Our entrepreneurial landscape has come on leaps and bounds in the last decade. Over those ten years, we’re proud to have played a leading role in supporting the nation’s founders – most principally by developing and championing policies that make it easier to launch, run and scale a business. And yet, for all the success we’ve seen, it still feels like a lot of that has been achieved in spite of, not because of, the underlying structure of Britain’s economy. 

In Building Blocks, we take a step back. While remedying small issues can be important, there’s a danger that too much attention in policymaking is afforded to them, while more fundamental problems go unchecked. We contend that even marginal policy improvements in any of these bigger areas – from simplifying our country’s planning rules, to rationalising the tax code, to modernising the visa system – will do more to ensure we are genuinely offering the best possible platform from which to unleash the full potential of entrepreneurship and innovation in Britain.

• Eamonn Ives – Head of Research, The Entrepreneurs Network

• Dr Anton Howes – Head of Innovation Research, The Entrepreneurs Network

• Derin Kocer – Policy Researcher, The Entrepreneurs Network

• Philip Salter – Founder, The Entrepreneurs Network 

Britain is an entrepreneurial nation. Evidence for this can be seen all around us – last year, it boasted 5.6 million private businesses, produced 147 unicorns, and venture capital investment was exceeded $21 billion. Our world-leading universities produce an abundance of groundbreaking research and skilled graduates. London is a global city that attracts talent from every corner of the world, but entrepreneurial ecosystems exist all around the country. 

We should celebrate this more than we do. Entrepreneurs and the startups they found are a critical source of job creation. While not all push forward the boundaries of innovation, many do – developing the solutions to help tackle problems associated with environmental breakdown, an ageing population and more. Having an economy which enables and encourages entrepreneurship can also be a lifeline for individuals whose talents may be overlooked or undervalued in the ‘traditional’ economy.

Despite this success, however, things are not all as they should be. Britain’s economic story of the past two decades or so has been one of stagnation. Productivity growth has all but flatlined since the 2008 Financial Crash, after which the Covid-19 pandemic threw the economy and public finances into disarray. Any opportunities presented by Brexit have mostly gone unexploited, while the harms are already biting. For all the promises to ‘level up’ the economy, inequality between different regions of Britain persists – and there is strong evidence that Britain is an especially divided economy relative to other nations.

Amid this backdrop, we believe entrepreneurs can play a vital role in fixing the problems we face. But while politicians may sing their praises and look back on past accomplishments with pride, long-term success requires a state that actively and continually empowers entrepreneurs to start, run and grow their businesses. 

Since The Entrepreneurs Network was set up ten years ago, we’ve led the charge for policy changes that would make Britain a better place to be an entrepreneur. Some of these have been small fixes – for instance specific regulatory tweaks that often aim to put innovative startups on an even footing with their traditional equivalents. At other times, we have called for more expansive changes, to deliver a whole new settlement for the country’s extended entrepreneurial community. 

As such, there’s precious little that we have not already covered. But given the political and economic circumstances we currently find ourselves in, we feel now is the time to present our vision for how to meaningfully secure Britain’s entrepreneurial future. Instead of trying to cover every individual issue or scheme that might matter to our entrepreneurs, we focus more on the foundational building blocks of what underpins economic success. This is not to downplay the importance of improvements at the margin, but rather to give us a chance to step back and consider the core fundamentals of the economy, and see whether they are still giving the best possible platform from which to unleash the full potential of entrepreneurship and innovation in Britain.

We focus on the following areas: 

• Addressing under-agglomeration. Agglomeration is the basis of all productive economies, and will only become more important in a world increasingly characterised by intangible capital. But a wealth of evidence shows that Britain falls short of its agglomerative potential, with political incentives making it harder to build hubs, connect them with one another, and allow them to grow. 

• Alleviating fiscal headaches. Britain’s fiscal situation is increasingly bleak and is already driving policymakers into short-termist, zero-sum thinking. The overall tax burden has grown, and threatens to balloon further to cope with a number of looming challenges. But a tax system which is geared for growth without sacrificing revenue is possible.

• Accelerating innovation. The limiting factor on future growth is not generally to exploit ever more inputs, but to use existing ones more efficiently. Innovation is the force that enables this. Although Britain does a lot to support innovation, this itself could benefit from being more efficient, doing more with less when it comes to both allocating innovation funding and deciding how to approach regulation.

