Jeremy Hunt faces hard choices as he prepares for Thursday’s Autumn Statement. The government’s fiscal position is dire, but as it looks for £50bn to balance the books it must not forget that, as we face the longest recession in living memory, we need to grow the economy too.
Making British businesses more innovative is one surefire way to get the UK economy back on its feet. But despite successive governments’ efforts in doing this, the UK still lags far behind its peers. Businesses here spend just 1.8 per cent of GDP on R&D compared to 2.1 per cent in Germany, 2.2 per cent in the USA and 3.6 per cent in South Korea.
In last year’s Mais Lecture, Rishi Sunak, the then Chancellor, noted this himself, citing the UK’s lack of R&D investment as a significant drag on our competitiveness.
And in fairness, the government has for the last two decades offered firms an increasingly generous package of R&D tax incentives to encourage them to invest more. But these schemes have come under fire. The former Cabinet Secretary Lord Turnbull recently labelled them a “major financial scandal” and woefully open to abuse and fraud.
They are also becoming increasingly expensive. The number of SMEs applying for the government’s R&D tax credit scheme alone has increased fivefold in recent years and the combined cost of R&D tax incentives has ballooned to over £8bn per year.
Some businesses have almost certainly taken advantage of the generosity of the schemes by claiming tax credits for investments that stretch the definition of R&D to the very limit. But, despite the limitations of the schemes, they have been instrumental in making many British firms – and the economy more broadly – more innovative and more productive.
In fact, new estimates from the ONS suggest that, at long last, we have actually reached the government’s target to spend 2.4 per cent of GDP on R&D spending. This is good news. But there is a worry that the government will, in search of that £50bn and mindful of the recent criticisms of the R&D schemes, pull future funding.
Doing this would be a colossal mistake. We are still spending comparatively little compared to other science superpowers such as Israel and South Korea. And the real benefits from investing in R&D aren’t typically felt for about ten years. So we should soon begin seeing the benefits of the last decade of investment filtering out into the wider economy at exactly the time that we need it most.
So rather than cutting the scheme right when it’s beginning to pay dividends, the Treasury should instead focus on making it work better, as I argue in a new paper for Onward today. Making the scheme more transparent, cracking down on fraud and tightening up the definitions of R&D would all help build a system that is fit for purpose.
The best way to restore Britain from its economic malaise is through innovative businesses investing in cutting-edge R&D. Business confidence has taken a battering with Brexit, Covid-19 and political instability. Through it all they have relied on R&D tax incentives to help them invest in the future. The chancellor can increase business confidence with wise reforms to the scheme that send the clear signal that Britain is an Innovation Nation. Cutting support for R&D would send the opposite message, and doom us to an inevitable economic decline.