For a long time, it’s been received wisdom among policymakers that the UK spends too little on research & development (R&D). And not without cause: in 2017, the government’s industrial strategy whitepaper found that total investment in R&D in the UK was equal to just 1.7% of GDP, well below the OECD average of 2.4% subsequently adopted as the government’s R&D target.
So it came as a surprise to many when, in September, the Office for National Statistics (ONS) published a new, significantly higher estimate of UK R&D spending by businesses. By examining the difference between their prior estimates and the amount claimed by firms for tax credits, the ONS discovered that smaller UK businesses had been neglected by previous surveys. Updating the ONS business expenditure on research and development (BERD) statistics to better represent these smaller businesses led to a new estimate of £43bn in 2020, a 60% increase on the previous estimate of £26.9bn. This would take total R&D expenditure (including government, non-profits, etc. as well as businesses) to – strangely enough – 2.4% of GDP.
The new estimate should be scrutinised precisely because it’s closer to the amount claimed by businesses for tax purposes. Firms often inflate the amount of R&D expenditure they report to HMRC; for example, by claiming for normal business expenses such as market research. A cottage industry of consultancy firms helps them claim as much as possible in exchange for a proportion of the tax savings, worsening the problem.
But while the ONS is keen to emphasise that this new estimate is only meant to be an interim figure prior to a more concrete reappraisal in November 2023, they’re nevertheless confident that it’s significantly more accurate.
The new estimate is no reason to abandon our ambitions to spend more; the UK still lags behind many comparable economies. The OECD average for R&D spending has increased to 2.7% since 2017, and countries like Germany and the US spend more still. But the ONS figures pose a more fundamental question: if we’re spending £16bn more than we thought each year, why don’t we have more to show for it? We aim to increase R&D expenditure because innovation will be required to solve many of our greatest national challenges: improving productivity, transitioning to net zero, helping people live longer, healthier lives, and maintaining our national security. We thought it plausible that businesses were spending only £26.9bn on such innovation; finding out that they’re spending far more is, in many ways, an indictment.
So whilst Labour should keep their 3% target, they must also ensure that R&D is directed towards solving our collective priorities. The party’s Prosperity through Partnership plan would be a significant improvement on the status quo, but we may need to go further if we are to address the lack of consistency and coordination that have historically plagued policy. A good place to start might be reforming the UK’s overly generous tax credits system. These tax credits cost over £8bn per year, making them the government’s de facto industrial policy, and are probably not incentivising as much “good” R&D as grants and loans might. The overuse of tax credits is representative of the decline of industrial policy since the 1980s.
The party can also learn from past reforms. The Science & Innovation Investment Framework introduced by Gordon Brown created stability and provided forward guidance but was scrapped after Labour left government in 2010. A similar initiative from a new Labour government could facilitate the return of a coherent industrial strategy.
Beyond that, Labour should consider appointing a Cabinet-level Secretary of State for Science and Technology to act as a political advocate for science and technology and ensure coordination across departments where necessary.
Finally, when asked to find savings, departments often cut R&D budgets first. To prevent this, Labour could task the statutorily independent Industrial Strategy Council with setting minimum R&D expenditure targets.
The new ONS estimate of R&D spending should be heartening – but in reality, it suggests a deeper malaise is afflicting our investment in innovation. Labour’s Industrial Strategy would be an important step towards reorienting research towards our greatest societal challenges, but further institutional reforms, such as introducing a Secretary of State for Science and Technology and setting minimum departmental R&D budgets, are needed to put science to work.
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