An index of issues in UK science and innovation policy – part 1: the strategic context

We’re in the mid-term of a government that’s placed a lot of emphasis on science and innovation for the future of the country. There’s been a lot of rhetorical ambition and some snappy slogans (“science superpower”, “innovation nation”). There’s also been a lot of change in the way the nation’s science system is wired up, and much of that change is yet to work through. In this series of four posts, I’m going to try to give an overview of where this process of change has got to and what is yet to evolve. I’ll be covering a lot of ground, so the posts will form more of an index of issues than a comprehensive discussion; each item I’ll mention will undoubtedly deserve a longer piece of its own.

Since any strategy should begin with a clear view of what one is trying to achieve, the first part of the series, below, will think about the wider challenges the UK government faces, asking what problems we need our science and innovation system to contribute to solving.

The second part will discuss some big questions about how the UK’s science and innovation system works.

  • How research intensive should the UK economy be?
  • Do we have the right balance between basic research and more applied development?
  • Is the overall productivity of the research enterprise – in the UK and globally – growing, or falling?
  • What’s the relationship of geography to innovation?
  • How can national and regional economies be best equipped to take advantage of advances in science and technology made elsewhere?

The third instalment will get into the details of the UK’s R&D system as it is currently evolving, discussing what is changing, and what is yet to be resolved.

  • In government support of R&D, what’s the right balance between direct commissioning and tax incentives?
  • How well are the government’s agencies for supporting R&D (e.g. UK Research and Innovation, InnovateUK, the new agency ARIA, EU funding (or whatever replaces it), government departments) working, and how should they develop?
  • Is the UK’s landscape of institutions where R&D is carried out optimal?
  • Is the connection between policies for skills development and policies for innovation working well enough?
  • How can a national government influence business R&D largely carried out by multinational companies?
  • What should we make of the government’s focus on “missions” and “technologies” to organise innovation policy?
  • How should the government use science and innovation policy to reduce the UK’s regional productivity disparities?
  • Can the new National Science & Technology Council effectively develop national strategy for science and innovation, and convert that into implementable policy across the whole of government?

Finally, I’ll sum up by asking what it might mean for the UK to be a “science superpower”. Given the UK’s current position in the world as a medium size economy, accounting for about 2-3% of the worlds added value from knowledge & technology intensive industries, what is a realistic aspiration for the UK’s science and innovation system?

With that introduction, on to part 1 of this series of blogposts.

1. What problem(s) are we trying to solve?

1.1. Getting the UK economy growing again

The UK’s most serious economic problem now is its lack of productivity growth. As I’ve discussed many times here, after many decades in which productivity grew at a steady rate, a little more than 2% a year, this growth was arrested after the global financial crisis in 2008; since then productivity has been more or less stagnant. This translates directly into a stagnation in average wages, as the first plot shows – this is the painful backdrop to the current “cost of living crisis”.

Productivity and average wages since 2000. From Build Back Better: our plan for growth, HMT, March 2021

This stagnation almost certainly has more than one cause. There may be some general factors affecting all developed economies. Progress in some areas of technology may be slowing; the exponential growth in computer power that came from the combination of Moore’s law and Dennard scaling came to an end in the mid-2000s, for example. But, while productivity growth in all developed countries has slowed, the stagnation has been more pronounced in the UK than any other advanced economy except Italy.

Structural effects specific to the UK include the rapid fall-off of North Sea oil and gas production since the early 2000s, and the unwinding of the bubble in financial services that burst in the global financial crisis. The combination of North Sea oil and the financial services boom may have led to a touch of “Dutch disease”, squeezing other sectors such as manufacturing. There have been difficulties in specific sectors that the UK has been specialised in – notably pharmaceuticals.

There’s an effect of some policy choices over the last decade; macroeconomists focus on the role of demand in driving productivity growth, so the effects of the fiscal consolidation of the early 2010s may themselves have contributed. Other economists highlight the beneficial role of international trade in driving productivity growth, so the choice to impose additional frictions on international trade will give an additional headwind over coming years.

But the fundamental driver of productivity growth is innovation, which finds ways of reducing the inputs needed to produced existing goods and services, and develops entirely new, highly valued goods and services. Not all innovation arises from formal research and development, but it is striking that the UK’s decline in productivity growth follows a period in which the overall R&D intensity of the UK economy declined substantially, and that the UK’s weak performance in productivity growth compared to international comparator countries is correlated with comparatively low R&D intensity.

In terms of productivity, the UK is a highly divided country. The Greater Southeast – London, the Southeast, parts of East Anglia – has an economy with a comparable level of productivity to other high performing Northern European economies, but most of the rest of the country more closely resembles Southern Italy, Spain or Portugal. Moreover, the UK’s large second tier cities – Birmingham, Manchester, Glasgow etc – instead of being drivers of the national economy, actually have levels of productivity below the national average.

Without a recovery of productivity growth, wages will continue to stagnate, living standards will fall, and it will be impossible for governments to provide public services of a quality that people have come to expect. It will not be possible for one corner of the nation to carry the economy of the whole country, so it should be a priority to raise the productivity of those parts that are currently lagging behind their potential – particularly the UK’s large, second tier cities. This is the pre-eminent economic driver that the development of science and innovation policy needs to focus on.

1.2. Managing the energy transition to net zero

All western economies and lifestyles depend on the availability of cheap, abundant energy – and this has been supplied by fossil fuels, which still account for around 80% of our energy supplies. But our dependence on fossil fuels has driven accelerating and potentially disruptive climate change. There’s widespread agreement about the need for our energy system to make a transition to one that stabilises the output of greenhouse gases, and in the UK a commitment to producing net zero greenhouse gases by 2050 is rightly enshrined in legislation. But it isn’t clear to me that policy makers and politicians fully understand the scale of this challenge.

The UK has made some good progress in decarbonising its energy economy, but naturally the UK has done the easy bits first. We’ve exported much of our heavy industry, shifted electricity generation from coal to gas, and we now get roughly half of our electricity generation from a combination of burning biomass, offshore wind and the continuing operation of legacy nuclear power stations.

What remains will be much more difficult. The majority of our energy use still comes from directly burning oil and gas, for transport and domestic and industrial heat. We need to reduce demand by much more focus on energy efficiency, especially in heating. This will need a major drive to retrofit existing commercial and residential buildings, and a large scale programme building out new, zero-carbon social housing, with the remaining heating needs being met by electric heat pumps

The transition to electric vehicles needs to accelerate; heavy goods vehicles and shipping may need to transition to hydrogen or ammonia, while in my view long-haul aviation will only be viable powered by synthetic, zero carbon hydrocarbons (e-fuels). These new fuels themselves need to be synthesised in a zero carbon way – hydrogen by electrolysis using renewable energy and/or high temperature process heat from high temperature nuclear reactors, synthetic hydrocarbons from green hydrogen and carbon dioxide captured directly from the atmosphere.

