The Government welcomes the report of the then Business, Energy and Industrial Strategy Committee on ‘UK plc’. We are grateful to the Committee for its work and recommendations, and to all those who provided evidence.
The Government has carefully considered the Committee’s recommendations and conclusions in formulating its response below. The Committee’s conclusions and recommendations are in bold type; and the Government’s response to the
recommendations is in plain type.
Part of the reason why the UK achieves lower productivity rates than other advanced economies is that levels of business investment and research and development investment have fallen behind. (Paragraph 17)
We welcome the Chancellor’s announcement on full expensing for capital investment but highlight the short period of time that this policy is available for businesses. Many businesses will make much longer-term investment decisions which could benefit from making this change permanent, providing long-term investment stability. (Paragraph 18)
Whilst we recognise some of the challenges associated with the previous R&D tax credits scheme, we call on the Government to conduct an annual review of the impact of recent changes on overall R&D investment in the UK to ensure that any unintended consequences can be remedied quickly. (Paragraph 19)
The R&D tax reliefs review is ongoing. At Autumn Statement 2022 the Chancellor announced that, as part of the ongoing R&D tax reliefs review, the Government would rebalance the R&D tax reliefs to ensure taxpayers’ money is used as effectively as possible to support innovation. The permanent increase from 13% to 20% for the R&D Expenditure Credit rate from 1 April 2023 means the UK now has the joint highest uncapped headline rate of tax relief in the G7 for large companies.
The Government also committed to considering the case for further support for R&D intensive SMEs. The Government announced at Spring Budget 2023 a new permanent rate of relief for the most R&D intensive loss-making SMEs, worth around £500m p.a. We expect that by the end of the score card in financial year 2027/28, around 20,000 SMEs will benefit from this scheme each year. This builds on previously announced changes to support modern research methods by expanding the scope of qualifying expenditure for R&D reliefs to include data & cloud computing costs.
As committed to at Spring Budget 2023, on 18 July the Government published a Summary of Responses to the consultation on a potential merged R&D scheme that combines the existing RDEC and SME schemes, as well as draft legislation setting out the proposed design of such a scheme. Merging schemes would be a significant opportunity for tax simplification, provide more clarity and certainty to SMEs, and help to drive innovation in the UK. The Government has not yet taken a decision on whether to merge schemes and intends to keep open the option of doing so from 2024. A decision on whether to merge scheme will be made at the next fiscal event.
R&D reliefs will support an estimated £60 billion of business R&D expenditure in 2027/28, a 50% increase from £40 billion in 2020/21. Expenditure on R&D reliefs is forecast to increase in every year of the scorecard period. The Government keeps all tax reliefs under review and measures the impact of tax reliefs through monitoring and evaluation.
There is a need to raise not just the basic skills levels of young people entering the workforce but also their digital and “green” skills, both of which contribute to enhancing productivity in the modern digitalised economy. (Paragraph 22)
Witnesses supported the apprenticeship levy in principle but told us that more Government support for skills development should be directed to upskilling existing members of the workforce, whether through reform of the apprenticeship levy or other mechanisms. (Paragraph 26)
We note that there are numerous Ministers with responsibility for skills—from compulsory, further, and higher education to adult and in-work training. The Government previously coordinated a ‘Green Skills Taskforce’ between the then Department for Business, Energy and Industrial Strategy and the Department for Education. We call on the Government to consider reviving such a taskforce to grapple with the wider challenge of skills shortages in the labour market. (Paragraph 27)
The Green Jobs Taskforce was announced in November 2020 as part of the Ten Point Plan for a Green Industrial Revolution and was convened by Ministers from the then Department for Business, Energy and Industrial Strategy and the Department for Education. The Taskforce reported its conclusions in July 2021.
The policies set out in the Green Jobs, Skills and Industries chapter of the Net Zero Strategy represent a first step in addressing the challenges identified by the Green Jobs Taskforce, which included a commitment to set up a Green Jobs Delivery Group. The actions within the Net Zero Strategy were recently added to through the Net Zero Growth Plan which set out in more detail how Government continues to ensure the skills system is delivering for net zero. This includes the implementation of the Department for Education’s Sustainability and Climate Change Strategy, which will equip children, young people, and adult learners with the knowledge and skills to contribute to the green economy.
