7 September 2022

A massive uplift in R&D is vital to getting Britain ‘working, building and growing’


The new Prime Minister Liz Truss has kicked off her time in Number 10 with a promise to ‘get the United Kingdom working, building, and growing’. Given that the UK has already experienced one lost decade after the financial crisis and is currently on course for another, there can be no more urgent priority than getting the growth rate up.

The ‘tax cuts and reform’ Truss mentioned yesterday are certainly part of the answer, but focusing too heavily on tax risks neglecting an even more effective way of increasing growth: boosting investment in research and development (R&D).

For all the economic gloom around at the moment, we ought to remember that the UK has enormous strengths in technology, science, computing, engineering, and pharmaceuticals. It is home to truly world-leading businesses, and the research produced by these firms and the country’s universities is groundbreaking.

Be in no doubt though – we are in danger of losing our edge to competitors in Europe and Asia if we aren’t careful. One of our biggest problems is that the UK simply spends less on R&D than other advanced economies.

It is encouraging that the Government recently established the Advanced Research and Invention Agency (ARIA) in order to help focus  innovation and get spending on R&D to reach the OECD average of 2.4% of GDP. But we should be even more ambitious. Rather than aiming for the average, the new Government should take the opportunity to be bold. Japan, Germany, the US, and some of the Nordic countries all spend more than the OECD average. South Korea spends approximately 4.8% of GDP and Israel a whopping 5.4%.

To steal a march on our competitors, the UK should be much more ambitious and aim to spend 5% of GDP on R&D by 2030. It may seem like a big target, but it will be worth it. The innovations in technology, computing, manufacturing, and medicine which will flow from increased R&D will not only boost economic growth and increase wages but also have the potential to radically transform our lives for the better.

So, how do we get there? Though far from sufficient on its own, the Government can lead the way by increasing public spending on R&D from 0.7% of GDP to at least 1.5%. This will obviously be expensive, but government spending is about priorities and there are few better ways get growth up than by investing in science and research. It’s not just about directing things from the centre though: the Government also needs to facilitate as much investment as possible by having the right policy mix.

That starts with a tax system that incentivises investment. While it is welcome that Truss has promised to scrap the planned rise in corporation tax, we again can be more ambitious. The ‘super deduction’ that lets firms write off the cost of plants and machinery should be made permanent, so that companies are encouraged to invest more. Moreover, the Office for Tax Simplification – which does excellent work – should launch a review of the impact of our tax system on investment.

Promises to slash red tape are always a crowd-pleaser, particularly when it comes to retained EU law, but the biggest drag on the British economy is domestic, namely our insanely restrictive planning laws.

More often than not we discuss this in relation to housing, but the inability to get things built is a huge drain on our research-based industries too. Our most innovative and world class technology companies, pharmaceutical firms, and universities are mainly based in and around the ‘golden triangle’ of London, Cambridge, and Oxford. The problem is, these also happen to be the parts of the country where it is hardest to get anything built. That means that there are not enough homes for the researchers and scientists we need, and those who can find somewhere to live pay through the nose to do so.

Just as crucial is a chronic lack of lab space, particularly in Oxford and Cambridge. Recent data from property firm Bidwells found there was ‘close to zero’ lab space in either city in June of this year. What’s particularly galling is that there is enormous interest in UK life sciences that we are not fully capitalising on because of our national addiction to Nimbyism, which reached its apogee with the recent decision to scrap the ‘Ox-Cam Arc’.

Of course, it’s not just homes and labs that suffer from the planning system: everything from transport to wind farms and nuclear plants is hampered by red tape and endless local campaigns. That not only makes construction in the UK damnably slow, but hugely increases the costs of building just about anything (one reason the price tag for HS2 is so vast is that buying up land for the track was so expensive).

Given the urgency of the situation, there’s a strong case to simply take away planning discretion from local authorities in Cambridge, Oxford and London. Some have argued that this is antithetical to the ‘levelling up’ agenda, but it’s nothing of the sort: a fast-growing, productive economy is one in which there is more tax revenue to spend on the parts of the country that most need public investment.

It’s not just about tax and planning though. We also need to look at immigration. So far the post-Brexit system, with its emphasis on high-skilled workers, has worked quite well in attracting talent from all over the world. However, it could be even better. One simple step would be to expand the number of foreign universities designated as ‘world class’ for the purposes of applying for High Potential Visas, making it easier for talented people to come and work here.

Home-grown education is just as important, of course. One of the great weaknesses of the UK system is that we make children specialise far too early. Many drop maths and the sciences at 16, meaning they lack the skills they need to either study these subjects at university or get a job in related industries. Maths and science may not be for everyone, but people develop at different rates and so do their interests. The new Prime Minister should need little persuading on this score. Indeed, when she was an Education Minister under David Cameron, Liz Truss pushed through a new core maths qualification to expand the number of teenagers studying maths. We should now go further and expand post-16 education so that the vast majority have to study at least some maths and science up to 18.

Finally, there’s a strong case for reform in the way Whitehall approaches R&D. If we are serious about expanding research, we need a dedicated Department of Innovation which will reunite the universities and science briefs, while also subsuming the technology portfolio from BEIS and digital from DCMS (and scrapping the Online Harms Bill).

Taken together, these measures could get us nearer to that target of 5% of GDP on R&D by 2030. Achieve that and we really will get a Britain that is ‘building, working and growing’.

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Ben Ramanauskas is a research economist at Oxford University.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.