In addition to being totally decarbonising our electricity supply, we’ll need to substantially expand it to accommodate this transition from directly burnt oil and gas to electricity. The heavy lifting in the UK will likely be done by offshore wind, including floating offshore wind. In addition to intermittent renewables, we’ll need both more storage capacity, and sources of zero carbon firm power. For the latter, the choice is between continuing to burn gas, but with carbon capture and storage, and a bigger programme of nuclear new build. For why I think the latter route is both preferable and more likely, see my earlier post: Carbon Capture and Storage: technically possible, but politically and economically a bad idea. We should support fusion R&D (where the UK has a genuine comparative advantage) in case it works, though it isn’t likely, in my view, to make a substantial contribution to the 2050 net zero target.

This is a daunting list, combining some established technologies, some that exist but aren’t yet cheap or deployable at scale enough, some that exist only in principle. The scale of the transition is wrenching, and like all big changes, it will produce winners and losers, both at a national level and geopolitically. We need innovation to drive down the cost of the new, cleaner technologies to the point at which economic forces drive the transition more than political ones.

1.3. Keeping the nation secure in a more dangerous world

We now have a full-scale European war involving a nuclear-armed adversary, reminding us forcefully that one of the primary duties of a state is to keep its people secure. The 2021 Integrated Review of Security, Defence, Development and Foreign Policy reasserted the importance of science and technology as a source of strategic advantage and as a central part of national security. Although the war in Ukraine has called into question some of the assumptions of the Integrated Review, with a painful reminder that the security of our European neighbourhood can’t be taken for granted, this emphasis on security as a key motivation for the state’s involvement in science and technology will surely only strengthen.

The Ukraine war has also reminded us that the geopolitics of energy never went away, and that the resilience of the material base of the economy and our lives can’t be taken for granted. Since the end of the Cold War and the subsequent deepening of globalisation, we have become complacent about the degree of our dependence, as a small country, on imports for energy, food, materials and finished goods. Of course, our prosperity depends greatly on our international trade, so a North Korea-style Juche-UK policy would be ridiculous – but the pandemic reminded us of our dependence on other countries for some essential items like PPE and pharmaceutical precursors, as well as teaching us how sensitive our complex global supply chains have become, with the effects of disruptions in obscure corners rippling out worldwide.


UK government research and development spending by socio-economic objective, for selected sectors. Data: Eurostat (GBARD)

After the end of the Cold War, one of the ways in which we cashed in the “peace dividend” was by reducing the amount of R&D devoted to defense, as my last post discussed in more detail. We’re in a different world now, so, as I wrote there, priorities for the government’s R&D spending will inevitably and rightly be different, with more emphasis on food and energy security, rebuilding sovereign capabilities in some areas of manufacturing; as well as a return to higher spending directly on defence R&D, including new threats to cybersecurity.

1.4. Keeping an ageing population healthy

The pandemic has been a traumatic experience for the nation, with more than 175,000 deaths to date. As the UK went into the pandemic, there was some optimism that its strong position in life sciences would place it in a better position to weather the pandemic than other countries. As it turned out, its record was mixed. On the one hand, there was a successful rapid vaccination programme; on the other, the pandemic was unforgiving in the way it revealed and exacerbated widespread health inequalities.


Life expectancies at birth for males and females in 2020 for England. These are not predictions of how long a baby born in 2020 will live; instead they represent an estimate of the average number of years a baby born in 2020 would live if they experienced the age-specific mortality rates for 2020 throughout their life. Data from Public Health England.

A more complete reckoning of the strengths and weaknesses of the UK’s pandemic response awaits a full inquiry. The plot shows the impact of the pandemic on life expectancies. What is interesting, though concerning, is that even before the pandemic the rate of increase in life expectancies that we’d seen in 1980’s, 90’s and 2000’s had already, after 2010, begun to stall.

The paradox here is that this slow-down in the rate of improvement of life expectancy follows soon after the substantial increase in R&D devoted to health. As always, there are probably many factors at play here. But there is a conceptual muddle, in my view, about the way the UK thinks about its “Life Sciences Strategy”. The problem is that this strategy has two, largely separate, goals, which are sometimes in tension.

One objective of a life sciences strategy is to do the research needed to improve the way healthcare is delivered to the UK’s population, and to address the broader determinants of the health of the public. The other is to support the UK’s pharmaceutical and biotechnology industries. These are important areas of comparative advantage for the UK economy, strong exporting sectors. But in recent years, as I’ve already mentioned, productivity growth in the pharmaceutical sector has markedly slowed down, and given the UK’s specialisation in pharma, this underperformance has made a material contribution to the UK’s overall productivity problem, as demonstrated by this recent research.

So while it is an entirely appropriate piece of industrial strategy to support the pharmaceutical and biotechnology sectors, it’s important also to think about the wider innovation needs of the health and social care system. Nor should we expect the pandemic we have just been through to be the last, so we should pay some attention to making sure we’re better prepared for the next one.

As other priorities for R&D – like national security and net zero – become more pressing, it is going to be more important than ever to be clear about how we set our strategic priorities.

To come next: part 2 – Some overarching questions about the UK’s research & innovation system.

Science and innovation policy in a new age of insecurity

It’s conventional to date the end of the Cold War to the break-up of the USSR, in 1991. Around that time, people started talking about a “Peace Dividend” – the economic benefits that would come as economies like the UK stood down from the partial war footing that they’d been operating under for the previous half-century. In the early 1980’s, the UK was spending more than 5% of its GDP on defence; in the late 80’s there was an easing of international tension, so by 1990 the fraction had already dropped to 4%. The end of the Cold War saw a literal cashing in of the peace dividend, with a fall in defence spending to around 2.5% in the 2000’s. The Coalition’s austerity policies bore down further on defence, with its share of GDP reaching a low point of 1.9% in 2017 [1].

But I’d argue that there was more to the post-cold-war peace dividend than the simple “guns or butter” argument, by which direct spending on the military could be redirected towards social programmes or to lower taxation. In the apparent absence of external threats, there is less pressure on governments to worry about the security of key inputs to the life of the nation. Rather than worrying about the security of food or energy supplies, there was a conviction that these things could be left to a globalising world market. Industries once thought of as “strategic” – such as semiconductors – could be left to fend for themselves, and if that led to their dismemberment and sale to foreign companies (as happened to GEC/ Marconi), then that could be rationalised as simply the benign outcome of the market efficiently allocating resources. Finally, in the apparent absence of external threats, for a government with an ideological prior for reducing the size of the state, a general run-down of state capacity seemed, if not an actual goal, to be an acceptable policy side-effect.

Things look different now. The invasion of Ukraine has brought Russia and NATO close to direct confrontation, and the resulting call for economic sanctions against Russia has shone a spotlight on the degree to which Europe has come to depend on Russia for supplies of oil and gas. This all takes place against the background of what’s starting to look like a chronic world polycrisis. As the effects of climate change become more obvious, we will see patterns of agriculture disrupted, stress on water supplies, people and communities driven from their homes. We’ll have to be more realistic about confronting the scale and speed of the necessary transition of our energy economy to net zero greenhouse gas emissions, and the economic and political disruptions that will lead to. And the pandemic that’s dominated our lives for the last couple of years isn’t likely to be the last.

