the moment, with significant numbers of new-build apartments going up in the city, and a string of new suburbs like Eddington being built around its fringes, complete with new schools and supermarkets. The issue here is the completely inadequate transport infrastructure to get into and around the city; it’s these infrastructure problems that are stopping the further growth of what is the UK’s most successful science-based cluster, and are stopping the spread of its benefits to its less prosperous hinterland.

But this leaves the bigger problem – how can public R&D investments be used to raise productivity and economic growth in what is the majority of the country, where levels of R&D investment, both public and private, are far too small? It’s easy to imagine arbitrary and ill-thought through investments imposed on regions with no understanding of the potential their economic history and current industrial base will support. But for a counter-example, in my own city, Sheffield, I think there has been a well thought through policy based on promoting advanced manufacturing through investments in translational research and skills, which is bearing fruit through the twin routes of the attraction of inward investment from firms at the technological frontier and improving the performance of the existing business base.

Where does this leave the new organisation, UK Research and Innovation, whose job should be to rectify these issues? It’s not going to be easy, given that the cultures of the organisations UKRI are being built from have been positively opposed to place-based policy. The research councils have focused on “research excellence” as the sole criterion for funding, while the policy of InnovateUK has been to be led by industry. But “place-blind” policies inevitably lead to research concentration, though the well-known Matthew effect. I know that EPSRC at least has been seriously grappling with these issues in the last couple of years, while there is real expertise in Research England on the economic potential of universities in their cities and regions, so there is something to build on.

The early actions of the new organisation are not encouraging. The move back from Swindon to London is a retrograde step, suggesting that UKRI’s first priority is keeping ministers happy and keeping ahead of Whitehall office politics. When the Technology Strategy Board (the predecessor organisation to InnovateUK) was first set up as a free-standing funding agency, it was moved out of London to Swindon to emphasise that it served business, not Whitehall, and it was the better for it.

Moreover, the main board of UKRI is conspicuous for its lack of geographical diversity – out of 16 members, just one – Aberdeen’s Ian Diamond – is from outside London and the southeast. Allowing this situation to arise was a telling and worrying oversight.

One urgent concrete step UKRI should take is to create a high-level advisory board to hold its feet to the fire on a plan to rebalance R&D expenditure across the country. UKRI is to produce a strategy within the next month or two, and it is to be hoped that addressing the regional balance issue forms a central part of this strategy. This board should include senior representatives from the Devolved Administrations, and economic development leads from the metro mayors’ offices and combined authorities in the regions of England. At an operational level, UKRI needs to get its staff out of their London home, perhaps with regional specialists seconded to economic development units in the regions and nations.

The stakes here are high. UKRI has been set up with great expectations – the substantial injection of extra research spending, the 2.4% R&D target are signals that the government expects UKRI to deliver. If it does not produce tangible, positive effects on the wider economy – across the whole of the UK – UKRI will rightfully be judged to have failed – it will have failed the country, and it will have failed UK science. Let’s hope it can rise to the challenge.

The UK government has published the first outcome of the Industrial Strategy “sector deals” announced in the spring’s Industrial Strategy Green Paper. The Life Sciences Industrial Strategy was headed by Sir John Bell; the area is of undoubted importance for the UK, and the document has some very sensible recommendations. But there’s a bigger problem here – the life sciences aren’t an industry, they’re a science area. You wouldn’t describe your policies for the aerospace industry as a Materials Science Industrial Strategy or a Fluid Dynamics Industrial Strategy – industry policy should be driven by and framed in terms of the demand for innovation, not by the science areas which contribute to it.