The Green Jobs Delivery Group (GJDG) was established in 2022 and has met four times so far. The group is co-chaired by the Rt Hon Graham Stuart, Minister for Energy Security and Net Zero, Department for Energy Security and Net Zero and industry representative, Michael Lewis, CEO of Uniper. Its membership also consists of ministers from across Government, including Minister Robert Halfon from the Department for Education, who holds the portfolio for Skills, Apprenticeships and Higher Education; Lord Benyon from the Department for Environment, Food and Rural Affairs, who is the Minister for Biosecurity, Marine and Rural Affairs; and Minister Opperman from the Department for Work and Pensions, the Minister for Employment, alongside business leaders, the skills and education sector, local Government and other key stakeholders.
The Net Zero Growth Plan announced that Government and industry will work together to create a Net Zero and Nature Workforce Action Plan, for publication in 2024. To facilitate this the Green Jobs Delivery Group has recently set up a range of underlying time-limited task and finish groups to carry out sectoral deep dives, detailed workforce assessments and understand the further action needed.
We have started with a pilot Power and Networks Working group to tackle the range of near-term workforce challenges facing the power sector. This group is helping to unlock workforce and skills opportunities to deliver economic growth whilst meeting Government’s goals on net zero and energy security. The groups principles of intent and a set of head start actions were published in the Powering Up Britain plan in March 2023.
There was support amongst witnesses for greater use of automation and a more flexible migration scheme as part of the solution to labour shortages in the UK. (Paragraph 31)
We note the wide range of measures affecting the labour market announced by the Chancellor in the 2023 Budget, which we will consider and respond to in out adjacent inquiry on the UK Labour Market. (Paragraph 32)
Regional disparities in productivity are limiting the UK’s economic growth. A concentration of resources towards cities outside London and to improving regional productivity should be a priority for the country’s overall economic growth. (Paragraph 38)
As HMG’s Levelling Up White paper highlighted, the UK faces significant regional productivity disparities, with differences originating and cementing due to history, deindustrialisation and deficiencies in the presences of the six capitals (physical, human, intangible, financial, institutional and social).
The first Levelling Up Mission—improving living standards—aims to directly address these productivity disparities. The mission states that by 2030, pay, employment and productivity will have risen in every area of the UK, with each containing a globally competitive city, with the gap between the top performing and other areas closing.
City regions are particularly important to driving economic growth and long-term prosperity, but the major cities outside of London punch below their weight. The UK Government recognises the need to put the development of dynamic city regions at the centre of any plan to raise living standards. Improving the performance of cities can benefit the surrounding towns and communities as well, through raising growth and productivity.
For instance, policies such as extending the geographical reach of the British Business Bank’s Regional Investment Funds; incentivising private sector investment through freeports; establishing the UK infrastructure bank to catalyse investment and support regional growth; and announcing the launch of the investment zones programme (which will be predominantly located across the UK’s major cities outside of the Greater South East) directly work towards the living standards mission. Likewise, since the White Paper, HMG has committed to expanding devolution further across England with new deals and deeper devolution for existing MCAs. The White Paper also announced three innovation accelerators in Greater Manchester, the West Midlands and Glasgow City region—given that innovation is a key input to productivity growth, this policy also aims to supercharge the UK’s city regions to close regional productivity gaps.
The regulatory landscape has changed significantly for many industries following the UK’s exit from the European Union. Witnesses representing business sectors acknowledged the need for effective regulation, but they were clear that it needed to be appropriate and developed by the Government in partnership with industry and others. (Paragraph 42)
Witnesses from a range of industrial sectors were clear that they value partnership with Government to deliver targets as well as effective regulation, and that the recent industrial strategy and sector deals had been beneficial. (Paragraph 47)
We call on the Government to ensure effective partnerships with business and other related parties on the development of regulation, with better use of impact assessments. It would be for the Government, industry, and regulators to determine the form of any future partnership working, but the evidence presented to us indicates that it would boost business confidence and provide a foundation for mutual understanding and effective communication between industry and Government. (Paragraph 48)
The Government agrees that the development of regulation should include effective engagement with business and other key stakeholders wherever possible. As highlighted in the Government’s Consultation Principles, formal consultations are only part of a process of engagement, and it should be an iterative process.