The assumptions that became conventional wisdom in the benign years of the 1990s are now obsolete. I’m not convinced that politicians and opinion formers fully understand this yet. We not starting from a great place; the UK’s economy is already well into a second decade of very poor productivity growth, as I’ve been pointing out here for some time. This has led to a long period in which wages have stagnated; this is about to combine with a burst of inflation to produce an unprecedented drop in people’s real living standards. We are going to see increases in defence spending; there is more talk of resilience. But the talk of many senior politicians seems to speak more of a hope of a return to those benign years, more of a clinging on to old nostrums than a real willingness to rethink political and economic principles for these new times.

I don’t have any confidence that I know what those new political and economic principles should be. Here I’m just going to make some observations relevant to the narrower world of science and innovation policy. How might this new environment affect the priorities the state chooses for the science and innovation it supports?

UK government research and development spending by socio-economic objective, for selected sectors. Data: Eurostat (GBARD)

My plot shows the way the division of UK government R&D between different socio-economic goals has evolved since 2004 [2]. The big story over the last twenty years has been the run down of defence R&D, and the increase in R&D related to health – another under-appreciated dimension of the peace dividend. In the heyday of the UK’s postwar “Warfare State” (as the historian David Edgerton has called it [3]), defence accounted for more than half of government R&D spending. As late as 2004, defence still accounted for 30% of the government’s expenditure, but by 2019 this fraction had fallen to 11%.

As for those other sectors that the warfare state would have regarded as of strategic importance – energy, agriculture and industrial production – by the mid-2000s, their shares of R&D had been run down to a few percent, or, in the case of energy, a fraction of a percent. Since then there has been some recovery – in the mid-2000’s, the government’s chief scientific advisor, Sir David King, very much aware of the issue of climate change, was instrumental in restoring some growth in energy R&D from the very low base it had reached. Meanwhile industrial strategy has made a slow and halting comeback, with increased government funding to agencies such as InnovateUK and collaborative initiatives in support of the aerospace and automotive sectors.

Now, the security of the nation, using that word in its broadest sense, no longer seems something we can take for granted. This will inevitably and rightly affect priorities for the government’s R&D spending. More emphasis on food and energy security, with a focus on driving down the cost of the transition to net zero; rebuilding sovereign capabilities in some areas of manufacturing; as well as a return to higher spending directly on defence R&D (including new threats to cybersecurity); these shifts seem inevitable and probably need to happen on a faster time-scale than many will be comfortable with. We won’t return to the world of the Warfare State, nor should we, but I don’t think the institutions we currently have are the right ones for a science and innovation policy driven by security and national resilience.

[1] Defense as fraction of GDP: SIPRI
[2] Gbard data from Eurostat.
[3] David Edgerton, Warfare State: Britain 1920 – 1970 (CUP). Historic defence R&D figures quoted on p259.

Levelling Up Research and Development

The government published its long-awaited “Levelling Up” White Paper on February 2nd. This is a much expanded version of a piece I wrote for Research Fortnight, “Levelling Up R&D is about spreading power as well as money”, in which I look at the implications of the White Paper for research and development.

What do the government mean by “levelling up”?

It’s fair to say that the Levelling Up White Paper, published after a long delay last week, struggled to compete with other political events for the front pages, and what comment there was about it focused, somewhat unfairly, on its great length, its thumbnail history of 9 millennia of urbanism, and its invitation to compare our Northern and Midland cities with renaissance Florence. But for those interested in the UK’s research and development landscape, it would be wrong to underestimate its significance.

For those who have been wondering what “levelling up” actually means, the White Paper does offer some concrete answers. Correctly, in my view, it puts the UK’s regional disparities in productivity centre stage. It offers some detailed analysis of the UK’s regional problem; for all that “industrial strategy” is not a “brand” currently in fashion with the government, the mark of the prematurely terminated Industrial Strategy Council, as transmitted through the person of Andy Haldane, now head of the government’s “Levelling Up Task Force”, is clear. In addition to much discussion of the data, there is an analytical framework based on a consideration of different types of capital, their unequal distribution across the country, and – crucially – a discussion of the vicious circles that can lead places into a self-reinforcing decline.

The role of research and development in levelling up

Research and development, together with skills, contribute to a place’s “intangible capital”, and, echoing an argument myself, Tom Forth and others have been making for some time, the connection is made between the unbalanced distribution of government R&D expenditure across the country and regional disparities in economic performance. Under the overarching goal of boosting “productivity, pay, jobs and living standards by growing the private sector, especially in those places where they are lagging”, one of the 12 “Levelling Up Missions” promises that public investment in R&D outside the Greater South East will grow by 40% by 2030, and by one third in the current spending review period (i.e. by FY24/25). The aspiration is that this increase in public sector R&D should “crowd in” roughly double the amount of private sector R&D.

Although it’s been pointed out that in many areas the Levelling Up White Paper isn’t supported by new money, this is not actually true for R&D. The October 2021 Comprehensive Spending Review did commit the government to a substantial rise in government R&D spending – about £5 billion, taking spending from a bit less than £15 billion to £20 billion. The commitment to a spending uplift of a third outside the Greater SE doesn’t, therefore, represent a real rebalancing of the current situation, and it actually represents a dilution of the commitment of the October Spending Review, which promised that “an increased share of the record increase in government spending on R&D over the SR21 period is invested outside the Greater South East”.

Given that the CSR commitment is reiterated in the White Paper, perhaps we should regard these targets as represents a floor to to the ambition, and they do at least mean that the current imbalances won’t get any worse. To be fair to those managing science funding agencies, it should also be recognised that, given that they have already taken on substantial multi-year commitments, changing the overall distribution of funding isn’t something that can happen very quickly.

Where is this new money going? It’s important to remember that, although academics tend to focus on the research councils, much public R&D is carried out by government departments. When we look at where the uplift in funding is concentrated, we find that the core UKRI budget, comprising the research councils and block grants to universities and research councils, does have an increase of £1.1 bn between 21/22 and 24/25, a 23% increase in cash terms. In percentage terms, though, the really big winners are departments like the Ministry of Defence, The Department of Health and Social Care, and the agency Innovate UK, which between them see an increase of 64%, representing a £2.7bn cash uplift.

If the promised one third increase in R&D spending outside the Greater Southeast is to be funded from the uplift committed in the spending review, much of the heavy lifting will need to be done by these more mission focused and applied funding streams. However, it is fair to say that the details of how this commitment will be met are not yet fully fleshed out in the White Paper.

How UKRI can support levelling up (and why it should)

UKRI gets a new organisational objective, to “Deliver economic, social, and cultural benefits from research and innovation to all of our citizens, including by developing research and innovation strengths across the UK in support of levelling up”, and an instruction to increase consideration of local growth criteria and impact in R&D fund design. It will be interesting to see how the organisation responds to this new mandate. Some may feel that UKRI shouldn’t take explicit measures to rebalance the distribution of R&D across the country, as this might compromise its primary commitment to funding excellence in science. I would certainly agree that UKRI needs to avoid funding poor quality research, but I’d make two points about the question of excellence.

