Balance and effectiveness of research and innovation spending Contents

2Level of ambition of the 2.4% target

9.This Chapter considers the importance of research and innovation spending, and details the current level and composition of spending in the UK. In this context, and compared to spending in other countries, we consider whether the current target of 2.4% of GDP should be viewed as an ambitious one. We also identify other factors that will be of importance in reaching this goal.

Importance of research and innovation spending

10.The Department for Business, Energy and Industrial Strategy (BEIS) highlighted in its submission that “research and innovation are vital to our country’s prosperity, security and wellbeing, and an integral part of delivering the UK’s Industrial Strategy”.11 UK Research and Innovation (UKRI) summarised the importance of investment in R&D and the positive social returns it had (i.e. additional value created for others in society, beyond those undertaking the investment):

There is significant national and international evidence that shows public investment in R&D achieves high social rates of return, of around 20% p.a. It attracts substantial private investment in R&D from within the UK and overseas, with every £1 of public spend leveraging about £1.40 of private spend. Private R&D investment also leads to significant benefits, with direct returns to the firm of about 20% p.a. and social returns two or three times this.

The evidence suggests that on average £1 of public R&D investment generates around £7 of net benefit to the UK.1213

11.The R&D target therefore represents a path of increased spending that will benefit the whole of the UK economy through these ‘spill over’ effects. The Industrial Strategy suggested that doing so will “transform our economy”:

with our businesses creating the next generation of technologies to revolutionise productivity in all sectors from construction and agriculture to manufacturing and the creative industries. This will raise the standard of living and establish UK leadership in global markets.14

Current R&D spending

12.The Government has set targets for R&D spending to constitute 2.4% of GDP by 2027, and to reach 3% of GDP in the longer term. The latest ONS data15 shows that in 2017 total R&D expenditure in the UK was £34.8 billion, or 1.69% of GDP, but the breakdown of this spending is complex16 and dependent on whether split by funding source or by the sector in which R&D is performed. The Frascati Manual (the internationally recognised methodology for collecting and using R&D statistics), categorises investment from four sectors: business enterprise; Government (including research councils); higher education; and private non-profit organisations (such as charities).17 Investment by business and non-profit organisations may originate domestically or from overseas.

13.In terms of funding, the UK business sector funded £18.7 billion of total UK-performed R&D activity, representing around 54%. The Government sector was the second-largest source of funding at £6.8 billion or 20%. However, whilst this includes funding by the seven research councils of £3.7 billion, it excludes funding by the higher education funding councils (HEFCs) for England, Scotland, Wales, and the Department for Employment and Learning in Northern Ireland. An alternative split shows funding by Government departments of £3.7 billion (11%) and dual support funding through HEFC and Research Councils of £5.3 billion (15%). Around £5 billion (14%) of UK R&D funding is from overseas investment.

14.The figure below, published by the Office for National Statistics (ONS), represents these flows of funding through the R&D ecosystem. The values in the boxes are the amounts of funding that each sector provided to the recipient performing sector.

Figure 1: Flows of Research and Development Funding, Office for National Statistics (2019)

15.In terms of R&D activity, business R&D represents the largest share at £23.7 billion in 2017, or 68% of total UK R&D expenditure. The product groups with the largest R&D activity were pharmaceuticals (£4.3 billion), vehicles and parts (£3.6 billion), and computer programming and information services (£1.9 billion). The higher education sector accounts for R&D activity of £8.2 billion, or around 23% of total UK expenditure, mainly provided through the dual support system by research council and HEFC funding as shown above. The statistics show R&D activity in the UK Government department research institutes and laboratories of £2.2 billion, or 6% of total R&D activity. Private non-profit organisations undertook a further £0.8 billion of activity, or 2% of total spending.

16.The ONS data suggests that R&D spending of 1.69% in 2017 was an increase from 1.67% the previous year. However, OECD data suggested there was a decrease from 1.68% to 1.66%, although this may be revised in light of the more recent ONS figures.18

17.In terms of international comparison, using UNESCO data these levels are similar to Canada and Norway, but lower than France (2.3%), Germany (2.9%) and behind table leaders such as South Korea and Israel (both 4.2%).19

18.The target of 2.4% of GDP represents the current OECD average spend on R&D; a briefing by the Royal Society illustrated the gap between current level of UK investment, the OECD average, and the eventual target in the figure below.20

Figure 2: UK R&D funding, Royal Society (2019)

2.4% as a ‘stretch’ target

19.The Campaign for Science and Engineering (CaSE) submitted to us modelling of the additional private and public investment required to meet the 2.4% target. The baseline assumption used by CaSE was that without increased Government investment public expenditure remained flat in cash terms and private expenditure increased in line with GDP; and that additional public investment would leverage further private spending at a ratio of 1.36. Their results showed that “public investment must reach £20 billion in 2027, [an] additional £9 billion per year” if the UK is to reach its 2.4% target.21 This additional spending is shown in the figure 3 below.

