Select Committee on Science and Technology Third Report

3  THE SETTLEMENT FOR SCIENCE IN 2004

Table 2: Expenditure on science (£ million)

	2001-02 Outturn	2002-03 Outturn	2003-04 Working provision	2004-05 Plans	2005-06 Plans
Total OST expenditure on science of which:	1,882.5	2,075.1	2,494.4	2,704.3	3,033.4
BBSRC	230.1	252.6	267.5	282.9	324.2
ESRC	74.9	77.9	94.5	104.0	119.8
EPSRC*	481.1	510.4	466.9	490.0	544.8
MRC	390.1	360.5	453.5	452.5	497.0
NERC	228.6	241.9	317.2	317.1	339.9
PPARC	219.2	249.0	264.2	273.0	292.0
CCLRC	42.7	42.6	129.9	123.4	127.8
Research Councils' pension scheme	27.0	28.5	29.7	31.1	33.2
Royal Society	26.0	28.8	29.2	31.0	32.4
Royal Academy of Engineering	4.3	4.8	5.3	5.6	5.9
Roberts Review (unallocated)	-	-	7.8	19.3	56.2
Diamond Synchrotron	4.6	14.9	41.4	82.9	52.6
Joint Infrastructure Fund	101.7	85.3	44.0	-	-
Science Research Infrastructure Fund	6.1	105.0	250.0	296.6	300.0
Capital yet to be allocated	-	-	16.3	52.4	54.4
Knowledge Transfer	-	-	-	11.8	12.3
Science Enterprise Challenge Scheme	2.5	4.8	5.0	-	-
Cambridge/MIT Institute	4.2	10.7	14.0	14.0	-
University Challenge Fund	5.9	7.3	5.0	-	-
Higher Education Innovation Fund	4.8	22.8	40.0	60.3	69.4
Exploitation of discoveries at PSREs	2.9	5.0	0.0	4.7	9.7
Foresight LINK Awards	0.4	2.5	5.0	2.0	-
OST initiatives	8.2	2.3	6.0	5.3	5.3
Delivering sustainability	-	-	-	8.4	120.5
Exchange rate and contingency reserve	-	-	2.0	36.0	36.0
Nuclear Fusion	14.3	14.6	-	-	-
Contract of association	2.9	2.9	-	-	-

* EPSRC includes figure for Nuclear Fusion

Source: Department of Trade and Industry, Departmental Report 2004, Cm 6216, April 2004, p 94

14. Table 2, above, gives a breakdown of total OST expenditure on science.

15. In 2004, the Government placed science at the heart of its political agenda with the publication of its Science and Innovation Investment Framework 2004-2014 and the announcement of significant increases in funding for UK science. These developments were greatly needed. The 2004 report by Evidence Ltd shows that the UK is spending relatively less on research than its competitors and that the gap is growing. For both the indicators showing gross expenditure on research and development (GERD) as a proportion of GDP and publicly performed research and development (PUBERD) as a proportion of GDP, the ratio of the UK to the OST comparator group average fell in 2002 relative to the average ratio for the previous five years.[15] The new round of investment announced in 2004 is therefore fundamental to ensuring that the UK Science and Engineering Base can continue to compete on a world stage.

Science and Innovation Investment Framework 2004-2014

16. The Science and Innovation Investment Framework 2004-2014, jointly produced by DTI, the Department for Education and Skills and HM Treasury, sets out "how we will continue to make good past under-investment in our science base".[16] The document outlines the Government's framework for action across eight themes: challenges and opportunities for the UK science base; management of the science base; business R&D and innovation; knowledge transfer and innovation; science, engineering and technology skills; science and society; science and innovation across Government; and global partnerships, devolved administrations and the regions.

17. The Investment Framework sets some challenging new headline targets and announces a number of new measures, particularly to assist in the improvement of science teaching. Nonetheless, much of the document is dedicated to "making clear how the money that we have allocated under the Spending Review is going to be used in achieving our objectives".[17] This statement confirmed our impression that the Investment Framework was simply a consolidation of previous science policy papers, such as Investing in Innovation, rather than a whole new framework for science spending. Whilst it is useful to have all the elements of the Government's thinking on science and innovation gathered together in one place, this is hardly the dazzling array of new policies anticipated before the publication of the Investment Framework. Similarly, we are not convinced that DTI's Five Year Programme adds anything to the assortment of publications already in existence that deal, either in full or in part, with science policy.[18]

