Government must match investment target with ambitious plan

James Tooze discusses how Government can help to meet its R&D investment target.

Today’s release of the Public Accounts committee report on R&D funding across government gives us the opportunity to review how far the UK has to go to meet the Government target of spending 2.4% of GDP on R&D by 2027. As highlighted in the Public Accounts committee report, the Government must do more to use its policy levers to make the UK an attractive destination for private investment. In addition, the report states that the Government lacks an ambitious plan in order to achieve this R&D target in under a decade. We welcome the report from the committee, scrutinising the Government in reaching its 2.4% target. You can also read our response to the committee’s inquiry.

What does reaching the Government target look like?

The most recent figures released by the ONS show that the UK spent 1.67% of GDP on R&D in 2016 (you can read more detailed analysis of this data in our digest). This was at the same level as 2015, while it is also worth noting that announcements on increases in public R&D funding and the Industrial Strategy were pledged to begin in 2017. This 2016 figure was only held by increases in R&D investment by business, while public R&D funding actually decreased from 2015 to 2016. Based on sector funding, private R&D investment was £24bn in 2016, compared to £9.1bn in public investment in the same year.

There can be no debate that the Government, industry and private non-profit organisations all need to invest more money to reach the Government target. Following the report we commissioned in 2014, we found that increased public investment effectively crowds in private investment. We have consistently called for the Government to set an interim milestone to invest 0.7% of GDP on R&D by 2022. To reach 2.4% of GDP by 2027, we also recommend that the Government aims to spend 0.8% of GDP on R&D. The target is to reach 2.4% in nine years, but the Government has also stated its long-term aim to reach 3% of GDP spent on R&D. This is why we think it is important for the Government to reach 0.8%, as a sign that it will continue to increase its funding in line with current proportions.

So, what does reaching this target look like over the next few years? Thankfully, a graph can say a thousand words.

The graph factors in the most recent ONS figures, and also fixes our targets of Government investment by 2022 and 2027. In order to meet the Government’s target of 2.4% of GDP spent on R&D, working towards our one-third to two-thirds ratio, private investment will need to increase by £8bn in 2027. This is an increase of 33% on current private investment levels, an ambitious target within a decade.

Our figures show that the Government was £600m down on where we think they needed to be in 2016, and will need to invest an extra £4.3bn in 2022 to reach our recommendation of spending 0.7% of GDP on R&D. The Government have pledged to increase public investment by £7bn over the period of 2017 to 2021. This would take public investment to £12.5bn in 2021, working from this baseline would mean that Government would only need to increase its investment by £2.9bn between 2021 and 2027 (an increase of 23%). Given that no spending commitments have been made beyond 2021, our projections mean that the Government would need to invest £6.2bn extra in 2027 to fulfil their portion of the total R&D investment to reach its own 2.4% target, working to the 2016 baseline. This means that public investment will need to increase by 68%. This is a huge target, if the Government are serious about reaching its own target then these are the types of increases we will need to see.

Over the next year CaSE will be carrying out a project of work around investment, scrutinising Government investment, understanding what spending this investment well looks like, and working with Government to understand how they can help to drive private investment in the UK.

Horizon 2020

Also this week, BEIS published statistics that detail the UK’s participation in Horizon 2020. Since the EU referendum in 2016, the UK has seen a steady decrease in the overall share of projects UK-based individuals and organisations are involved in, and a decrease in the overall proportion of funding the UK has received. The table gives a quick snapshot of these changes over time.

Note: The statistics above are cumulative, i.e. statistics from March 2018 encompass the entire length of the Horizon 2020 funding period up until March 2018, not just the quarter in which they are released.