• Acquiring new skills. Britain invests heavily in education and attracts a lot of foreign talent, but we do not always make the most of our labourforce. Any attempts to limit certain kinds of immigration must be sensitive to the need to compete for an increasingly mobile and global talent pool. It should also be recognised that some of the biggest long-term gains for growth may be had from encouraging people to apply their existing skills to innovation.

Agglomeration refers to the concentration of economic activities in distinct geographic areas, and specifically the way by which this fosters greater rates of innovation and economic growth. The tangible footprint of agglomeration can be seen all around us – from Silicon Valley as a tech megacluster to the City of London as a global financial hub. We can also identify more prosaic examples – Cumbria’s high-end culinary scene, for instance – and plenty more throughout history, such as Sheffield’s steel industry or Northampton’s shoemakers.

Understanding the dynamics of agglomeration is imperative for understanding the future of sustained economic growth. Those dynamics are broadly threefold: specialisation; scale; and spillovers.

Specialisation. One of the most powerful economic forces that agglomeration gives rise to is specialisation. Deeper labour markets mean people can be better and more quickly matched to jobs at which they are most well suited to. This in turn means they can more readily concentrate on producing what they are relatively best at producing, and trade the fruits of their labour with one another. All things being equal, the deeper the labour market, the more specialised individuals within it can become – in other words, allowing them to get better at doing what they do best. 

Scale. Agglomeration also enables economies of scale, thus increasing efficiency. When economic activity concentrates in specific locations, firms benefit from shared hard and soft infrastructure and other services. And as individual firms themselves scale, they can more readily invest in specialist capital – further fuelling specialisation. 

Spillovers. These are the positive, incidental consequences of economic activity, which are often as intangible as they are invaluable. When firms, researchers and entrepreneurs locate in close proximity to one another, they can exchange ideas and expertise more readily. Even in an increasingly digitised economy, where working remotely has become commonplace, physical clusters retain an advantage of their own.

Achieving agglomeration

If we accept that agglomeration matters – as we firmly do – then how do we get more of it? At its core, agglomeration means people being physically close to each other. While there is such a thing as digital agglomeration, for most of us, and most of the economy, location remains paramount. Even with the recent shift to more hybrid working, the “death of distance” has not come to pass.

The first and most obvious way to stimulate agglomeration is to enable people to live within shorter distances of one another. Places with higher population densities typically experience higher productivity, and particularly in well-educated areas, differences in city size explain a lot of the variation in worker productivity. The way this manifests itself in real life is through the creation of cities, which have forever been the most productive places on the planet. Increasing the supply of homes in cities should therefore be the central focus for anyone interested in amplifying agglomerative forces in an economy. Ignoring the link between restricted housing supply and economic stagnation is like a doctor ignoring the link between smoking and lung cancer.

But successfully delivering a sustained supply of new homes, year after year is easier said than done, and has eluded political parties of all stripes in Britain for decades. Although the root causes are abundantly clear – our rigid and archaic planning system – even well-meaning politicians have had trouble reforming it because of the vested interests involved. Yet ‘keyhole’ solutions – which boost housing supply without crashing on contact with political realities – are possible. Ideas such as street votes, gentle densification, estate regeneration, and prioritising building around existing transport hubs all fall into this category. 

As well as allowing more people to live within close proximity to one another, we can also promote agglomeration by making it easier for people to travel between places. A key aspect of successful agglomeration is that it happens best when interactions are spontaneous and serendipitous. People need to be able to mix freely, and the extent to which this can occur is largely dependent on how easy, cheap and attractive it is to travel between and within urban areas. To enable this, we should strive for neighbourhoods that are walkable, for public transport systems that are appealing to use and for roads that are uncongested. 

People do not limit themselves geographically, but rather ‘temporally’. When we think about travelling somewhere – be that to an office, to a university campus or just to meet a friend – it isn’t generally a question of how far away it is in yards or miles, but how long it will take to get there in minutes or hours. Cities that are quicker to traverse will have deeper and more specialised labour markets, and when it’s easier to get between cities, their labour markets begin to overlap. It is through this that founders can meet workers, investors and other founders, and agglomeration can take hold. 

Unfortunately, many British cities lag behind their European equivalents when it comes to transport connectivity. According to the Centre for Cities, commuting by public transport to city centres from the suburbs is easier and faster in Europe – on average, 67% of people can do it in under half an hour, compared to just 40% of people in Britain. A 2023 paper from Anna Stansbury, Dan Turner and Ed Balls estimates that UK cities have 48% higher road congestion levels than similarly-sized US cities, and 15% higher road congestion levels than similarly-sized cities in Western Europe. Facts like these mean that UK cities are far more sprawling than they need to be, not only making city life less pleasant, but costing the economy tens of billions of pounds in unrealised productivity. 