R&D AS A PROPORTION OF GDP

18. The Government argues that there is a clear link between the proportion of GDP that a country spends on research and development (R&D) and productivity: "recent OECD research found that a 1 per cent growth in public R&D leads to a 0.17 per cent increase in total factor productivity in the long run".[19] UK investment in R&D currently amounts to 1.86%. Table 3, below, shows how this figure is broken down in comparison with the figures for France, Germany and the US:Table 3: Public and private sector investment in R&D as a proportion of GDP

% of GDP	UK	France	Germany	US
Business	1.24	1.37	1.73	1.87
Public sector	0.62	0.83	0.78	0.80
Total	1.86	2.20	2.51	2.67

19. Perhaps the most striking target contained within the Investment Framework is that to increase UK investment in R&D as a proportion of GDP to 2.5% by 2014. Table 4, below, sets out the Government's indicative scenario for meeting this target:Table 4: The Government's indicative scenario towards 2.5% target (R&D as % of GDP)

	2004	2014
Science Base	0.35	0.50
Other Government R&D	0.31	0.30
Private Sector	1.24	1.70
UK total	1.90	2.50

Source: HM Treasury, DTI and DfES, Science and Innovation Investment Framework 2004-2014 (July 2004), p 55

20. In the Investment Framework itself, and repeatedly in oral evidence, the Government has acknowledged that the above scenario "represents a considerable challenge both for Government and for UK business".[20] Nonetheless it falls short of the Barcelona target adopted by the European Commission to increase investment in European R&D to levels approaching 3% of GDP by 2010. All the Ministers we questioned about this discrepancy agreed with the Chief Secretary to the Treasury that "it would, I suppose, have been open to us to go for the EU target, which is 3 per cent, but to be frank with you, that in our view is not a realistic one".[21] Lord Sainsbury told us that "I would not put any magic on 3 per cent; it is an aspirational target for the whole of Europe".[22] By contrast, a target of 2.5% was perceived to be "realistic and attainable".[23]

21. We asked Ministers if there was any chance that the Barcelona target would be met at a European level, given the UK's decision to abandon any attempt to reach the target itself. Lord Sainsbury was "doubtful of how many of the big countries in Europe will get to the 3 per cent. [It] is a target for the whole of Europe not for each individual country, because it is accepted that not all countries will get to that".[24] He cited some of the Scandinavian countries as the exception because of the relatively large numbers of multinational corporations that they played host to.

22. We are surprised that the Government signed up to European targets which it does not believe that the UK has any "realistic" hope of achieving. If the UK wishes to be at the forefront of European research and development it should aspire to match the most successful of the European countries in meeting the most challenging of targets. It can only achieve this if the targets it signs up to are genuinely attainable.

23. In meeting even the lower target of 2.5% by the later date of 2014, the Government is reliant on increased investment in R&D by the private sector, over which it has only limited influence. The Secretary of State for Trade and Industry told us that the two main instruments that the Government intended to use to encourage private sector R&D were the R&D tax credit, which is discussed in paragraphs 27 and 28 below, and the investment of £178 million in the Technology Strategy, discussed in paragraphs 62 to 64 below.[25] Although both these measures are very encouraging, the Government has accepted that there is no guarantee that they will succeed in leveraging increased private sector investment in R&D.

24. In its indicative scenario the Government has chosen to place the greatest emphasis on improvements to be made by the private sector. By contrast, the scenario does not place any of the burden for increased investment in R&D on the sector over which it could exercise some control: Government departments. We asked the Government to explain this decision following the evidence session with Ministers on 1 November. In response we were told that the target was based on a "neutral assumption": it "implies real terms growth in the aggregate Other Government R&D total at the trend rate of growth of the economy as a whole. We have not set overall ambitions for the more rapid growth in the aggregate level of R&D across other Government Departments as these budgets should properly be for Departments themselves to decide and to allocate within their spending review settlements".[26] R&D carried out in Government departments not only yields policy benefits for those departments, but also has spin-off benefits. For example, the development of the internet arose from research carried out by the Defense Advanced Research Projects Agency (DARPA), part of the Department of Defense in the US. Furthermore, if levels of departmental R&D fall too far, there is a danger that Research Councils will be increasingly drawn into funding policy research at the expense of other research projects.

