Statement Of Intent?
After a tumultuous few months for the UK economy, the recent Autumn Statement was an exercise in fiscal responsibility that will have a far-reaching impact for households and businesses through the course of the recession and beyond.
It would be remiss of me not to reflect on the nature of the UK government’s new fiscal plan, which the Treasury had long trailed as being painful on both tax and public spending as it looked to address the national deficit. However, while the Chancellor’s appearance in the House of Commons mostly reflected the economic challenges that lie ahead, there were a number of positive interventions that have the potential to drive growth in the future.
Speaking as someone whose remit includes supporting the growth of entrepreneurial life sciences scale ups, it was heartening to hear Jeremy Hunt suggest that any reduction of the UK’s R&D budget would be a mistake. The Chancellor made the point that the government has come close to investing 2.4 per cent of GDP in R&D, and has now committed to protecting this budget – aiming to increase public funding for R&D to £20bn by the end of this parliament. The Statement also confirmed a 35% increase in support for Innovate UK’s network of innovation centres called Catapults – a total of £1.6bn over five years. However, it is worth mentioning that the 2.4% figure has been boosted somewhat artificially thanks to SME spend on R&D being included in the ONS’ assessment for the first time.
In my last article, I discussed what was needed for the UK to become a ‘science superpower’ by 2030, so it was notable that the Chancellor continued to adopt the phrase – an extension of the government’s 2019 manifesto – alongside the budgetary commitment.
Life sciences is one of the key battle grounds on which MPs have debated the pro and cons of Brexit and, while I am an active advocate of the UK regaining access to the EU’s Horizon research programme, it will be interesting to see how the sector will play into the new Brexit Freedoms Bill which was resurfaced as part of the Statement. The Bill is due before the end of next year and my industry is one of five being measured up for a new regulatory approach.
While we await those changes, the decision to change the existing R&D tax credit scheme was a less positive intervention. The scheme is part of the UK’s flagship industrial policy and vital to the investment decisions of many of the most innovative start-up and scale-up companies operating within our innovation economy. As such, the reduction of the deduction rate for the SME part of the scheme from 130 per cent to 86 per cent, and the credit rate from 14.5 per cent to 10 per cent, was concerning. The government will of course be hoping that any potential negative impact on R&D is outweighed by interventions elsewhere. However, the changes have the potential to be disastrous for the many R&D-heavy, pre-revenue businesses operating in the sector who simply won’t have budgeted for it and will be particularly affected if it is implemented in 2023.
On a more positive note, the ability to use private investment in more flexible ways through changes to Solvency II regulations is something we have been making the case for alongside our public and private sector partners, so it was good to see progress on that front.
I would also welcome the changed approach to investment zones (IZs), which will now focus on leveraging research existing strengths by being centred on universities outside of London. It’s been well trailed that IZs as they were previously conceived were uncosted and unlikely to have boosted growth in a sustainable way.
The idea of replacing them with something focussed on the research strengths of universities and knowledge-intensive growth clusters such as those in Birmingham, Manchester, Leeds and Glasgow is potentially very exciting; particularly if aligned with the Chancellor’s pledge to help turn world class ideas into world class companies. The intention to work with local partners and make decisions in the spring is a sensible approach to getting the best outcomes for our regional cities and the UK as a whole.
More broadly, it was also positive to see the commitment to continue to deliver on infrastructure promises including both Northern Powerhouse Rail and HS2 to Manchester. We have long made the argument that the northern economy needs both. The detail will of course be important though as the commitment to previous spending plans is currently only for the next two years, after which real terms cuts are budgeted. Getting the detail of these schemes right and how they work together to operate efficiently for the long term is essential.