In its detailed policies, there is much to agree with in the Life Sciences Industrial Strategy. There’s no question that the UK has a strong base in the life sciences, that this is a source of comparative advantage, and that this capacity should be preserved and strengthened. New industrial clusters in medical technology should be developed (especially outside the existing concentration of biomedical life sciences between London, Oxford and Cambridge), and the data the health system generates is an enormously powerful resource that should be exploited more (but with great care and sensitivity). And who could disagree with the proposition that the Home Office should be suppressed (they’re too diplomatic to put it quite like that, of course). There are some less good ideas too, with demands for more distorting tax breaks. The proposal to widen the scope of the “patent box” to include other types of intellectual property is a particularly bad idea, which would take what’s already a very poor piece of public policy and make it worse.

The headline recommendation is politically opportunistic, potentially positive, but not completely thought through in its current form. This is for a “Health Advanced Research Program”, in analogy to the US defense research agency DARPA. It’s politically astute in that it appeals to the current bout of DARPA envy amongst British policy makers (and it’s got a good acronym). As I’ve discussed before, I’m not convinced that this enthusiasm is underpinned by enough understanding of the way DARPA actually operates and the way it sits as one relatively small part in the wider USA innovation system.

One key issue is the question of how to define the problems, and being clear about who owns those problems. Part of DARPA’s success comes from the close connection to the people who own the problems the agency is trying to solve, who in DARPA’s case, are in the USA’s military. This clarity is not yet present in the “HARP” proposal. For healthcare, the key owners of the problems are the NHS, and the local authorities responsible for social care. Industry is important, both as potential providers of solutions, and as beneficiaries of the new business opportunities that the innovations should give rise to, but they don’t own the problems.

The strategy does indeed suggest that the key USP of HARP should be the involvement of the NHS, who, it is envisaged, will provide patient data and opportunities for piloting the resulting technology. The difficulty this leaves unsolved is one that the strategy itself correctly identifies – “Evidence demonstrates that access to and diffusion of products in the NHS is often slower than in some comparable countries. This environment risks creating a negative impression in boardrooms around the world with trials being diverted to geographies deemed more likely to use products. Partnership with industry through this strategy and a subsequent sector deal will be challenging unless there are clear signals that innovation will be encouraged and rewarded, and the challenge of adoption of new innovation at pace and scale is resolved.” The NHS is, as currently configured, structurally inimical to innovation.

How could you frame an industrial strategy in this general area? You could define it in terms of conventional industry sectors. For healthcare, this would include those sectors which develop and supply products – including pharmaceuticals and biotechnology, and the broader area of medical technology, including tools and devices, diagnostics and digital healthcare. Equally, it should include those sectors that actually deliver health and social care, which after all form a large part of the economy, albeit one that remains in large part outside the market. These include social care – a very large sector, which has low productivity and is problematic in some other ways, as well as hospitals and primary care. The interests of these sectors don’t always point in the same direction, as one can see from the constant tussles between NICE and the NHS and pharmaceuticals companies about drug pricing and availability.

Although in reality the Life Sciences strategy does largely read as a sector strategy for the pharmaceuticals and biotechnology sector, calling it a Life Sciences strategy does frame it in terms of the underpinning science. And in this sense Life Sciences is not a great term, being at once too inclusive and not inclusive enough.

What the strategy means by “Life Sciences” is essentially the high status science of biomedical research. But life sciences – biology – doesn’t just include those bits of biology that are relevant to human disease. That would cover the cell biology and physiology of the human organism itself, together with the biology of those organisms that are studied as more experimentally tractable models for humans – whether that’s mice or zebra-fish. And it includes the biology of human parasites and pathogens. What is left out in this narrow definition of “Life Sciences” are those aspects of biology that have other applications – in agriculture, for plant science and animal health, in industrial biotechnology, in environmental science and ecology. And of course we should not be afraid to stress that we should study biology because it is fascinating in its own right and yields insights into some of the biggest outstanding scientific issues that there are – how life started, whether other types of life are possible.

But the focus in “Life Sciences” on high status biomedical research is also too exclusive. Other areas of science and technology are important for healthcare, and are underemphasised in academia. These include engineering and nano-science, data science and IT, and, perhaps above all, the social science of public health and health economics.