The first is to point out that, for many in the research community, the most prominent funder of purely excellence based research for the UK at the moment isn’t part of UKRI at all, but is the European Research Council, with its mission to “support investigator-driven frontier research across all fields, on the basis of scientific excellence”. The ERC delivers this mission through the rigorous peer-review, by acknowledged international experts, of proposals whose quality is driven up by healthy competition from a whole continent’s worth of leading scientists. Much of UKRI funding, in contrast, is influenced by strategic priorities set by the research councils themselves. Of course, the UK’s ongoing participation in the ERC, like other parts of the EU Horizon programme, is now under serious question, but that’s another story. Perhaps the most important lesson we can take from the success of ERC in supporting excellence, though, is that it is entirely people-focused. Places aren’t excellent, people are.

The second point is to note that UKRI’s current aspiration is to be a steward of the whole research system. This stewardship certainly should include supporting excellent researchers wherever they are to be found, but it should also involve creating the environments that support those researchers. Research councils have in the past, quite correctly, taken on some responsibility for building those environments, so it is a natural extension of those activities to widen the range of places which do provide those environments. They can do this by building capacity, and by developing partnerships.

UKRI has a responsibility for maintaining the capacity of the UK system to do good research. This starts with helping to provide the infrastructure for that research, whether that is by providing funding for strategic equipment in universities, (in England) the block grant support to universities through quality related funding (QR) from Research England, through to creating and supporting entire research institutes. Research councils have rightly intervened to maintain the UK viability of some fields of research deemed strategically important. And there is a continuous, entirely justified, commitment to support the talent pipeline for research, and supporting good training environments for PhD students has become an increasingly important part of the research council’s business. It is a natural extension to UKRI’s stewardship of the UK’s future research capacity to give more weight to the geographical dimension of building that capacity.

Partnership remains another very important dimension of UKRI’s work, both internal and external. The whole point of creating UKRI as a single organisation was to promote more partnership working between the component parts of the organisation, the research councils, Research England, and Innovate UK. Research councils like EPSRC are rightly proud of the large proportion of their grants that involve some partnership with industry, and high profile recent initiatives include EPSRC’s Prosperity Partnerships, large scale research programmes with matched funding from industry, to deliver a research agenda co-created by academic and industrial researchers.

It’s welcome that the most recent prosperity partnership call offers an invitation to articulate the degree to which these partnerships support place-based outcomes, such as attracting inward investment to specific regions or otherwise supporting regional economic growth. It would be a natural extension to include regional bodies more explicitly as partners for research council supported research, and as co-creators of research strategy, in the way that R&D intensive companies currently engage with UKRI.

Innovate UK has different drivers from the research councils; as an explicitly “business led” agency one might expect there to be some correlation between the regional distribution of business R&D and Innovate UK’s investments. The relationship is shown in my figure –regions to the left of the line receive more Innovate UK money than you would expect from a simple correlation with business R&D, regions on the right receive less.


A comparison of Innovate UK expenditure with business R&D for 2018. Innovate UK data from UKRI, regional business R&D data from ONS BERD statistics.

This distribution doesn’t immediately suggest a straightforward explanation. One might wonder whether it reflects industrial sectors that are particularly well organised to receive support from Innovate UK – perhaps the importance of automotive for the West Midlands and aerospace for the South West and East Midlands is reflected in the above average Innovate UK support for those regions.

Another factor in determining these spending patterns is the location of the Catapult Centres. These receive core funding directly from Innovate UK, as well as participating in joint projects with industry that receive partial funding from Innovate UK, so the regional distribution of Innovate UK funding probably to some extent reflects the location of Catapult Centres.

It’s possible that the high London figure to some extent reflects spending being registered at Head Offices rather than in the R&D centres where the work is actually carried out. I don’t have an obvious explanation for the relatively low level of spending in the South East and East.

The expectation of a correlation between existing business R&D spend and Innovate UK investments rests on the idea that Innovate UK should be led by the business R&D landscape as it is, rather than trying to shape it. But if the goal of “levelling up” is to increase productivity in underperforming regions, then perhaps the goals of innovation policy should include the use of applied R&D, together with other interventions to promote innovation diffusion and workforce development, explicitly to develop innovation and manufacturing capacity, as Eoin O’Sullivan and I have argued in our recent submission to the Nurse review. As we outline in our paper, this could be done by Innovate UK through the Catapult Network, but this would require some explicit modifications in their mission and in the selection criteria for new Catapults.

One programme run by UKRI in recent years is designed to build regional capacity in this way, through partnership with research organisations and industry in particular places. This is the “Strength in Places Fund”, administered as a partnership between Innovate UK and Research England. I believe this scheme has been a success in the collaborations it has generated, although the bureaucracy surrounding it has been frustrating. It’s very disappointing that the White Paper lacked any commitment to continue this scheme, currently the only explicitly place-based funding instrument run by UKRI. Hopefully this will be remedied in the ongoing detailed discussions of the CSR settlement; if not it will inevitably interpreted as a signal of the UKRI’s lack of commitment to addressing regional R&D imbalances.

R&D for levelling up health inequalities

Turning to non-UKRI funding streams, one that does receive a very substantial uplift is the National Institute of Health Research, the research arm of the Department of Health and Social Care. The White Paper, entirely correctly, draws attention to the shocking disparities in health outcomes across the country, which amount to about a decade of life expectancy between the most and least prosperous parts of the country, and sets as another of the 12 “Levelling Up missions” the goal of narrowing this gap. I believe these health inequalities are not just morally unacceptable in a prosperous country, they are themselves direct contributors to productivity gaps. Further details of how this aspect of levelling up will have to wait until another White Paper, promised for later in the year.

Narrowing these gaps should be a key focus of the National Institute of Health Research – yet of all the research funding agencies, this is the one whose funding is most concentrated, not just in the Greater Southeast, but specifically in London. There is in the White Paper a commitment that NIHR will “bring clinical and applied research to under-served areas and communities in England with major health needs to reduce health disparities”, but the targets are currently vague. This refocusing NIHR on the urgent problem of health inequality needs to go further and faster.

Innovation policy to support levelling up needs to be co-created with cities, regions and nations

But making a material change in the distribution of R&D funding using existing mechanisms will always be a hard and slow process. Tom Forth and I, in our 2020 NESTA paper “The Missing Four Billion”, argued that to make a real difference, it will be necessary to devolve significant funding to nations, cities and regions. To make an impact on productivity, R&D interventions need to work with the grain of the existing regional economic base, and even the best central government departments and agencies, in Whitehall or Swindon, can’t be expected to have the local knowledge and develop the partnerships that would make this work. Ultimately, developing an effective regional innovation strategy is a matter of finding out who is doing the innovating, and helping them do more of it.