The nature of solving this challenge is similar, though perhaps even harder, than fostering agglomeration by building more homes. A new rail link, for instance, will necessarily involve undertaking more planning, coordinating more actors and spending more money. Ending road congestion, meanwhile, faces political obstacles even where there are viable technical solutions (solutions that other countries adopted long ago). But answers do exist. Devolving more decision making and financial powers down to city or regional authorities could help. Reforming the planning process – so that for example, as Britain Remade have highlighted, National Highways don’t have to spend £267 million on the Lower Thames Crossing’s planning application alone – would bring us closer into line with other nations. And congestion pricing would speed up traffic and prevent billions of pounds of value in lost productivity being wasted away by drivers who are stuck on gridlocked roads.

We also need to make it easier to create value near to where people already live. Startups need offices, retailers need shops, manufacturers need factories, scientists need laboratories, tech firms need data centres and all of us need cheap, clean energy. Just as we require an adequate supply of homes, we also require an adequate supply of all of these assets too. 

Their general underprovision often owes itself to many of the same factors – not least a planning system which is biassed against development and in favour of stasis. It can, for example, take 13 years to build an offshore wind farm in British waters and the last time a new nuclear power station was switched on John Major was still Prime Minister – and it is facts like these that make it no wonder why our industrial electricity prices are so high. If we want innovators to innovate and entrepreneurs to flourish, we must dismantle the barriers that prevent us from building.

It will take time to see the results of building, even if we act quickly. But there are ways to gain some of the advantages of agglomeration in the meantime. As we set out recently, holding large-scale exhibitions of industry, on the model used by the Victorians, can serve as a kind of temporary but growth-focused agglomeration. Events such as these could bring at least a handful of the major benefits of better infrastructure and denser cities, while we wait for them to materialise in permanently.

The Upshot

Too few people subscribe to an agglomeration-led approach to growth. The political focus of late has shifted away from championing dynamic hotspots like the Golden Triangle, most obviously, but also even regions like Manchester, Leeds, Birmingham, Edinburgh and Bristol. Instead, attention has shifted towards revitalising so-called ‘left behind’ areas – places on the periphery of cities, and coastal towns. The motivations for this dramatic switch in thinking are mostly well motivated (and understandable, for electoral reasons), but it is our contention that the dream of turning such areas into productive zones of economic and innovative activity is inevitably a losing battle, and politicians who peddle such promises do a disservice to constituents hungry for change. 

This categorically does not mean that we should write off the ‘left-behind’ areas, however. Rather, it means envisaging a different role for them. One blessing that a lot of the low-productivity, post-industrial areas have is they are, geographically at least, close to our big cities. This offers scope for a symbiosis between the two. Improving transport links to the point that commuting into cities becomes an inexpensive and reliable option would be a significant fillip to workers living in towns. Such areas would then become a relatively more attractive place for workers to move to once they have outgrown living in the city centre, perhaps lured in by quieter neighbourhoods, better schools, larger expanses of green space, lower crime rates, and by virtue of them generally being better places to raise families. These are the advantages – of low-density living – that towns should be leaning into. But we should be under no illusions that in an agglomeration-led approach to economic growth, the priority in terms of both investment and political effort must be to make our already-dynamic cities all the more dynamic.

Raising taxes is a central concern of all modern states. Public services have to be paid for one way or another, and that requires revenue. Although nothing is as inevitable as death and taxes, different kinds of tax can have radically different effects on growth. The nature, rate and base of taxes all have significant ramifications for how the overall tax system impacts the economy.

We believe that a more growth-friendly taxation system is possible. This is not a question of whether taxes ought to be lower or higher. Rather, we believe that there is a conversation that needs to be had about the overall ‘shape’ of the tax system – focusing on who and what we tax, and why, along with whether this is the most optimal way to raise the funds needed to pay for public services.

Before exploring what a more favourable tax system could look like, it is worth quickly reminding ourselves of the state we are currently in. For the fiscal year 2022-23, Britain raised just over £1,027 billion in receipts, equivalent to 40.3% of the value of everything produced or consumed in the economy. This overall tax burden has not been so high since the early 1980s, and is forecast to rise still further to 41.2% of GDP in 2028-29. According to analysis from the Centre for Policy Studies, Britain will need annual growth of 2.9% over the next 50 years simply to keep pace with the cost of the welfare state. 