The issue, then, is that by calling itself a “Life Sciences” strategy, it gives primacy neither to the relevant industry sectors, nor to the fundamental problem of caring for sick people. I think the ultimate goal here is the big problem of providing affordable health and social care with dignity for the whole UK population, in the context of the changing age profile of the country. The key organisations here are the NHS and the deliverers of social care, and the priority needs to be on enabling those organisations to become more innovative. This will certainly generate opportunities for key industrial sectors like pharmaceuticals and medical technology; improving the connections between the research base, industry, and the clinic remains just as important. But framing the problem right will change some of our priorities.

There’s a piece of folk political science (attributed to Bill Clinton’s campaign manager) that says the only thing that matters in electoral politics is the state of the economy. Forget about leadership, ideology, manifestos containing a doorstep-friendly “retail offer”; what solely matters, in this view, is whether people feel that their own financial position is going in the right direction. Given the chaos of British electoral politics at the moment, it’s worth taking a look at the data to test this notion. What can the economic figures tell us about the current state of UK politics?

Median household disposable income in 2015 £s, compared to real GDP per capita. ONS: Household disposable income and inequality Jan 2017 release

How well off do people feel? The best measure of this is the disposable household income – that’s income and benefits, less taxes. My first plot shows how real terms median disposable household income has varied over the last 30 years or so. Up to 2007, the trend is for steady growth of 2.4% a year; around this trend we have occasional recessions, during which household income first falls, and then recovers to the trend line and overshoots a little. The recovery from the recession following the 2007 financial crisis has been slower than either of the previous two recessions, and as a result household incomes are still a long way below getting back to the trend line. Whereas the median household a decade ago had got used to continually rising disposable income, in the last decade it’s seen barely any change. To relate what happens to the individual household to the economy at large, I plot the real gross domestic product per head on the same graph. The two curves mirror each other closely, with a small time-lag between changes to GDP and changes to household incomes. Broadly speaking, the stagnation we’re seeing in the economy as a whole (when expressed on a per capita basis) directly translates into slow or no growth in people’s individual disposable incomes.

Of course, not everybody is the median household. There are important issues about how income inequality is changing with time. Median household incomes vary strongly across the country too, from the prosperity of London and the Southeast to the much lower median incomes in the de-industrialised regions and the rural peripheries. Here I just want to discuss one source of difference – between retired households and non-retired households. This is illustrated in my second plot. In general, retired households are less exposed to recessions than non-retired households, but the divergence in income growth rate between retired and non-retired households since the financial crisis is striking. This makes less surprising the observation that, in recent elections, it is age rather than class that provides the most fundamental political dividing line.

Growth in median disposable income for retired and non-retired households, plotted as a ratio with 1995 median values: £12901 for retired and £20618 for non-retired. ONS: Household disposable income and inequality Jan 2017 release

What underlies the growing narrative that the public is tiring of austerity, as measured by the quality of public services people encounter day to day? The fiscal position of the government is measured by the difference between the money in takes in in taxes and the money it spends on public services – the difference between the two is the deficit. My next plot shows government receipts and expenditure since 1989. Receipts (various types of tax and national insurance) fairly closely mirror GDP, falling in recessions and rising in economic booms. For all the theatre of the Budget, changes in the tax system make rather marginal differences to this. Over this period tax receipts average about 0.35 times the total GDP. Meanwhile expenditure increases in recessions, leading to deficits.

Total government expenditure, and total government receipts, in 2015 £s. For comparison, real GDP multiplied by 0.352, which gives the best fit in a linear regression of GDP to government receipts over the period. Data: OBR Historical Official Forecasts database.

The plot clearly shows the introduction of “austerity” after 2010, in the shape of a real fall in government expenditure. But in contrast to the previous recession, five years of austerity still hasn’t closed the gap between income and expenditure, and the deficit persistently remains. The reason for this is obvious from the plot – tax receipts, tracking GDP closely, haven’t grown enough to close the gap. Austerity has not succeeded in eliminating the deficit, because economic growth still hasn’t recovered from the financial crisis. If the economy had returned to the pre-crisis trend by 2015, then the deficit would have turned to surplus, and austerity would not be needed.