On the other hand, the necessary organizational and analytical capacity to make good decisions about innovation don’t always exist or aren’t fully developed in our cities and regions. Our answer to this dilemma was the idea of an “Innovation Deal”, where central government work with cities and regions to develop this capacity, in return for substantial devolution of innovation funding.

The White Paper does take a tentative step in this direction. Three “Innovation Accelerators” have been announced, with £100m of funding over three years going to three pilot areas, Greater Manchester, the West Midlands, and Glasgow City-Region. The idea is that national and local government, together with industry and R&D institutions in those cities, will work together to develop projects to improve the strength of the existing R&D base and maximise its economic impact, to attract new investment from international companies at the technological frontier, and to improve the diffusion of technology into the existing business base.

In Greater Manchester, we’ve been preparing for such a programme. The organisation “Innovation Greater Manchester”, which brings together the private sector, universities and the Mayoral Combined Authority, has been developing a pipeline of rigorously tested investment opportunities aimed at driving productivity across the whole of GM. This needs to support not just the city centre economy, where digital and creative industries are currently thriving, but the economies of GM’s outlying boroughs like Rochdale, Bury and Oldham, which are amongst the most deprived communities of the Northwest. Here, initiatives like the Advanced Machinery and Productivity Institute (supported by the Strength in Places Fund) will help existing innovative manufacturing businesses to develop and grow. Innovation GM will work with central government to develop its “Innovation Accelerator” as an exemplar of locally informed innovation policy.

R&D is an important element of the productivity-enhancing investments that should be at the centre of the levelling-up agenda, and it’s right that the Levelling Up White Paper sets as one of its missions the need to increase the R&D intensity – both public and private – of those parts of the country currently not fulfilling their economic potential. Work does remain to translate some of the high level commitments on R&D spending into changes in the way government departments and agencies spend their R&D budgets.

In addition to this, I believe that co-creation – and ultimately devolution – of innovation programmes with city-regions will be important, to incorporate local knowledge about the existing economy, and ultimately to assign local responsibility for the outcomes. Innovation Accelerators are a good first step to develop the institutional landscape for this to work, and I hope that this initiative can soon be rolled out to include other areas of the UK.

Will the government’s interest in regional economic disparities be sustained for the long-term?

Finally, one of the most telling sections of the Levelling Up White Paper is a history of 100 years of local growth policy, with the comment “spatial policy in the UK has, by contrast, been characterised by endemic policy churn…. By some counts, there were almost 40 different schemes or bodies introduced to boost local or regional growth between 1975 and 2015, roughly one every 12 months.” Surely no-one can argue with the White Paper’s call for policies to be applied consistently at sufficient scale over the medium to long term. Addressing the UK’s fundamental problems of disparities in regional economic performance must surely take a project that will take decades, and it’s realistic that the White Paper defines milestones for 2030.

But what will be the longevity of this White Paper itself? Of course, 2030 is beyond the life of this government – but given the prevailing political instability, some may doubt that the “Levelling Up” agenda will even last the year. It’s odd that a central manifesto commitment of a government elected with an 80 seat majority should be in doubt, but it’s not clear that enthusiasm for the agenda is universally shared across the ruling party. Many influential people and institutions doubt that the reduction of the UK’s regional economic disparities is possible or even desirable. In fact, many people and institutions benefit from the current state of affairs, and there’s a surprisingly large constituency for economic stagnation.

So I wouldn’t be surprised if some people in government and its agencies will be tempted to drag their feet, in the hope that if they wait long enough the entire “levelling up” craze will go away. Naturally, I think this would be wrong in principle – the role of regional economic disparities in the UK’s current economic difficulties, and the resulting societal instability, has become more and more obvious and widely acknowledged. I suspect that such foot-dragging would be politically unwise too.

What’s missing in the UK’s R&D landscape – institutions to build innovation capacity

The UK government has commissioned a new review of the institutional landscape in which research, development and innovation (RD&I) is carried out, led by Sir Paul Nurse. In response to an invitation for views, Eoin O’Sullivan, from Cambridge University’s Institute for Manufacturing, and I submitted this brief paper:
The role of intermediate RD&I institutes in building regional and sectoral innovation capabilities (PDF).

Our paper argues that what’s underdeveloped in the UK’s research landscape are research and development institutes whose mission goes beyond just doing applied research, to encompass a wider range of activities to build the innovation and manufacturing capabilities of regional economies that are currently underperforming. There are many international examples of this kind of institution, which carry out workforce development and innovation diffusion functions as well as applied research, and there are lessons from these other countries that the UK could usefully learn.

Here’s the first section of our paper:

The place of intermediate institutions in the UK’s RD&I landscape

National innovation systems have a complex landscape of different types of research institutes with different missions and goals. These include both research universities and institutes devoted to fundamental science, and public sector research establishments (PSREs), which support government strategic goals. A majority of research, development and innovation takes place in the private sector, in firms’ own laboratories, and in for-profit contract research organisations. It is this private sector innovation that most directly drives productivity growth. Public and private sector R&D can be connected in intermediate RD&I institutes, which carry out more applied research, often as a public/private partnerships, as well as taking a wider role in building regional and sectoral private sector capability, through the promotion of innovation diffusion and skills development.

In the absence of government intervention, the private sector will systematically invest less in R&D than would be optimal for the whole economy, due to the inability of firms to capture all of the benefits. This market failure provides the justification for government investment in R&D. In many successful innovation economies, intermediate RD&I institutes play a vital role. Examples include the Fraunhofer Institutes in Germany, the Industrial Research and Technology Institute in Taiwan, and VTT in Finland.

In the UK, basic research is carried out in a strong university base, supplemented by some stand-alone institutes, such as the Laboratory of Molecular Biology at Cambridge and the Crick Institute in London. The PSRE sector has diminished in size over the past few decades, because of privatisations and absorption of some institutes into universities, but it retains some strong institutions such as the National Physical Laboratory and the Meteorological Office.

The perceived weakness of the UK’s landscape in intermediate research and innovation institutions led to the development of the Catapult Network in the 2010’s, modelled in some respects on Germany’s Fraunhofer network, though not as yet commensurate with it in scale.

Discussion of the purpose of Intermediate RD&I institutions in the UK, such as the Catapult Network, has focused on their role carrying out applied research in collaboration with industry. The purpose of this note (which summarises the argument of a longer working paper current under preparation for the Productivity Institute) is to draw attention to the wider range of functions that such institutions carry out in other nations, and in particular their role in supporting economic development in regions with lower productivity.

The rest of the paper can be found here: The role of intermediate RD&I institutes in building regional and sectoral innovation capabilities (PDF).

Video of my lecture on “levelling up” R&D

On the 9 February I did a lecture at the think-tank Policy Exchange, on the subject “Can we level up research and innovation?”.