25. Given the centrality of the R&D target to the Investment Framework, the Government's indicative scenario for its achievement assumes considerable importance. In written questions following the evidence session on 1 November we asked the Government for the basis on which the scenario and the projections contained within it were drawn up. The question seems to have been misunderstood, as the answer we received merely reiterates what we already knew: "the average annual real growth rates of 5³/₄ per cent implied by this scenario relates, as the text in the framework states, to both the private and public sector research bases".[27] This does not explain how the figures for 2014 contained within the scenario were arrived at. We are, therefore, unable to make a judgement as to whether or not attainment of the target is realistic.

26. It is not clear to us why the Government is able to set ambitious targets for increased private sector investment in R&D but balks at setting similarly challenging targets for its own departments. If the UK is to succeed at meeting its target of investing 2.5% of GDP in R&D by 2014 the Government needs to lead by example.

R&D TAX CREDITS

27. R&D tax credits are one of the few concrete measures that the Government has at its disposal to encourage business investment in R&D. The Investment Framework states that "there is strong academic evidence that tax incentives can increase R&D spending by an amount equal to the loss in tax revenues - every pound spent in tax support is invested by companies in additional R&D".[28] In 2002-03, over 95% of eligible SMEs made a tax credit claim. The Government has given over £600 million in support since their inception.[29] There is a risk that the R&D tax credit will most benefit those sectors that are already strong in R&D rather than encouraging those that are not. UK business investment in R&D is currently highest in the pharmaceutical sector. Other sectors, such as mechanical engineering and aerospace spend much less on R&D.[30] We recommend that the Government considers introducing sector-specific tax incentives in order to encourage the growth of R&D in those sectors that currently lag behind in this area.

28. As the Government told us in answers to written questions, it is "too early to judge what the actual effects of the R&D tax credit have been on UK business spending on R&D. R&D decisions are long-term in nature. The desired policy outcomes, such as boosting innovation and productivity, typically emerge some years after the initial investment".[31] We understand that, in 2005, the Government will investigate the impact that the tax credits have had on SMEs. It will also look at their impact on the technology-based manufacturing and service sectors.[32] We await the findings of these investigations with interest.

CONSULTATION

29. As part of the process of researching and compiling the Science and Innovation Investment Framework 2004-2014, the Government conducted a consultation, which took place in March and April 2004 over a period of six weeks. This is only half as long as the minimum period of 12 weeks that is set out as one of the six consultation criteria in the Cabinet Office guidance on Government consultations, entitled the Code of Practice on Consultation.[33] Paul Boateng, the Chief Secretary to the Treasury, told us that the completed Investment Framework "represents input from a broad cross-section of stakeholders, all of whom gave us a valuable insight and input into the document".[34] It is not, however, obvious how the consultation responses were used in the formulation of the Investment Framework since much of the document simply brings together existing policies.

30. It is a positive sign that the Government sought the views and expert opinions of the scientific community when compiling its Investment Framework. Nonetheless, we suspect that this may have been a token gesture. Insufficient time was given for meaningful contributions to be made. It is also unclear how the submissions have helped to shape the policies outlined in the Framework. This must have been extremely disappointing for the many organisations that expended considerable resources on producing their responses within an unreasonably tight deadline. We hope that the departments involved will seek to reassure the scientific community that their contributions are valued by allowing a minimum of twelve weeks for future consultations, as recommended by the Cabinet Office.

Spending Review 2004
Table 5: Department of Trade and Industry: Spending Review 2004 settlement (£ million)

	2004-05	2005-06	2006-07	2007-08
Resource Budget Of which Administration Budget	4,932 427	5,858 449	6,110 414	6,249 404
Capital Budget	160	328	480	475
Total Departmental Expenditure Limit	4,971	6,062	6,453	6,582
Department of Trade and Industry	4,818	5,267	5,445	5,689
Other bodies	153	157	152	147

Source: HM Treasury, 2004 Spending Review: New Public Spending Plans 2005-2008, Cm 6237, July 2004, p 146

31. The publication of the Science and Innovation Investment Framework 2004-2014 was accompanied by a substantial increase in the Science Budget. The budget for DTI is given in Table 5, above. Of its total £5.6 billion budget, the majority, £3.3 billion, will be invested in science and innovation.[35] This represents a growth in the DTI Science Budget of an average of 5.6% per annum in real terms over the Spending Review 2004 (SR 2004) period.[36] The science base will also see increased investment through the budget of the Department for Education and Skills (DfES). In total, Spending Review 2004 "provides for increased funding for the science base through DfES and DTI, such that spending on science will be over £1 billion higher in 2007-08 than in 2004-05".[37] The Wellcome Trust pledged to match the increased Government funding for science by providing £1.5 billion of investment over five years.

