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The Good, the Bad, and the Unknown

26 Nov 2015

As the dust settles, Naomi Weir takes an in-depth look at yesterday’s Spending Review

Having been working towards the 25th November for so long, it seems strange to have reached the 26th. But here we are.

As little red books are put away, permanent potholes are pondered, and the Speaker’s heart rate returns to normal, we can lift our heads up and take a look at some of the details of the Spending Review. From many-a-quote yesterday I believe I should expect to find the devil in them.

Yesterday, CaSE was quite purposefully positive. There is some good news in there. Not least that I hope never to have to write ‘the cumulative shortfall in science investment is…’ again, due to the resource and capital budgets being protected in real terms up to the end of the Parliament. But there are many other reasons to be encouraged too.

Is it all good news for science and engineering?

Certainly not. Many departments saw cuts of over 20% and BIS saw an overall cut of 17%, which will have a real impact despite being lower than many feared. And as many have commented, a lot remains unknown, both through questions raised by announcements made yesterday and indeed through notable silence on some areas. Here I will attempt to unpick the good, the bad, and the unknown.

Real-terms, ringfences and Research UK

The Chancellor introduced the science section in his speech by saying,

“In the modern world one of the best ways you can back business is by backing science. That’s why in the last Parliament, I protected the resource budget for science in cash terms. In this Parliament I’m protecting it in real terms so it rises to £4.7bn. That’s £500 million more by the end of the decade. Alongside £6.9bn in the capital budget too.”

Now I’ve had clarification from Treasury that £4.7bn is in fact the cash baseline for the resource budget, and not the cash amount at the end of the decade as the Chancellor stated. In fairness, he had a lot of numbers to announce in a short space of time, surrounded by braying crowds of MPs, so I’ll happily overlook that. Especially as the actual settlement outlined in the document is better.

Unpicking the numbers, we learn that the difference between flat cash and real terms will be bridged by £1.5bn resource funding from the ODA budget held in DfID, and transferred across to BIS. Rather confusingly the £1.5bn covers the period 2016/17-2020/21, whereas the rest of the resource budget is only confirmed up until the end of this Parliament in 2019/20. The £500m mentioned, is how much the ODA commitment to science will be in 2020/21.

The Government also reaffirmed its long term science capital commitment of £6.9 billion between 2015 and 2021. There were also announcements of up to £150 million (total capital and resource) to launch a competition for a Dementia Institute, to build on the UK’s strengths in medical research. In addition to the £6.9 billion figure, there will be £75 million in the University of Cambridge’s Cavendish Laboratories.

Adding resource and capital together the total research base budget will be £6.3bn in 2019/20 up from £5.8bn in 2015/16. We’re working on the detailed figures and will do a briefing with some updated graphs in the next few days which will hopefully make the numbers a bit clearer.

So in brief what we now have is both the resource and capital budgets for science, inflation-proofed, each year, until the end of the Parliament. This isn’t the real terms increase that many, including CaSE, have (with good reason) been asking for. And it doesn’t send us back to the science super-league in terms of funding levels. But it does halt the decline in spending power of the science budget and it isn’t the flat cash settlement, with an extra helping of ‘tucking under’, that many feared.

Although there was not a science ring-fence (hyphenated or otherwise) to be found in the Spending Review document, I understand from discussions with BIS that it still stands. But we’ll have to wait for more detail on what precisely the science budget is expected to fund to find out if ‘tucking under’ has been avoided entirely. And how the £1.5bn Grand Challenges fund is allocated will be a major factor in determining whether the additional ODA funding increases the capacity of research council funding, or ends up top slicing their budgets and squeezing funding in other areas. These are important questions that will determine quite how rosy the settlement is for science, but currently are without answers.

An answer the Chancellor did give us, that perhaps many weren’t expecting, was the briefest of responses to a review that took the best part of a year (although it does feel like longer). Regarding the Nurse Review, George Osborne said,

“I want to thank [Paul Nurse] for the excellent report he has published this week – and we will implement its recommendations.”