The talk had three parts:

  • On the relationship between Research and Development, productivity and regional growth: why it’s important to level up R&D;
  • On levelling up R&D in the White Paper: what government has committed to – and what remains to be done;
  • On levelling up R&D in practice in a city region: Innovation Greater Manchester and the Innovation Accelerator pilot.
  • The lecture can be watched on YouTube here, and the slides can be downloaded here: (PDF) Levelling up R&D.

    Lessons from the gas price spike

    On April 1st this year, the average UK household will see its annual energy bills rise from £1,277 to around £2,000 a year, according to the Resolution Foundation. After 10 years of stagnant wages – this itself a result of the ongoing productivity growth slowdown, there’s a clamour for some kind of short term fix for a potential political crisis, made worse by a forthcoming tax rise. Even more ominously, an unfolding geopolitical crisis over a conflict between Russia and Ukraine may interact with this energy crisis in a potentially far-reaching way, as we shall see.


    UK gas and electricity spot prices (monthly rolling average of “day-ahead” prices). Data: OFGEM

    My first plot shows the scale of the crisis. This shows the wholesale, spot prices of gas and electricity since 2010. I don’t want to dwell here on the dysfunctional features of the UK’s retail energy market that have led to the failure of a number of suppliers, or to look at the short-term issues that have exacerbated a current supply squeeze. Instead, it’s worth looking at the longer term implications for the UK’s energy security of this episode of market disruption, and to try to understand how we have been led to this state by global changes in energy markets and UK policy decisions over decades.

    Natural gas matters existentially for the UK’s economy, because 40% of the UK’s demand for energy is met by gas, and without sufficient supplies of energy, a modern economy and society cannot function. The price of electricity is strongly coupled to the price of gas, because 34% of our electricity (in 2020) was generated in gas-fired power stations, compared to 15% from nuclear and 23% wind. But generating electricity only accounts for 29% of our total demand for gas. The biggest fraction – 37% – is used for heating our houses, with another 12% is directly burnt in industry, to make fertiliser, cement and in many other processes.

    To understand why the wholesale price of gas matters so much, we need to understand a couple of ways in which the UK’s energy landscape has changed in the last twenty years. The first – the UK’s own balance between production and consumption – is shown in the next plot. Since 2004, the UK has gone from being self-sufficient in gas to being a substantial importer. Production of North Sea gas – like North Sea oil – peaked in the early 2000s, and has since rapidly dropped off, as the gas fields most easily and cheaply exploited have been exhausted.


    Gas production and consumption in the UK. Data: Digest of UK Energy Statistics 2021, table 4.1.

    The second consideration is the nature of the international gas market. A few decades ago, natural gas was a commodity that was used close to where it was produced – it could not be traded globally. But since then an infrastructure has been developed to transport natural gas over long distances; a network of intercontinental pipelines have been built, so gas produced, for example, in Arctic Siberia can be transported to markets in Western Europe. And the technology for shipping liquified natural gas in bulk has been developed, allowing gas from the huge fields in Qatar and Australia, and from the USA’s shale gas industry, to be taken to terminals across the world. This means that a worldwide gas market has been developed, tending to equalise prices across the world. A liquified natural gas tanker can leave Qatar, the USA or Australia and choose to take its cargo to wherever the price it can fetch is highest.

    The combination of the UK’s dependency on gas imports means that the prices UK households and industry have to pay for energy reflect supply and demand on a global scale. My next plot shows how global demand has changed over the last couple of decades. The UK’s demand has held steady – the UK’s “dash for gas” represented an early energy transition from extensive use of coal to natural gas. This was a positive change that has reduced the UK’s emissions of greenhouse gases. Now other countries are following in the UK’s footsteps – again, a positive development for overall world greenhouse gas emissions, but putting huge upward pressure on gas supplies. This stresses that the UK is a minor player in world gas markets; its consumption accounts for about 2% of world demand.


    World gas consumption by continent, together with China and UK. Data: US Energy Information Administration

    Where is this gas coming from? The largest net exporter, as shown in my next plot, is Russia. There’s an ominous echo of the 1970’s and its linked energy, economic and political crises, as dominant energy suppliers realise that withholding energy exports can be a powerful weapon in geopolitical conflicts. As it happens, the UK’s gas imports come primarily from Norway, by pipeline, and Qatar, through LNG imports by ship. But this doesn’t mean that the UK won’t be affected if Russia chooses to exert pressure on Europe by throttling back gas exports. There’s a global market – if Russia cuts off supplies to Germany and Central Europe, Germany will seek to replace that by buying gas from Norway and on the world LNG market, and the prices the UK has to pay will rocket.


    Top gas net exporters (i.e. exports less imports).Data: US Energy Information Agency

    What should the UK do about this energy crisis?

    We can discount straight away the suggestion made by veteran Thatcherite and Eurosceptic MP, Sir John Redwood, that the UK should simply produce more gas of its own. The UK is a small-scale participant in a global market. Even doubling its gas production would make no impact on the global balance of supply and demand, so prices would be unaffected. It’s true that if the gas was produced by a government-owned organisation, the rent – the difference between the market price and cost of production – would be captured by the UK state rather than having to be handed over to the governments of major exporters like Qatar, Norway and Russia. But British Gas was privatised in 1986.

    The reason the UK ran down its production was that governments in the 1980’s made a conscious decision that energy should be left to the market, and the market said that it was cheaper to import gas than to produce it from the North Sea (and even more so than to develop a fracking industry in Sussex and the rural Pennines). One can’t help getting the impression that UK politicians like John Redwood are in revolt against the consequences of the national economic settlement that they themselves created.

    In fact, there is nothing fundamental the UK can do now apart from strengthen the social safety net for the poorest households, accepting the pressure to increase taxes this leads to. Less politically visible, but nonetheless important, is the pressure high gas costs will put on energy-using industries. The reality is that, as a net importer of energy, higher gas prices inevitably lead to a real loss of national income. Energy infrastructures take many years to build, so all we can do now is look back at the things the UK should have done a decade ago, and learn from those mistakes so that we are in a better position a decade on from now.

    What the UK should have done is to reduce the demand for gas through an aggressive pursuit of energy efficiency measures, and to increase the diversity of its energy sources by accelerating the development of other forms of (low-carbon) electricity generation. It failed on both fronts.

    In 2013, the Coalition government reduced spending on energy efficiency measures as part of a campaign to “cut the green crap”; the result was a precipitous drop in measures such as cavity wall insulation and loft insulation. In 2015, the zero-carbon homes standard was scrapped, with the result that new housing was built to lower standards of energy efficiency. Recall that 37% of the UK’s gas demand is for domestic heating, so the UK’s poor standards of home energy efficiency translate directly into increased demand – and, with the current high prices, higher bills for consumers. “Cutting the green crap” turned out to be a costly mistake.

    It is true that the UK has brought on-stream a significant amount of offshore wind capacity. However, too much of this capacity has been offset by the decline of the UK’s existing nuclear fleet, now approaching the end of its life. The UK government has committed to a programme of nuclear new build, but this programme has stalled. In 2013, I wrote that the nuclear new build programme was “too expensive, too late”, and everything that has happened since has born that diagnosis out.