Less taxing taxes

If you were designing a tax system afresh, which raises enough money to pay for public services while impeding growth as little as possible, Britain’s current approach would not be the place to start. While there is no objective measure of how good or bad any given country’s tax code is, there are some indicators. For instance, according to the Tax Complexity Index, an index of corporate tax complexity developed by academics from Paderborn University and the University of Munich, in 2022 Britain ranked a distinctly average 36 out of 64. Meanwhile, on the Tax Foundation’s International Tax Competitiveness Index, which measures the degree to which countries’ tax systems promote competitiveness, Britain ranks 30 out of 38 OECD countries. 

The question we must ask, then, is how do we get out of this dismal situation? Generally speaking, most economists believe that a growth-friendly tax system is one that aims for neutrality and simplicity. 

Neutrality. The tax system should not, as far as is practicable, attempt to steer individual decision-making. In other words, taxes should be as ‘non-distortive’ as possible, resulting in an overall system whereby people do not generally factor in the tax implications of one choice over another. In doing so this would minimise what economists call deadweight losses – the effects of distortions that benefit neither producers, nor consumers, nor even the government, but instead represent only destroyed value. Not all taxes are equal when it comes to growth. Two taxes may raise the same amounts of revenue, but with one resulting in much higher deadweight losses than the other, making us all poorer than we could have been.

Simplicity. Deadweight losses are not only associated with particular taxes, but can result from the overall way that the tax system is structured. A simpler tax code, for example, requires fewer resources to be spent on compliance and enforcement – resources that could instead be spent on creating value. And paying the costs of compliance and enforcement can also create further distortions. Bigger businesses and wealthier individuals can more easily shoulder the burdens of complicated tax regimes, because they have more resources at their disposal, while creating exceptions for smaller businesses or people on lower incomes can result in damaging cliff-edge effects as people respond to perverse incentives. When the tax system is littered with carve-outs, it encourages individuals and businesses to exploit the loopholes, spending valuable time and resources on minimising their tax burden.

Taking these two principles of taxation into account, there is lots of low-hanging fruit that could immediately be addressed to make Britain’s tax system more suited to growth. 

Stamp Duty Land Tax (SDLT) – which is paid when a property is sold – stands out as particularly pernicious for growth, as it essentially penalises people for moving house and making it less likely that they will live in the places best suited to their talents or their needs. The levying of SDLT is in effect an anti-agglomeration policy, working against all the benefits discussed above, as well as having various other exceptions and complications that cause still further distortions. In 2022-23 it raised £15 billion, but at a significant cost to the wider economy. 

VAT is similarly ripe for reform. Although it is fundamentally a well-designed tax, and a good way to raise revenue, in practice Britain’s VAT falls short of its potential because of the accrued effects of years of political short-termism. One of its biggest failings is the widespread use of ‘zero-rating’, reduced rates and even full exemptions for certain products. In 2022-23, these deviations from the standard 20% rate collectively amounted to HMRC losing out on nearly £70 billion, while creating major distortions and deadweight costs, and providing one of the main sources of complication to the tax system. Working out whether a particular product is zero-rated is often a source of costly uncertainty and litigation. 

Another anti-growth feature of VAT is the threshold for registering for it, which will soon be raised to £90,000 (meaning businesses with annual turnovers of less than this do not have to register for or charge it). The rationale behind this is that it reduces the administrative burden on smaller businesses. Yet one ramification of the threshold is that it instantly lumps any business that only just breaches it with an enormous marginal cost, as well as losing them a substantial cost advantage over larger companies. As a result, what we see in the data is significant bunching of businesses who turn over ever so slightly less than the threshold – and tax experts note how some businesses deliberately stop working as they approach the threshold. Lowering the threshold, which is already extremely high by international standards, along with making the cliff-edge less severe, would remove an enormous disincentive for Britain’s small businesses to grow.

Looking at the tax system in the round, a shift to a more pro-growth system would be one which ensures neutrality between different kinds of activity. As things currently stand, employment is penalised compared to investment, but business investment is also penalised compared to particular investments in property. As a result, the tax system has become ever more complicated – with special exemptions and carve outs for particular kinds of investment. Yet these schemes ultimately add distortions in order to undo the effects of still other distortions, making the system as a whole yet more distortive and complicated. 

