Reaching 3 percent

What might the 3% of GDP target mean for public funding levels and private investment? Naomi Weir has a look at the numbers.

Science was by no means the talk of the town during the election, or indeed the first few weeks of this Parliament. However, there were significant commitments made in manifestos by Lib Dems, Labour and Conservatives to aim for ambitious levels of R&D investment. Although many Conservative commitments have not survived the election, Jo Johnson confirmed in Business Questions today that it “remains a priority for the Government and for the delivery of our industrial strategy. We want to get to 2.4% of GDP for our R&D spend, and we have a longer-term ambition of 3% after that.”

Here we take a rough* look at what that would mean for public funding levels and private investment. Our figures are based on ONS GERD stats for 2015 (published 2017). Throughout we have assumed that total R&D investment will continue to be 29% from public sources and 71% from private sources.  

*It is a rough look as our figures do not account for changes to GDP over time (which will be impacted by external factors as well as by the level of R&D investment itself) or inflation.

In CaSE’s priorities for the new Government we have included an interim target of 0.7% of GDP by 2022 (in theory, the end of this Parliament) as a halfway checkpoint for the public portion of the 2.4% 2027 target. This is ever so slightly frontloading the public investment portion. But as public investment crowds in private investment, Government should not rest on their laurels following their latest landmark increase in investment. For simplicity, we’ve also suggested the Government aims for their portion of the total to reach 0.8% by 2027 and 0.9% five years later to fulfil their portion of the 3% target.

The Government have made some in major funding announcements since 2015, including the Global Challenges Research Fund from the 2015 Spending Review and the additional £2bn a year announced in the 2016 Autumn Statement. I think this graph begins to show the scale of the task ahead, but also the potential for reaching 2.4% by 2027 and 3% by 2032 to be transformative. In terms of public funding, it amounts to 0.8% by 2027 which is an additional £4bn a year (in today’s money), on top of the £2bn a year announced in the Autumn Statement. The figure above each column articulates the amount of public funded needed that year in addition to existing commitments to keep on target for 3% by 2032.

The additional public funding is essential if the target is to be met, but not sufficient. The private and charitable component of the target must also proportionally increase, amounting to an additional £10bn a year by 2027 to reach 2.4% of GDP. This is clearly not in the gift of Government to deliver. And businesses do not have a responsibility to invest in the UK for the benefit of the UK economy and for the good of society. Some may choose to do so. But broadly businesses are not geographically tied. Many have global interests and will make strategic decisions about their R&D investment in a global setting. The UK must be an attractive environment that can compete for global investment in R&D – that includes the quality of our skills and research base, ease of movement of talent, data, goods and services, a competitive tax system, robust infrastructure, predictable regulatory frameworks, and political and economic stability etc.

So, in addition to increasing public investment in R&D, the government will need to work with the sector to ensure the additional funding is used effectively, and will need to work across government departments so that policies and priorities are all pushing in the same direction to maximise the opportunities this historic investment could bring.

The industrial strategy is a good place to start and a could be a good tool for drawing it all together. But we’ll wait and see what changes have been made in light of substantial sector input to the consultation on the green paper, which was silent on immigration, quiet on tax, lacked coherence across the 10 pillars, and didn’t yet have the 2.4% 10-year target to aim for.

We will be listening to members and working with colleagues across the sector and across government to aim for the long-term investment target, as reaching it would not only mean the sector is well funded, but that the UK has the skills and policies to enable science and engineering to thrive.