    There’s a more general lesson to learn from the current gas price spike. For some decades, the fundamental underpinning of the UK’s energy policy is that the market should be left to find the cheapest way of delivering the energy the nation needs. In the last decade, the government has intervened extensively in that market to promote one policy objective or another. We’ve seen contracts for difference, capacity markets, renewable obligation certificates – the purity of a free market has long since been left behind. But there’s still an underlying assumption that someone will be running a spreadsheet to calculate a net present value for any new energy investment.

    Cost discipline does matter, but it’s important to recognise that these calculations, for investments that will be generating income for multiple decades, rest on projections of market conditions running many years in the future. But what this current episode should tell us is that the future course of energy markets is beset by what the economists call “Knightian uncertainty”. On the reliability of predictions of future energy prices, the lesson of the past, reinforced by what’s happening to gas prices now, is that no-one knows anything.

    Energy can’t be left to the market, because the future state of the market is unknowable – but the need for energy is an inescapable ingredient of a modern economy and society. For something that is so important, building resilience into the system may be more important than maximising some notional net present value whose calculation depends on guesses about the state of the world over decades. This is even more true when we factor in the externalities imposed by the effect of fossil fuels on climate change, whose cost and impact remains so uncertain. To be more positive, there are uncertainties on the upside – the reductions in cost that an aggressive programme of low carbon research, development and deployment-driven innovation could bring. Rather than relying entirely on market forces, we have to design a resilient zero carbon energy system and get on with building it out.

    Levelling up and R&D – the case for innovation deals

    The UK has a profound problem of regional disparities in productivity performance, with second tier cities that underperform compared to expectations based on their size, and deindustrialised towns and urban areas that have failed to find productive new economic roles. Productivity growth arises from innovation, taking that term in its widest sense, and formal research and development (R&D) is one underpinning of innovation, so it’s worth asking whether there is a link between geographical disparities in R&D intensity and regional economic underperformance.

    The distribution of research and development investment in the UK – especially in the public sector – is currently highly skewed to the prosperous Greater South-East. London, together with the two subregions containing Oxford and Cambridge, account for 46% of all public and charitable spending on R&D, with 21% of the UK’s population. We know that there are substantial spillovers from public and private R&D; econometric estimates suggests that a 10% rise in public R&D would raise private total factor productivity growth by 0.03 percentage points per annum, with an estimated return on public R&D of 20% per annum, so a correlation between regional R&D intensity and productivity might be expected. But does it matter where the R&D is done?

    R&D matters not just for the knowledge it generates and the inventions it produces, but in the capacity of firms to absorb new technology. It’s certainly possible to innovate without formal R&D – through the development of new business models, or through the acquisition of new equipment. But in the UK R&D still takes the largest share of firms’ innovation expenditure.

    One key justification for public support of R&D is that firms are unable to capture the whole benefit of the research they undertake – there are “spillover” benefits to other firms that are able to copy the innovations of the leaders. The geographical aspect of these spillovers is captured in the importance of clusters, recognised in economic writing since the time of Alfred Marshall. A successful regional cluster draws on a set of collective resources and knowledge, much of it tacit, that drives innovations in both products and processes.

    This set of collective resources has been called by US researchers Pisano & Shih the “industrial commons”. A successful industrial commons is rooted in large anchor companies & institutions, together with networks of supplying companies; it is characterized by both informal knowledge networks and formal institutions for R&D, training and skills. International examples include advanced manufacturing in Lombardy, Italy, ICT hardware in Hsinchu, Taiwan, and in the UK, biotechnology in Cambridge. A goal of regional economic policy should be to consciously attempt to rebuild the industrial commons in places where de-industrialisation has caused them to wither.

    Public R&D in the UK is carried out in universities, and increasingly, in specialist research institutes such as the Crick Institute in London. In comparison to other developed nations, one type of institution that is relatively lacking in the UK are translational and applied research institutes such as the Fraunhofer Institutes in Germany, IMEC in Belgium and the Industrial Technology Research Institute in Taiwan. Such institutes may focus more on industry engagement, process innovation, the wider diffusion of existing innovations, and in skills development than is possible in institutions more focused on basic research, and they can play an important role in nucleating and developing an innovation ecosystem of the kind that can anchor an industrial commons.

    Recent policy developments in the UK do give encouraging signs that some of these issues are being recognised. The UK’s Innovation Strategy, published in July 2021, stated that “we need to ensure more places in the UK host world-leading and globally connected innovation clusters, creating more jobs, growth and productivity in those areas”, while the October 2021 Comprehensive Spending Review announced a £5.2 billion increase in government R&D spending from FY 20/21 to 24/25, and made the important commitment that “the government will ensure that an increased share of the record increase in government spending on R&D over the SR21 period is invested outside the Greater South East”.

    Further details for how this increase will be delivered are expected in the imminent “Levelling Up” White Paper. One possibility, signalled in the Budget, is that the Catapult Network might play an important role. These centres represent a recent UK initiative to create the kind of translational and applied research institutes discussed above; it would be valuable to develop these further in a way which more explicitly recognizes their potential for regional development.

    The White Paper is being driven by the newly renamed Department of Levelling Up, Housing and Communities, but it will need support across the whole government, including not just the Department of Business, Energy and Industrial Strategy, but in other departments that have received substantial increases in their R&D budgets, especially Defence and Health and Social Care.

    For increased R&D spending to have a material effect on the UK’s regional productivity imbalances, it will be important to avoid two pitfalls. The first is to recognise the importance of scale. Too often previous attempts to boost innovation in the regions – for example, by the English Regional Development Agencies in the 2000’s – have been worthwhile in themselves, but implemented at a scale too small to make a material difference to regional economies.

    For example, the three Northern RDAs spent £157m on innovation in the three years of the 2004 spending review period – while government and HE R&D spending over the same period was £20.3 billion in total, of which £4 billion was in the North.

    To make a material impact on regional inequality of R&D spending, the resources deployed need to be at least an order of magnitude bigger; a crude calculation shows that to level up per capita public spending on R&D across the UK to the levels currently achieved in the Greater Southeast, additional annual spending of more than £4 billion would be needed. If the government is serious about devoting a significant share of the £5.2 billion R&D uplift to “levelling up”, the possibility now exists to make a real change, without jeopardising the existing excellence of R&D clusters in the Greater SE.

    The second is to ensure that spending priorities aren’t defined entirely “top-down”, from Whitehall or Swindon. To be effective in driving productivity growth, government spending on R&D must be deployed in a way that maximises its effect to “crowd in” private sector investment. This needs to be done in a way that works with the grain of local economies, building on the existing business base and complementing their existing assets and endowments. This will need local knowledge that it is unreasonable to expect national agencies to possess.

    The current geographical imbalances in R&D spending across the UK are of long-standing, and they won’t change without a significant change in the way funding is allocated. One way of doing this would be simply to devolve government R&D funding to cities, regions and nations to make their own decisions in the light of their knowledge of local economies.