32. It is intended that the increased funding for science should provide for:

—  "shaping the science base to be more responsive to the research and skills needs of the economy, including through central funding of £35 million in 2006-07 and 2007-08 to enable Research Councils to respond more quickly and effectively to emerging priorities and opportunities;

—  additional Research Council funding grants in Higher Education Institutions of £80 million in 2007-08, accompanied by further financial management reforms, to improve the sustainability of the UK's university research base;

—  measures to enhance the supply of scientists and engineers, following the recommendations of the 2002 Roberts Review in this area, by raising the average PhD stipend to £13,000 in shortage areas; raising post-doctoral salaries by £4,000 and developing a new academic fellowship scheme; and

—  strengthening business-university collaboration, responding positively to the 2003 Lambert Review recommendations, including building support for knowledge transfer from universities to £110 million a year by 2007-08, and enhancing the role of RDAs in encouraging effective links between business and the research base".[38]

33. We received informal reports that, in the formulation of the Investment Framework, the Treasury had taken the lead, whilst OST had taken a back seat. When we asked Ministers about these reports in oral evidence on 1 November, the Rt Hon Paul Boateng told us that "David Sainsbury needs no driving in the promotion of science, technology and innovation; so the DTI certainly was not driven".[39] We also enquired whether the new money for science would mean greater control by the Treasury over how the funds were spent. However, the Chief Secretary to the Treasury told us that "fortunately, David Sainsbury and Kim Howells have substantial allocations under this particular Spending Review, and in the context of this framework; and it will be for them to decide within those allocations how the spending will be delivered".[40] Since DTI and DfES have expertise in the area, it is only appropriate that they should determine how the new funds are spent.

34. As with elsewhere in Government, increases in funding for science are tied to undertakings to make efficiency gains. DTI will secure "at least £380 million in efficiency gains by 2007-08". These efficiency gains will entail a reduction of 1,010 Civil Service posts in core DTI, 200 in UK Trade and Investment and 270 in other bodies, by 2007-08.[41] We were assured by the Secretary of State that, because science is a priority policy area, OST will experience "rather fewer job cuts" than other sections of the department.[42] Given the substantial increases in the Science Budget, it is important that DTI retains sufficient staff capacity within OST to manage and administer the new funds. We intend to monitor this situation closely.

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15   DTI, PSA target metrics for the UK Research Base (October 2004), p 10 Back

16   Investment Framework, p 1 Back

17   Q 62 ["Science Question Time"] Back

18   DTI, Five Year Programme: Creating wealth from knowledge (November 2004) Back

19   HM Treasury, 2004 Pre-Budget Report, Cm 6408, December 2004, p 57 Back

20   Investment Framework, p 55 Back

21   Q 174 [Rt Hon Paul Boateng MP] Back

22   Q 212 [Lord Sainsbury of Turville] Back

23   Q 115 [Rt Hon Patricia Hewitt MP] Back

24   Q 176 [Lord Sainsbury of Turville] Back

25   Q 116 Back

26   Ev 55 Back

27   As above Back

28   Investment Framework, p 65 Back

29   HM Treasury, 2004 Pre-Budget Report, Cm 6408, December 2004, p 58 Back

30   Investment Framework, chart 4.1, p 56 Back

31   Ev 49 Back

32   HM Treasury, 2004 Pre-Budget Report, Cm 6408, December 2004,p 58 Back

33   Cabinet Office, Code of Practice on Consultation (January 2004), p 4  Back

34   Q 160 [Rt Hon Paul Boateng MP] Back

35   DTI, Five Year Programme: Creating wealth from knowledge (November 2004), p 10 Back

36   HM Treasury, 2004 Spending Review: New Public Spending Plans 2005-2008, Cm 6237, July 2004, p 141 Back

37   As above, p 142 Back

38   As above, pp 142-143 Back

39   Q 161 [Rt Hon Paul Boateng MP] Back

40   Q 164 [Rt Hon Paul Boateng MP] Back

41   "Spending Review 2004", HM Treasury press notice A10, 12 July 2004 Back

42   Q 157 Back

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Prepared 31 January 2005