The Upshot

A Chancellor who tried to fix all of the shortfalls associated with Britain’s tax system in a single budget would probably find themselves swiftly exiting Number 11. But a reforming Chancellor, who wants to see long-term growth in the economy, would be one who plots a course over a parliament or two to methodically eliminate the tax system’s various absurdities, pinch points and distortions that currently limit growth. 

This is something that will inevitably have to be done with pairing measures, so that particular interest groups find themselves better off or at least not significantly out of pocket. Eliminating VAT exemptions on goods, for example, might be paired with increases in benefits and the personal income tax allowance, or with a lowering of Employer’s National Insurance Contributions to bring the taxation of employment closer in line to that on investment. And any attempts to abolish SDLT will need to accept that while the revenue it raised in 2022-23 was less than 2% of the total tax take, it still paid for more or less the entire policing budget for England and Wales. But lost revenue here might be offset by removing tax reliefs offered to first-time buyers, or reducing the capital gains tax exemptions from selling a home.

A simpler definition of productivity growth is to ‘get more from less’. This is largely achieved by using new technologies that make economic activity more efficient – whether that’s mechanisation allowing farmers to grow more food per acre, or artificial intelligence allowing doctors to better and more quickly diagnose patients. 

But these technologies do not just fall from the sky. While some might be the result of flashes of isolated genius, technological advancement is generally the result of countless people incrementally and continuously refining products and processes. Productivity growth is thanks to innovators.

Although some instances of innovation may spark concern and require careful thinking about how they are regulated, we cannot lose sight of the fact that innovation is broadly responsible for the living standards we enjoy today. It is something to encourage, so that we can actively improve the world and allow people to live healthier, happier and more fulfilling lives.

No risk, no reward

One of the essential characteristics of innovation is that it can be risky. Entrepreneurs may plough considerable time and resources into attempting to turn an idea into reality, only for it to fail to materialise. As a whole, the process of innovation is inherently wasteful. Resources must invariably be spent on the experiments that fail, just to discover that they don’t work.

Another aspect of innovation is that even if it proves successful, the benefits it has for society far outweigh the benefits it has for the individuals or companies responsible for undertaking it. Economist William Nordhaus once estimated that innovators are only able to capture 2.2% of the total value to society of new inventions, and even this may be an overestimate. When innovations are successful, they almost always have extremely large, positive spillovers.

This leads us to some broad conclusions:

You get what you pay for. Innovation doesn’t come cheap – scientists need to be paid and laboratories need to be equipped, and, as such, the government plays a big role in directing the funds necessary to do that. They do this directly, through research grants and other direct subsidies, and indirectly, such as through Research and Development Tax Credits or giving investments in startups preferential tax treatment. Some of these policies have been effective, such that 3% of economic output in Britain is spent on R&D each year, slightly above the OECD average. 

But it isn’t just the quantity of funding we should be concerned with. We need to look at the quality of that funding. Are we sure we’re allocating resources in the best possible way? In recent years, Britain has set up the Advanced Research and Invention Agency (ARIA), and announced funding for Focused Research Organisations (FROs) – a move we advocated early on. New ‘research architectures’ such as these take into account the fact that experimentation is inherently prone to failure, allowing for more high-risk, high-reward bets to be taken, that would otherwise be politically difficult to justify.

And the funding we give out needs to get to the right people, so that incentives are properly aligned. Recently, some attention has been focused on whether Britain has the right settlement for incentivising university academics who spin out their research into commercial ventures. As we have noted, however, there’s strong evidence that the way Britain vests intellectual property rights – with universities rather than with the scientists and inventors themselves – is not the optimal arrangement for making the most of Britain’s substantial advantages in scientific research. 

A final source of state spending that can have significant consequences for entrepreneurs and innovation is public procurement. In 2022-23, this totalled nearly £400 million, and therefore represents a lucrative source of revenue for businesses able to access it. Yet there are good reasons to believe we could improve upon our current system of public procurement. We’ve previously highlighted how the number of single-bid tenders increased fivefold between 2012 and 2018, and that the average number of days suppliers are given to respond has fallen. If we want to tap the innovative potential of entrepreneurs, and ensure public services are being delivered as efficiently and intelligently as possible, procurement cannot continue to be biassed against bids from innovative startups.

