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CaSE analysis of the 2022 Autumn Statement

18 Nov 2022

Policy Officer Camilla d’Angelo breaks down yesterdays Autumn Statement and what it means for R&D.

CaSE’s top takeaways

Research and innovation have been placed front and centre of the Government’s ambitions for growth. The Government has reaffirmed its commitment to increase R&D investment to £20bn by 2024/25 and highlighted innovation as one of three growth priorities.

There have been other welcome commitments to support innovation, including support for high potential knowledge clusters across the UK and a focus on skills and education to build a high skill economy.

There are planned reforms to the R&D tax relief scheme, proposing a reduction in R&D tax credits for SMEs in favour of increases for larger firms. Reduced support for innovative SMEs could hamper ambitions for growth and work against the Chancellor’s ambitions for the sector.

The continued reduction in ODA spending and uncertainty around Horizon Europe will limit the UK’s ability to collaborate internationally on research to address global challenges.

Research and innovation placed front and centre

In yesterday’s Autumn Statement, the Chancellor reaffirmed the commitment to increasing research and development (R&D) investment to £20bn by 2024/25, indicating that it would have been a “profound mistake” to cut R&D budgets. The Government has recognised the vital importance of R&D and innovation in driving growth, with innovation forming one of three ‘growth priorities’. In tough economic circumstances this renewed commitment to R&D is hugely welcome, and a clear signal that the Government is placing research and innovation front and centre.

The R&D budget allocations set out by BEIS earlier this year will remain the same. The Government also highlighted an allocation of £1.6bn for the UK’s nine Catapults over the next five years, an increase of 35%. While the commitment to R&D spending is good news, there are concerns that high inflation will continue to put pressure on budgets in real terms, particularly in those areas of R&D spending that have seen the lowest uplift. There was also no mention of the Government’s longer-term commitments for R&D investment to reach £22bn by 2026-27.

Other welcome commitments: supporting people and place

In addition to R&D funding, the Chancellor’s announcement provided a welcome focus on other vital aspects of innovation. The Government intends to leverage local strengths in R&D through catalysing a limited number of high potential knowledge clusters, working with local stakeholders. We welcome the focus on supporting clusters across the UK as part of levelling-up – a key plank of the recommendations in our report ’The Power of Place’. We look forward to seeing more detail from the Department for Levelling Up in the coming months.

The statement also emphasised the value of people and skills to drive innovation and long-term economic growth. The Chancellor stated the Government’s commitment to people and skills to build a “high skill economy that leads to long-term prosperity.” Specific areas of focus for future skills provision included T-Levels, Higher Technical Qualifications, Skills Bootcamps and Apprenticeships. The Government also recognises the importance of supporting lifelong learning, including through reskilling and upskilling, with the introduction of the Lifelong Loan Entitlement from 2025 to provide more flexible finance for adults to study throughout their lives.

CaSE believes that skills provision is an essential dimension of the UK Government’s ‘science superpower’ ambition. Wider skills provision will be needed to meet the requirements of an expanding R&D sector, and ensure that everyone can participate in and benefit from a more innovative UK. CaSE is currently undertaking a piece of work examining the needs and requirements across the skills landscape. The work aims to highlight the importance of a joined up approach to skills policy across Government, from science teaching in schools and STEM careers advice, through to higher and further education, apprenticeships, lifelong learning, and immigration.

Reforms to R&D tax relief could hamper ambitions for growth

It is good to see the Government recognise that public spending on R&D plays a crucial role in stimulating private sector investment. However, in yesterday’s statement the Chancellor highlighted reforms to the R&D tax relief scheme, which has generated some concerns. The planned changes propose a reduction in R&D tax credits for small and medium-sized enterprises (SMEs) in favour of increases for larger firms. Specifically, the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%, the small and medium-sized enterprises (SME) additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%. The Chancellor said he was making the changes to cut down on error and fraud in the SME scheme.

The increase in RDEC will make the UK tax credits scheme more attractive to larger companies but it could come at the cost of discouraging SMEs to focus on research and innovation. If the system becomes less generous for SMEs this could work against the Chancellor’s ambitions for the sector. It all comes after recent ONS data shows that SMEs are a key driver of business R&D spending in the UK, with much greater R&D investment from SMEs than originally thought. The Government has indicated that they are open to discussions on any potential reforms, and we look forward to working with the Government as they put public R&D investment to the best possible use, including building an R&D tax credit system that can further support private investment in R&D, particularly by innovative SMEs.

Other uncertainties: Europe and international research

The decision to maintain the reduction in official development assistance (ODA) spending from 0.7% to 0.5% has been met with some dismay. Cuts to ODA funding will limit the UK’s ability to collaborate internationally on research to address global challenges. Alongside funding, international collaboration is essential to deliver the UK’s R&D ambitions, not least with the EU. We must protect collaborations between UK researchers and partners globally, including through Horizon Europe. This is why CaSE continues to press for association to Horizon Europe as an immediate priority. In the meantime, we need to continue to provide certainty to researchers that the UK remains a great place for them to bring their talents and build their careers.