The production of impact assessments (IAs) is an important component of the preparation of regulation, and the Government remains committed to these being made available alongside consultations where appropriate. This publication also allows businesses and their representative organisations to see and comment on IAs where relevant.
To ensure IAs are as valuable as possible, the Better Regulation Framework sets out the requirements for independent scrutiny of IAs for significant regulatory proposals and supports best practice policy making. As announced in the paper ‘Smarter regulation to grow the economy’, the Government plans to launch a reformed Better Regulation Framework later this summer. The objectives of the new Framework are: increased engagement with departments to help drive the consideration and use of alternatives to regulation; earlier and more holistic scrutiny of regulatory proposals; and earlier and more consistent evaluation of whether implemented regulations are achieving their aims and objectives.
The proposed reforms will broaden early-stage impact assessments for significant regulations to include consideration of a more holistic set of criteria and metrics, including impacts on businesses, households, international trade, competition and innovation. This earlier and broader scrutiny will help encourage better engagement with business and consideration of alternatives to regulation. The new Framework will continue to require publication of IAs as at present so business will still be able to see and comment on these.
In relation to specific partnerships between industry and Government on the development of regulations, it should be considered on a case-by-case basis for the relevant policy areas and circumstances.
The Regulatory Policy Committee should be supported for its work in supporting Parliament in understanding the impact of proposed regulation and we recommend these impact assessments are used much more widely throughout the legislative process. Given the transfer of regulatory oversight from the European Parliament to our Parliament, we recognise the need to ensure that our Parliament finds its way in meeting this new challenge and providing effective scrutiny and oversight of new regulations—both from Government and from regulatory bodies. We draw to the attention of the Liaison Committee of this House the role which select committees can play in this field. (Paragraph 49)
The Government is committed to ensuring that Parliament has the information it needs to scrutinise regulatory proposals, and that impact assessments are published, where applicable and possible, when an instrument relating to regulatory policy is laid before Parliament.
Individual departments are responsible for producing a proportionate assessment of the impacts of their policy proposals ahead of laying relevant regulation, and for ensuring their timely publication. This is set out under the current Better Regulation Framework guidance which makes it clear that departments should publish their impact assessment, alongside either the relevant consultation document on GOV.UK or the relevant legislation on Legislation.gov.uk. The Regulatory Policy Committee provides independent scrutiny of these impact assessments and their opinions are also published alongside relevant proposals. As part of the reforms to the Better Regulation Framework, the Government is committed to continuing independent scrutiny. The reforms would see this take place at an earlier stage in the development of proposals, and look at a broader range of impacts, so as to help better shape policy development before new regulations are introduced to Parliament.
We note that the Chancellor referred to an ‘industrial strategy’ in his Budget statement, but that no industrial strategy was published. Given the global context referred to by our witnesses, and the very real threat of UK investments being tempted into the European or American markets, we call on the Government to make a statement to clarify whether the Government has an industrial strategy or not. If it does, we call on Minsters to engage with business, investors, and workers’ representatives as soon as possible in order to publish any such strategy for the purposes of scrutiny and private sector clarity. (Paragraph 50)
Delivering economic growth in key sectors is a priority for the Government. The Chancellor has identified five key growth sectors for the UK: Digital Technology, Green Industries, Life Sciences, Advanced Manufacturing and Creative Industries. The Spring Budget included a number of announcements in support of these policies including:
a) a £500 million per year package of support for 20,000 research and development (R&D) intensive businesses through changes to R&D tax credits.
b) £20 billion of investment over 20 years in carbon capture and storage was announced, alongside a reclassification of nuclear power as carbon neutral.
c) 12 new investment zones to catalyse growth clusters across the UK. Each cluster will drive growth in key future sectors and bring investment to the local area. Each English Investment Zone will have access to interventions worth £80 million over five years, including tax reliefs and grant funding.
Last month, DBT announced regulatory measures that will reduce burdensome red tape and tailor rules to suit the UK economy, potentially saving employers around £1 billion yearly. This includes reduce time-consuming and disproportionate reporting requirements for specific elements of the Working Time Regulations, while retaining the 48-hour week requirement and upholding our world leading employment standards. DBT is in constant dialogue with business, representing its voice across Whitehall, and we will continue to do that.