Writing the rules. Regulatory frameworks which are fit for purpose will also be critically important for allowing the emerging industries of the future to emerge. Whether it’s alternative proteins or autonomous vehicles, existing regulations will not necessarily apply in a way that works. Indeed, even some of the less exciting improvements coming to the fore can be deemed illegal under current rules. Look no further than the case of privately owned e-scooters, which remain forbidden to use on public roads in part because of a law passed in 1835.

Ensuring that innovative companies can easily develop, test and market their products here in Britain will be critical. Ideas such as an n+1 regulator, developed by former Head of the Office for Fair Trading, John Fingleton, could enable Britain to champion innovators while still upholding public safety. 

Even if this is considered too radical, however, we still have to grapple with the fact that coming up with appropriate regulations for new technologies is costly. Form Ventures, for example, has highlighted how the Food Standards Agency faces resource constraints post-Brexit, stifling the growth of the novel foods industry. And when it comes to the regulation of the rapidly developing drones sector, Britain has been relatively ahead of the pack only because of the extra initiative taken by the Civil Aviation Authority to apply for extra funding to meet the challenge. If government wants regulators to be adaptive and proactive when it comes to innovations in the sectors they cover, it needs to ensure they’re adequately resourced to do so.

One way for the state to save resources is to piggyback off the efforts already made by regulators in other countries. We already do this in some cases – in healthcare, for example, where developers of new medicines can submit applications via the International Recognition Procedure. We should adopt a broader approach to the mutual recognition of products already approved by trusted international partner organisations – the regulation of nuclear power and foodstuffs stand out as possible contenders where important gains stand to be made.

The Upshot

While a reasonably solid political consensus seems to have formed around the need to support innovation, we should not take for granted that it will remain as strong tomorrow as it is today. By its nature, state subsidies for innovation will inevitably result in some bets not paying off. Public money will be wasted on individual projects, or go towards supporting things that might not necessarily have required it. As such, it is easy to imagine opposition arising to spending on innovation, especially if public finances remain straitened. Yet we must remember that some failure is unavoidable when it comes to funding innovation, so policymakers must manage their expectations accordingly.

Keeping regulations fit for purpose will also continue to be a challenge as technology continues to change, and in the face of uncertain changes it is all too easy to exhibit caution. But policymakers should bear in mind that not innovating, or innovating more slowly, also comes with potentially massive, albeit ‘unseen’, costs. Approving a new drug or medical treatment now, for example, rather than a few years later, can prevent deaths and alleviate suffering that was entirely avoidable. Those whose lives are improved or even saved almost never appreciate it, because they are simply never made aware. But this does provide an opportunity for politicians and policymakers to make more explicit the benefits of bringing the technology of tomorrow to today, enumerating the good they have done when they act quickly. 

Of course, during times of rapid innovation-driven change, a constant theme is opposition to new technologies from incumbents, whose livelihoods may be threatened as a result. This opposition is not always obvious when it happens, and can take the form of special pleading to support particular industries, places, or projects. But here, we must always recall that the priority must be consumers. That is to say, although innovation may be disruptive to some, we should be concerned with the welfare of the many.

To best achieve growth, we need to allow all people to make the best use of their talents. To a large extent, this will be helped along by addressing the fundamentals discussed above, encouraging agglomeration, reducing fiscal distortions, and ensuring innovation is better rewarded. People’s talents will be best deployed when they can live within reach of where they will be most productive; when being more productive is no longer penalised by our tax system; and when we more effectively devote resources to those who innovate.

But Britain also taps two sources of new talent, from people raised either in or outside the country: that is, via both education and immigration. On both counts, Britain has a high supply. It spends well above the OECD average on primary, secondary, and tertiary education, and performs above average on the PISA Rankings. Net migration, meanwhile, is at an all-time high, with an estimated 672,000 people coming to Britain in the year ending June 2023. How we manage this supply, however, sometimes leaves a lot to be desired.

Leveraging our labour

When it comes to promoting growth and innovation, managing the sources of new talent should be treated with the following principles in mind:

Fleetness of foot. People with the most useful skills are also the most in demand, not just nationally but internationally. As such, we need to ensure that Britain is as easy as possible for high-skilled workers to move to and live in, to both attract and retain those with the skills we need. Making Britain more attractive by lowering barriers, such as reducing visa costs or speeding up administrative processes is something that we have repeatedly called for.