Figure 3: Additional Funding required to meet R&D targets, CaSE (2018)

20.Several conclusions flow from this result, notably that the public investment portion of research and development spending must be frontloaded to achieve sufficient leverage of private investment to achieve the target of 2.4% by 2027. CaSE explained that UKRI and BEIS could not deliver public investment by themselves so cross-Governmental R&D spend “will be crucial to meet the target”.22 However, whilst these are the implications of the modelling, they do not consider the capacity of the research system to absorb these increases and spend money effectively.

21.Rebecca Endean representing UKRI commented that, with the latest ONS data showing that “£34 billion is spent on R&D in the UK. To get to 2.4%, that number will have to double in nominal terms”.23 Professor Sir Mark Walport, Chief Executive, UKRI, also added that a whole-economy approach was needed: “you also need to think about the denominator. What the overall economy does is very critical as well.”24 The then Minister of State for Universities, Science, Research and Innovation, Chris Skidmore MP, noted that this did make the target a “slightly perverse one” as “we want to have a strong economy and recognise that investment in R&D can deliver that strong economy.”25

22.There was an element of disagreement in the evidence received regarding the ambition of the target. Kirsten Bound of Nesta summarised this conflict when she explained:

from one perspective, it is monumentally ambitious. It requires a sustained year-on-year increase that we have not seen in a generation. From another perspective, it will take us to an OECD average intensity spend. No country aspires to be average.26

23.Sir Paul Nurse agreed that the target was “a step in the right direction, but you cannot say that it is that ambitious”,27 whilst Mr Polcuch of UNESCO also raised the point that were the UK to move towards 2.4% it would necessarily by 2027 be under the OECD average.28

24.The interpretation of the target as ambitious was partly due to the recognised difficulty in pushing through substantial increases in R&D investment. Kirsten Bound suggested that “several countries have achieved this kind of increase in the past”, but that “input intensity targets are hard to meet”.29 Professor Edler of the German Fraunhofer Institute for Systems and Innovation Research noted that “there are countries in Europe that have done it [ … ] It can be done [… but] there is a decreasing return on R&D investment at some point”.30 This is partly reflected in previous UK R&D targets which were unmet, notably a 2004 commitment to reach 2.5% of GDP by 2014.31 A quarter of this increase was sought from public funding and three quarters from private; while there was a modest increase in private R&D investment over this period, publicly-funded R&D remained flat as a share of GDP.32

25.However, international comparisons themselves may be of limited use. Dr van Broek of the Raathenau Instituut in Holland suggested “you should think more about understanding what you want to achieve than just about trying to get to 2.4%”.33 Similarly, there was agreement between the international experts giving evidence that it was not desirable to simply copy traits of other systems; they argued that the UK needed to look at its own economic structure and identify where strengths were now and where they might be in the future, and this should dictate the “effectiveness” of any investment.34 This suggested that the goals of science and innovation policy and the Industrial Strategy must be kept at the forefront of investment decisions, ensuring a focus on quality as well as quantity of research funding.

26.With these points in mind, it was clear that reaching suitable settlements in the next Spending Review and any further spending settlements up to 2027 would be crucial. This was echoed by UKRI and BEIS. Professor Sir Mark Walport said that “in order to maintain the trajectory, we will be making a very strong case as part of the spending review, through BEIS, that we are heading in the right direction, but a lot more needs to be done.”35 The then Minister agreed that “the spending review is completely critical”36 and that “if we do not get it right this year we will struggle to get to 2.4% by 2027”,37 adding:

I am also chastised by the fact that, when you look at figures published on 14 March [2019] by the ONS, total R&D expenditure in 2017 represented 1.69% of GDP, up from 1.67% in 2016. We put an additional £7 billion into R&D between 2016 and 2021. To hit 2.4% is going to be a challenge and I want to make sure I can commit to meeting it effectively by a 0.1% uplift every year.38

27.Additional frontloaded funding will be key for reaching the 2.4% target, but it clearly is not sufficient. It is also important to ensure that the capacity of the UK economy and research system enables R&D expenditure to be used efficiently and effectively. Creating sufficient leverage of private sector investment will be crucial. The Government should consider whether a separate Government R&D spending target, either as a proportion of GDP or in real terms, would benefit the current national target.

28.UKRI and BEIS sought to assure us that work was underway to better understand the research and innovation landscape (see Chapter 3 for an explanation of the complexity of this landscape). UKRI’s engagement was demonstrated by its work on the ‘research and innovation infrastructure roadmap’—an assessment of existing UK infrastructure, and analysis of future economic and social needs, and the resulting investment priorities.39 The latest update was published in March 2019.40 UKRI have suggested that they will publish their roadmap in “summer or autumn”.41 BEIS is also developing a roadmap and have committed to publishing theirs “shortly after the spending review”.42 These are envisaged to sit “side by side”.43 BEIS has also continued to undertake related assessments through the ‘science and innovation audits’ (SIA), aimed at helping local and regional areas to map their research strengths and identify areas of potential global competitive advantage.44 Whilst the SIA appear beneficial for understanding the baseline environment in the UK, they do not themselves directly address the challenge of reaching the 2.4% target.