Now my understanding is that this predominantly relates to the major recommendations in the report and isn’t the Government committing to fully implementing everything in the Review. But it does end some of the uncertainty about what structure will be delivering the majority of research funding in future. Research UK will bring together the seven UK research councils, the (England-only) research funding from HEFCE, and also Innovate UK, which will retain its clear business focus and separate funding stream.

We also heard that the government will take forward a review of the Research Excellence Framework aiming to simplify and strengthen funding on the basis of excellence. There will certainly be some changes as responsibility moves from HEFCE to an as yet unknown body, but again it will be a waiting game as government have said they will set out further details shortly.

Certainly lots of questions marks remain, and indeed some raised eyebrows, as to how this new structure will work in practice. But it is now confirmed as the new structure, so whether you’re a believer, or need to peel your eyebrows off the ceiling, in my view we’d do well to ensure that the best problem-solvers in Britain work together to find a way to make the new structure deliver the best outcome for science.

Innovation and an Industrial Approach Strategy

The picture for innovation funding and support is equally tricky. Having seen above inflation budget increases in the last Parliament (albeit from a very low starting point), Innovate UK is now looking at 5 years of flat cash. But that’s not all. Within the budget, there is to be an unspecified increase to investment in Catapults, and from discussions the plea from industry for prioritising stability and proper funding of existing centres seems to have been heard. This increase, within the flat cash settlement, will mean something else will have to give.

Quite what that will be is unclear.

What we do know is that the much trailed policy of switching some existing Innovate UK grants to loans will happen, reaching £165 million per year by 2019-20. As the Spending Review document points out, this has been done in a number of competitor countries, and I have heard some support for the idea from some parts of business. But critics and sceptics abound, recognising the move as clever accounting to avoid short-term cuts, but potentially preventing the funds from achieving their purpose of supporting companies to do early-stage risky things that the private sector won’t fund. Despite it making the BIS balance sheet look healthier, the effect may be to reduce the total return to UK plc.

We also heard George Osborne speak of an ‘industrial strategy’. A phrase that has been notably absent from the lips of Conservative Ministers since May. He said,

“Businesses also need an active and sustained industrial strategy. That strategy launched in the last parliament continues in this one… We commit to the same level of support for our aerospace and automotive industries. Not just for the next five years but for the next decade.”

Considering there were real fears that it would be torn up and not replaced, there will have been a real sigh of relief from industry that there will be some continuity. Now the document itself is oddly more reticent and doesn’t use the words ‘industrial strategy’ and this is where some of the detail comes in. It states that

“the government commits to funding aerospace and automotive technologies for 10 years. This will provide over £1 billion additional funding for innovation in these sectors.”

So there is protection and extension of funding for the Aerospace Technology Institute and the Advanced Propulsion Centre. But what about the other 9 sectors previously under the bracket of the industrial strategy? That’s currently an unknown.

R&D investment across government

With around 40% of total government investment in R&D sitting outside BIS, I was hoping to hear something on departmental R&D. And I was expecting to hear something as the Coalition Government’s 2014 Science and Innovation Strategy (which the Conservatives have said still stands) said,

“We will examine how to ensure that R&D spending by departments is properly prioritised against other capital investment spending, for example by considering controls that can be placed on this spending to ensure that valuable R&D is not unduly deprioritised in favour of short-term pressures. We will report on this by the next Spending Review.”

However, D-day has been and gone and nothing has been reported. But I understand that Treasury hasn’t forgotten and have commissioned some work looking at departmental R&D. Perhaps it will be a review that lands on the desk of the new ministerial committee on science (or beefed up CST) proposed by Nurse. We’ll have to wait and see on that one too.