How do we measure economic growth? My next plot shows three important measures. The measure of total activity in the economy is given by GDP – Gross Domestic Product. This measure is the right one for the government to worry about when it is concerned whether overall government debt is sustainable – as my third plot shows, this is the measure of economic growth that the total tax take most closely tracks. It is certainly the government’s favourite measure when it is talking up how strong the UK economy is. But what is more important for the individual voter is the GDP per person. Obviously a bigger GDP doesn’t help an individual if has to be shared out among a bigger population, so it’s not surprising that household income tracks GDP per capita more closely than total GDP. As the plot shows, growth in GDP per capita has been significantly lower than total GDP, the difference being due to the growth in the country’s population due to net inward migration.

Growth in real GDP, real GDP per capita, and labour productivity: ratio to 1997 value. Data: Bank of England: A millennium of macroeconomic data v 3

Perhaps the most important quanitity derived from the GDP is labour productivity, simply defined as the GDP divided by the total number of hours worked. This evens out fluctuations due to business cycle, which affect the rates of employment, unemployment and underemployment.

Growth in productivity – the amount of value created by a fixed amount of labour – reflects a combination of how much capital is invested (in new machines, for example) with improvements in technology, broadly defined, and organisation. Increasing productivity is the only sustainable source of increasing economic growth. So it is the near-flatlining of productivity since the financial crisis which underlies so many of our economic woes.

It’s important to recognise that GDP isn’t a fundamental property of nature, it’s a construct which contains many assumptions. There’s no better place to start to get to grips with this than in the book GDP: a brief but affectionate history, by my distinguished colleague on the Industrial Strategy Commission, Diane Coyle. Here I’ll mention three particular issues.

The first is the question of what types of activity count as a market activity. If you care for your aging parent yourself, that’s hard and valuable work, but it doesn’t count in the GDP figures because money doesn’t change hands. But if the caring is done by someone else, in a care home, that now counts in GDP. On the other hand, if you use a piece of open source software rather than a paid-for package, that has the effect of reducing GDP – the unpaid efforts of the open source community who made the software may make a huge contribution to the economy but they don’t show up in GDP. Clearly, social and economic changes have the potential to move the “production boundary” in either direction. The second question is more technical, but particularly important in understanding the UK in recent years. This is how the GDP statistics treat financial services and housing. Just because the GDP numbers appear in an authoritative spreadsheet, one shouldn’t make the mistake of believing that they are unquestionable or that they won’t be subject to revision.

This is even more true when one considers the way that we compare the value of economic activity at different times. Obviously money changes in value over time due to inflation. My graphs attempt to account for inflation through simple numerical factors. In the case of household income, inflation was corrected for using CPI-H – the Consumer Prices Index (including housing costs). This is produced by comparing the price of a “typical” basket of goods and services over time. For the GDP and productivity figures, the correction is made through the “GDP deflator”, which attempts to map the changing prices of everything in the economy. The issue is that, at a time of technological and social change, relative values of different goods change. Most obviously, Moore’s law has led to computers get much more powerful at a given price; even more problematically entirely new products, like smart phones, appear. If these effects are important on the scale of the whole economy, as Diane has recently argued, this could account for some of the measured slow-down in GDP and productivity growth.

But politics is driven by people’s perceptions; if many people think that the economy has stopped working for them in recent years, the statistics bear that out. The UK’s economy at the moment is not strong, contrary to the assertions of some politicians and commentators. A sustained period of weak growth has translated into stagnant living standards and great difficulties in getting the government’s finances back into balance, despite sustained austerity.

We now need to confront this economic weakness, accept that some of our assumptions about how the economy works have been proved wrong, and develop some new thinking about how to change this. That’s what the Industrial Strategy Commission is trying to do.