Catching the spill. Investments in education and more immigration can have significant spillover effects, but we are not always good at capturing all those benefits. Britain’s higher education sector is in particularly high demand abroad, for example, but many of those graduates do not stick around after completing their studies, instead taking those skills abroad. We have suggested ways to remedy this, but it is not just a matter of retention. The principle runs the other way too: when other countries outdo us on education, we should be trying to steal their lunch, proactively recruiting the talent they have nurtured to live and work in Britain.

It’s not what you know, but how you apply it. Although Britain spends a lot on education, this doesn’t necessarily mean that we get all we could from that investment. Our population has many skills, but not always the opportunity to apply them to their full potential. A lot of this kind of underemployment can be blamed on under-agglomeration – on people not being able to work where their skills would be put to best use. Some of it can also be down to social barriers – today only 3.5% of total equity investment goes to female-founded startups, for example. 

But a lack of application can also be down to other factors. Very few people in general use their skills to innovate, not because they face barriers per se, but because it rarely occurs to them to do so. And it’s only through contact with innovators, or when innovation has an especially high cultural salience, that it becomes more likely that they will apply their skills that way – when they can come into contact with and then adopt an improving, or optimising mentality. Previous research we carried out showed a strong correlation between knowing an entrepreneur when growing up and becoming a founder later in life. Encouraging contact like this is something that can be helped along by more agglomeration of course, which by bringing people together makes them more likely to inspire one another. But there are likely to be other interventions that can help, from injecting the improving mentality into how we educate young people, to raising the overall salience of innovation through the honours system.

The Upshot

Following these principles is often easier said than done. There is substantial political pressure to reduce low-skilled immigration, for example, and invariably the answer to this has been to pursue a strategy of trying to make Britain seem an unattractive place to move to for all. Leaning into a strategy of deterrence, however, produces unproductive political splits – with one side baulking at offputting rhetoric used to deter migrants, and the other complaining that deterrence is insufficient – while also undermining the ability of Britain to compete in the global competition for talent. 

A growth-focused approach would be to reject deterrence as an option, and to focus on measures that will not threaten Britain’s reputation as an inviting and welcoming place to move to. There should also be close attention paid to making it generally easier to move to Britain for those who do so with permission, cutting out bureaucratic barriers and inconveniences that make it unnecessarily complicated. We should not be making life hard for every immigrant just because there is political pressure to prevent people moving to the country without permission.

Lastly, we should realise that there is an international race for talent. Advanced economies need specialised expertise to continue increasing rates of productivity and innovation. A brief look at the top companies which comprise Silicon Valley tells us all we need to know – the CEOs of Microsoft, Google, Adobe and IBM were all born not in California, but India. We ourselves have shown how foreign-born founders play a disproportionate role in starting the fastest growing companies in Britain – running 49% of them in 2019, and 39% in 2023.

As for education, although it can be a tool for growth, we must be careful not to confuse inputs with outputs. Just because Britain spends a lot on education, does not mean that the system is as effective as it could be. We should be focused on the productivity of that education – how much usefulness we get from each hour or week or year that people are taught, and not just adding more years to their education. The recent move to make mathematics a compulsory subject up to 18 is a case in point – just because more people are taught a subject for longer, does not mean that they are taught it better. 

And any such moves need to be adequately resourced. One of the key constraints we keep coming up against with using the education system to inculcate an improving mentality is that teachers are already under a lot of pressure merely to teach the existing curriculum, and adding more to their plate is neither welcome nor feasible without substantial additional resourcing. Nor are teachers necessarily the best-placed people to teach certain subjects, particularly when it comes to innovation. Educational institutions are at their best when they are focused and efficient, and not treated as a hammer with which to crack every nut. In many cases we should not shy away from creating entirely new institutions, rather than making existing schools, colleges and universities take on an ever wider remit.

Discussions of entrepreneurship policy over the last ten years have all too often focused at the margin. Small schemes and niche issues have a tendency to occupy more attention than they should, and often end up becoming sources of sclerosis – something which might seem a headline-grabbing initiative for a month or two ends up acting as a constant drag for several decades. When it comes to delivering an economy that fires on all cylinders, we cannot afford to forget the fundamentals.

Above, we have set out what we believe those fundamentals to be. If we want to end our productivity malaise, kickstart innovation and address other societal challenges, we cannot afford to waste any more time on tired interventions. Allowing agglomeration to blossom, approaching tax reform rationally, investing properly in innovation and maximising the talent on offer will do more than anything else imaginable to secure our economic future.