The Department of Health is one of the biggest R&D investors outside of BIS. What we found out about health spending includes that there will be over £5 billion in health R&D (perhaps indicating a cash or real terms protection of the NIHR budget of around £1bn a year), as well as up to £150 million to launch a Dementia Institute and a new £1 billion Ross Fund, partnered by the Bill and Melinda Gates Foundation. They also announced the launch of a Global Antimicrobial Resistance Innovation fund, partnered with China, £10 million to expanding the Healthcare Innovation Test Bed programme, £250 million for the 100,000 Genomes Project to introduce whole genome sequencing technology in the NHS, including funding for Genomics England, and £400 million to fund Public Health England labs in Essex to help combat threats such as flu and Ebola. Details are lacking on precisely what funding will come from which budgets though.

Another big investor is the Ministry of Defence. With a commitment to spend 2% of GDP on defence for the rest of the decade of which we’re told the government will dedicate 1.2% of its growing defence budget to science and technology over this Parliament to further support innovation. This includes a £165 million Defence and Cyber Innovation Fund to encourage new and innovative companies – undoubtedly with many based on developments from the science and engineering sector.

We also heard that Government will double spend on energy innovation and invest £250 million in a nuclear research and development programme, although debates about subsidies and sustainable energy policies continue. In more good news, having faced serious cuts in recent years, funding through DCMS for the Science Museum Group, as well as some other national treasures, has been protected. For the 2 million children who visit each year, and let’s not forget the millions of adults, this is a real win.

An education

Of course, a thriving science and engineering sector cannot live on R&D funding alone. And in his announcements on higher education, further education, apprenticeships, diversity and informal learning, the Chancellor giveth and taketh away.

Others have gone into more detail on the outcome for higher education, so I won’t delve into the detail here. But certainly many will be concerned about the hit to student opportunity funding which is likely to bear the brunt of £120m cuts to the teaching grant and we don’t yet know if HEIF has survived – a £150m annual fund that is hugely valued by universities, funds core salaries for many, and delivers consistently high returns from a relatively low initial investment. And as raised in the Commons Chamber, fine print changing the terms on student loans retrospectively might make economic sense for the Treasury but it doesn’t instil students with confidence when taking out a student loan.

Which is particularly bad news, when some of the good news from the spending review was around extensions to who can access loans and for what, including maintenance loans for part time HE students, tuition fee loans for higher level skills in Further Education and new loans for postgraduate Master’s degrees, as well as loans for those wanting to retrain by taking a second degree in STEM. More good news for the sustainability of STEM teaching at university is the announcement that the government will provide funding for a real terms protection for the overall budget for STEM subjects in HE, something we’ve been campaigning for.

Having taken a huge hit in recent years there was protection of funding for the core adult skills participation budgets. With many FE colleges struggling to keep STEM courses open due to recent cuts, a key question will be how existing colleges fit alongside the 5 National Colleges and new network of Institutes of Technology that government will create. This will impact on our engineering capacity in particular with the National Colleges estimated to train 21,000 students by 2020 in industries highlighted in the Government’s productivity agenda.

While FE has taken a hit in recent years, apprenticeships continue to be high on the political agenda. There are mixed reviews on the 3m apprenticeship target, with many concerned that low cost, low skill options will drown out proper investment in high-skill vocational training, which inevitably costs more. We heard more detail on the apprenticeship levy on larger employers announced in the Summer Budget. It will be introduced in April 2017 and set at a rate of 0.5% of an employer’s paybill and will only be paid on any paybill in excess of £3 million. Ensuring that the right incentives are in place to ensure the government’s investment contributes to boosting the STEM skilled workforce will be vital. Vocational STEM skills are much needed, and there seems to be the political will and investment committed to gain some traction, so this needs to work.

So there is some bad news, and science & engineering haven’t escaped from the spending review entirely unscathed. But there is much good news to celebrate, albeit slightly cautiously considering the number of unknowns. If you’ve got to the end of this post, I hope you think it was worth it. I might say the same about reaching the end of the Spending Review.

You can read CaSE’s response to the 2015 Spending Review here.