29.Plans such as the roadmaps are inevitably complex undertakings given the range of actors involved. UKRI assured us that they were “working with partners across Government” in developing theirs,45 and similarly that they were engaging with BEIS in gathering evidence and engaging with stakeholders for the Government’s version.46 Rebecca Endean representing UKRI summarised the need for an expansive view of what would contribute to the target:

We need to think about what our offering is around place, infrastructure and industry support. A range of other Government policies will need to support and encourage the R&D, through tax incentives, regulation… What we are trying to do, working with BEIS, is to think about that road map in a very holistic sense. UKRI is very important, of course, but it is not just about UKRI. It is about how UKRI fits into that wider cross-Government initiative, where we look at all the policy instruments around place, infrastructure, people and supporting business.47

30.The then Minister also recognised the difficulty inherent in planning towards a target in 2027 when the Spending Review was for a significantly shorter period, with the “interesting challenge” that the review period will be for “three years rather than, traditionally, four years.”48 He said that the publication of the roadmap would follow the Spending Review when “we know exactly how much money we have in the bag from the Treasury”.49

31.The Chancellor has subsequently confirmed that the next multi-year Spending Review will not be carried out until 2020, and instead on 4 September delivered a one-year Spending Round detailing departmental funding allocations for the 2020–21 financial year.50 The Spending Round re-iterated the Government’s commitment to the 2.4% target:

The government is committed to increasing levels of research and development (R&D) to at least 2.4 per cent of GDP by 2027. In the autumn, the government will set out plans to significantly boost public R&D funding, provide greater long-term certainty to the scientific community, and accelerate its ambition to reach 2.4 per cent of GDP.51

However, it is also noted that whilst the majority of BEIS’s capital settlement funds R&D, an accounting change meant that BEIS’s capital budget had not been fully set for 2020–21.52 The documentation currently shows the BEIS capital budget decreasing from £11.5 billion in 2019–20 to £6.4 billion in 2020–21, a reduction of £5.1 billion. Across Government there is an additional £6.5 billion unallocated capital budget for 2020–21 for which the departmental allocations will be “confirmed before 2020–21”.53

32.Little mention was made in evidence of the “longer-term ambition of 3%.”54 Achieving the initial target is a clear precursor to this aim, but it was left unclear whether success in meeting the initial target would put in place a trajectory that could be followed beyond that.

33.We welcome the Government’s target for R&D spending which, if achieved, would represent a significant increase in the research intensity of the UK economy. However, the difficulty in achieving the target should not be underestimated, and will require successful coordination of public spending and further increases in private investment.

34.We welcome the commitments by UKRI and BEIS to make a strong case at the Spending Review, which we had expected to be this autumn, for the additional funding required to reach the 2.4% target by 2027. Given the stretch of the target, it is apparent that additional public spending is likely to gain greater traction if it is undertaken earlier, thus increasing the potential for leveraging private sector spending.

35.Both UKRI and BEIS have committed to publishing roadmaps to show the path to 2.4%. It is our understanding that given the nature of both public and private investment required to reach the target, these roadmaps will address the landscape influencing R&D spending, including the wider Government policies and pillars of the Industrial Strategy (ideas, people, infrastructure, business environment, and places).

36.It is not clear whether the Government’s recent commitment to “set out plans to significantly boost public R&D funding”, which it had promised this autumn, relate specifically to the roadmaps, high-level long-term funding plans, or simply greater clarification of the BEIS capital budget for next year, which was not fully set in the recent Spending Round. Assuming that a multi-year funding commitment is made, a “significant boost” should suitably reflect the frontloaded investment that we have established is required. We are pleased that such decisions will not be delayed until the 2020 Spending Review and urge UKRI and BEIS to make the ‘strong case’ we expect of them.

37.We hope that the promise of providing “greater long-term certainty to the scientific community” indicates both a long-term funding commitment and the detailed plans we expect to be contained in the roadmaps. If not, we strongly recommend that both UKRI and BEIS publish their promised comprehensive roadmaps to illustrate the intended path to the 2.4% target as soon as possible, and no later than the end of 2019 following confirmation of Government funding plans. These should demonstrate an integrated approach between UKRI and BEIS that suitably reflects the strengths and prospects of the UK economy. These plans should also be developed beyond 2027 to ensure that travel towards the longer-term 3% target, indicating how momentum will be maintained and when more detailed plans for this target will be produced.