How to tackle the UK’s muddled and ineffective policy for growing the innovation economy

The UK needs an Independent Office for Innovation and Industrial Policy similar to the Office for Budget Responsibility, says submission by Cambridge Judge Business School expert at the request of the House of Commons Select Committee on Science and Technology.

The UK should create an “Independent Office for Innovation and Industrial Policy” similar to the Office for Budget Responsibility, says a submission to the House of Commons Select Committee on Science and Technology by David Connell of Cambridge Judge Business School, at the request of its Chairman, Greg Clark MP.

The proposed new body would address the problem of insufficient data and help ensure better coordination, budgeting and policy planning across Whitehall and government agencies, providing deeply researched and respected analysis to support ministers and officials.

Why UK ministers lack the tools to spark innovation

“Successive governments of all colours have failed to find the magic formula for growing more innovative and globally competitive UK businesses”, says the written submission to the Committee by David Connell, Senior Research Associate at the Centre for Business Research at Cambridge Judge Business School. “This is in large measure because incoming ministers and their advisers lack the tools and information to do the job.”

“The levers of innovation and industrial policy are spread across government. There is no overarching responsibility for policy and no meaningful co-ordination,” says the submission, while “the data required to monitor individual policy instruments is grossly inadequate.”

The submission’s author, David Connell, authored a May 2021 report entitled “Is the UK’s flagship industrial policy a costly failure?”, which was cited in current Prime Minister Rishi Sunak’s Mais Lecture in February 2022 when he served as Chancellor of the Exchequer.

New science and tech firms are needed to spur growth

The proposed new Independent Office for Innovation and Industrial Policy fits well with the current political winds, says Connell, given there is a renewed focus on the creation of new science and technology-based companies to replace industries in decline now that the growth-through-tax-cuts plan of former Prime Minister Liz Truss has been rejected by markets and abandoned.

Current spending programmes to support business R&D are spread across government with Treasury tax breaks – known as R&D Tax Credits and the Patent Box – forecast to cost nearly £11 billion a year in 2021-2022. This is nearly 20 times the annual grant funding for business R&D provided by Innovate UK, the delivery arm of the Department of Business and Industrial Strategy, nominally responsible for innovation policy.

Successive UK governments have been driving without a proper map

For at least two decades, incoming Business Ministers have struggled to achieve some level of coordination of policy planning across government, including spending departments like the Defence and Health, which have huge unmet potential to support the development of new STEM (science, technology, engineering and mathematics) businesses by funding R&D and new product trials as lead customers. But the lack of even basic spending information and frequent changes in ministers has prevented this, says Connell.

“For incoming business ministers, it must feel like the newly recruited delivery driver who, after getting into his vehicle’s driving seat, discovers that his accelerator and brakes are controlled by different people in head office and his sat nav only shows motorways,” comments Connell.

Two recent developments have highlighted the size of the problem: rapid growth in the number of SMEs claiming R&D tax credits, and September’s surprise 60% increase in the Office of National Statistics’ “gold standard” estimate of total business R&D spending (Business enterprise research and development, or BERD) to bring it in line with the much higher HMRC (HM Revenue & Customs) numbers used in recent tax credit claims.

“If the ONS revision is right it means the UK has met the Government’s target for R&D at 2.4% of GDP overnight,” says Connell, “If not, then the growth in cost of Treasury-led tax breaks has pre-empted funding for other more cost-effective policies”.

Are we spending enough on R&D?

There is already a fairly high level of errors and fraud in R&D Tax Credit claims, and it is possible that growth in SME claims significantly overstates true R&D spending, reflecting the increasing role of specialist R&D tax credit advisory firms, many operating on a payment-by-results basis. Either way, says Connell: “The UK needs to re-examine the assumption that just increasing business R&D spending is an adequate policy objective, when it is really just an intermediate proxy for the growth of sizeable, globally competitive, science and technology-based UK businesses. This should really be the UK policy objective and current evidence is disappointing.”