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From ring-fence to 2.4%

15 Feb 2019

James Tooze explains CaSE’s projection to meet Government’s R&D target

We have carried out a significant volume of analysis relating to R&D investment in the UK. This formed a large part of our submission to the House of Commons S&T committee inquiry on the balance and effectiveness of research and innovation spending and will be significant in shaping our work ahead of a Spending Review. This blog will be the first in a series of pieces discussing some key areas in the UK’s R&D landscape. Prepare yourselves for a long read as I explain our work in projecting the uplift in R&D investment that will be required to reach the Government’s target to increase R&D investment to 2.4% of GDP by 2027. 

A short publication of our projection is available here

Ring-fence and shift in science spending

Public expenditure on R&D has somewhat stagnated over the last decade, owing to a number of factors within and outside Government control. From the financial crash at a time when Government pledged to increase R&D intensity, to a flat-cash settlement for research, protected by a ‘ring-fence’ leading to a real-terms cut in investment in R&D.

It would be an understatement to say that 2016 was eventful. In the wake of the referendum, a new Prime Minister and a reformed department, the Government set about developing a new industrial strategy. In two of the major fiscal events that followed, the Government pledged an additional £7bn to UK R&D between 2017 and 2022, the largest uplift in 40 years.

During the 2017 General Election campaign, the UK’s major political parties all made pledges to increase R&D expenditure in the UK. The Conservative party pledged to increase UK R&D spending to 2.4% of GDP by 2027 and 3% in the ‘long-term’, the Labour Party pledged to increase R&D spending to 3% of GDP by 2030, and the Liberal Democrats pledged to double R&D spend in the ‘long-term’. The Conservative Government has reaffirmed its commitment to propel UK R&D spending to 2.4% of GDP by 2027, through the Industrial Strategy and a further £2.3bn allocated to R&D in 2021/22.

What does this uplift look like?

The environment to facilitate growth in R&D in the UK is much broader than just more money. However, a single blog that looked at every facet of the landscape wouldn’t be fun for anyone to read. The best place to start is looking at the 2.4% target, and what reaching this would require from the public and private sectors.

The latest available data shows that in 2016, the UK spent 1.67% of GDP on R&D. This means that in order to reach the Government’s target, R&D spending would need to increase by almost a half by 2027. To help inform our work in making the case for increased public spending in an upcoming Spending review, we decided to quantify the trajectory required to meet the target. Our model is not perfect; it contains assumptions that I will outline as I go. Below is the graph we produced, showing how much extra public and private funding would be required to get to 2.4% in 2027.

It looks like a lot of money because it is a lot of money. We are projecting that £9bn more of R&D investment will have to come from public sources in 2027 alone. The initial assumptions we made are related to how we measured our baselines, using data from the most recently available ONS GERD publication.

To best represent current trends over the last decade, we decided to increase the private investment baseline in line with GDP growth, to reflect the steady growth in private R&D investment. To a similar end, we decided to keep the public investment baseline flat to reflect recent trends. However, we needed to reflect the upturn in R&D funding promised in the 2016 Autumn Statement and 2017 Autumn Budget. Within the baseline, we have included these funding pledges up to 2021/22. This grows the public investment baseline to £11bn in 2021/22. We have decided that rather than seeing this drop off, we are assuming that this level of investment will continue through to 2027 and beyond.

Still with me? Good – because things are about to get a little more complicated.

Next, and crucially, we needed to calculate how much extra money would be required to reach the 2.4% target by 2027. Previous calculations we have undertaken show that business has historically provided between 65 – 70% of R&D investment in the UK. In conversations we have had with Government, they understand that a ratio of 2:1 on private:public investment is typical of more research-intensive nations. This was the first consideration of our projection, that the balance of funding in 2027 should be around a 2:1 ratio.

Rather than plucking random numbers for increased public and private investment, we wanted to ensure our projections were based on evidence reflecting the UK’s R&D environment. This is where a 300-page saviour came in, a 2015 BIS report that analysed the relationship between public and private funding in science, research and innovation. The report found that every additional £1 of public investment for R&D would leverage £1.36 of private investment over a 10-year period. This is where we could get to work in projecting the growth required. In our model, all additional private investment is essentially crowded in by public investment, as we can’t quantify external factors. The numbers in the graph outline how much extra investment is required, by who, in that given year.

Using this leverage ratio, we could project how much public investment needed to attract sufficient amounts of private investment to meet the 2.4% target in 2027 while working to the 2:1 ratio of private to public investment. I can acknowledge that our model isn’t perfect, overseas funding for R&D is considered with the private investment portion, and less is known about the effects that UK public investment has on the level of overseas investment, meaning that the leverage ratio we use may be slightly different in practice.  We have also projected GDP growth based on the most recent OBR forecasts, but growth in GDP could be very different in ten years time.

What we can say with great certainty, is that this is the quantum of increased investment that will be required to get anywhere near the 2.4% target. Showing the scale of the increase is almost as powerful as the exact numbers we have presented. What is also clear is that the Government will not be able to get anywhere near its target without significant public investment in R&D over the next decade. In a series of pieces on our website, we will be exploring the different roles that Government has to play in realising its ambition to make the UK a more research-intensive nation.