    There are potential objections to this approach. Given the very patchy nature of devolution across the UK – and especially in England – places may lack institutions with the analytical capacity and the legitimacy to set priorities and make good funding decisions. There’s a further risk that a lack of coordination, between different regions and cities, and between cities and central government agencies, leads to duplication, unhelpful competition and lack of coherence with national policy and priorities.

    The idea of an “innovation deal” provides a way forward that answers these potential objections. In an innovation deal, cities and regions would develop a strong institution to implement an evidence-based local innovation strategy. Such an agency should be based on a coalition of private sector actors, local government (e.g. Mayoral Combined Authorities) and regional R&D assets, and would give central government and its agencies confidence that there was a trusted local partner that would take responsibility for implementing an innovation strategy and developing the region’s innovation ecosystem.

    These agencies would give a robust mechanism whereby central government and cities and regions could work together to co-create a set of priorities for those new investments, many of which would be focused on translational research and skills development, that would both be most effective for improving regional productivity, while at the same time supporting national innovation priorities, such as the 2050 Net Zero target and a drive to reduce inequalities in health outcomes across the nation.

    In Greater Manchester, a private sector led partnership of business, the Mayoral Combined Authority, and universities has come together to create “Innovation GM”, with an invitation to central government to work with them to make R&D led levelling-up of regional productivity a reality. Other cities and regions are engaged in similar initiatives, so there is now a chance to inject a new, place-led, dimension into innovation policy.

    The substantial uplift in R&D funding announced in the October 2021 budget, together with the commitment to spend more of this uplift outside the Greater Southeast, offers a once-in-a-generation chance to make a material difference to the UK’s persistent imbalances in R&D spending. Innovation deals with cities and regions offer mechanisms for maximising the impact of this spending uplift on regional productivity.

    When the promise of economic growth is not fulfilled

    It’s been widely reported that the government is considering lowering the earnings threshold at which people need to start paying back their student loans. Let’s leave aside, for a moment, the question of whether it’s good economic sense for some graduates, at relatively early stages of their careers, to be facing very high effective marginal tax rates, or indeed bigger questions of the fairness of the current split in tax burden between young and old. The fundamental reason this change is having to be considered reflects the fact that, contrary to the expectations of economists and the experience of the rest of the post-war period, average wages in the UK have been stagnant for a decade. Worsening terms for student loans represent just one example of the way we’re starting to see the unfulfilled promise of continued economic growth having depressing and unwelcome real-world effects.

    The key number in understanding the UK’s byzantine student finance system is the so-called RAB charge. When a student goes to university, the Government fronts up a fee to the university – currently £9250 a year (except in Wales) – and in some circumstances advances a loan for living expenses. In return, the student agrees to repay the loan in monthly instalments that depend on their income, with any unpaid portion of the loan being written off after 30 years. So, the fraction of the money the government doesn’t get back depends on the average level of wages, projected 30 years into the future. The less wages rise, the higher the fraction of the loan the government doesn’t recover. This fraction is known as the RAB charge, and is counted as a cost in the government’s accounts.

    When the current student loan scheme was introduced by the Coalition government in 2012, the RAB charge was expected to be about 30%. As the years went on, this number increased: for 2014, it was estimated at 45%, and by 2020, the RAB charge stood at 53% – the government expected less than half of the student loans advanced that year to be repaid. The total advanced by the government under the student loan scheme that year was £19.1 billion, so under the original assumptions of the scheme, the cost to the government would have been £5.7 billion. Instead, under the current assumptions, the cost is now more than £10 billion, largely due to the failure of the average wage growth anticipated in 2012 to materialise.

    Much of the discussion around the cost of the student finance system now revolves around the calculated return to individual degrees, by subject and institution. The creation of a large data-set linking subject studied to income achieved makes it possible to identify those degrees that provide the highest and lowest financial returns. This is fascinating and useful data, but there’s a danger of misinterpreting it, to suggest that the problem of the high cost to the government of the current HE funding system is the result of bad choices by individuals, and of universities offering “poor value” degrees. Instead, the fundamental issue is a collective one, of the economy’s failure over the last decade to deliver the progressively rising wages we had come to expect in the post-war period.

    It’s clear from the data that if an able individual wants to maximise their earning power, they should do a degree in economics rather than, say, music. But from that, it doesn’t follow that the nation would be more prosperous if every student studied economics. There is an issue about how to find the optimum distribution of subjects studied that matches the changing needs of an economy, but the first order determinant of the overall cost of the HE funding system is the average wage that the economy can sustain. The problem we have isn’t low value degrees, it’s a low value economy.

    The reason wages have been stagnant is straightforward – the regular, year-on-year, increases in productivity we had become accustomed to in the post-war period stopped around the time of the global financial crisis, and have not yet returned. Labour productivity measures the value added, on average, by an hour of work, so given a relatively constant split between the reward to capital and labour, we would expect labour productivity and average wages to track each other quite closely. My first plot – taken from the Treasury’s March 2020 Plan for Growth – shows that this relationship has indeed held quite closely in the UK over the last twenty years.

    The relationship between labour productivity (output per hour) and total labour compensation. From HM Treasury’s Build Back Better: our plan for growth, March 2021.

    As the Treasury said in the March 2021 Plan for Growth, “In the long run, productivity gains are the fundamental source of improvements in prosperity. Productivity is closely linked to incomes and living standards and supports employment. Improvements in productivity free up money to invest in jobs and support our ability to spend on public services.” The corollary of this is that, without productivity growth, we see stagnant living standards, and tighter fiscal conditions, leading to poorer public services. The story of the swelling RAB charge for the student finance system is just one example of the malignant effect of productivity stagnation on public finances.

    It’s conventional wisdom to look back to the 1970’s as the nadir of UK economic performance. But measured by productivity growth, the last decade has been much worse. From 1971 to 2006, labour productivity grew at a remarkably steady rate of about 2.3% a year – and this provided the material for sustained growth in living standards. But since 2010, trend growth has remained stubbornly low – at less than 0.4% a year.

    Labour productivity since 1970, with the latest prediction from the Office of Budget Responsibility. Sources: ONS, OBR Economic and Fiscal Outlook October 2021.

    What are the chances of this dismal trend being broken? The forecasts of the Office of Budgetary Responsibility are based on the expectation of a modest upturn in productivity. The OBR has been predicting a recovery in productivity growth every year since 2010, and this recovery has so far failed to materialise. I’ve written a lot about productivity before (see e.g. The UK’s top six productivity underperformers,
    Should economists have seen the productivity crisis coming? and Innovation, research and the UK’s productivity crisis), and I’ll surely return to the subject. In the meantime, I don’t understand why the OBR think it will be different this time, particularly given the additional headwinds the economy now faces.

    Many – if not most – of the big economic transactions made, both by individuals and by governments, amount to shifting saving and consumption backwards and forwards in time. Whether it’s individuals getting a mortgage on a house, or saving for a pension, or governments borrowing money now on the basis of the expectation of future tax income, we are making assumptions about how our future income, at a personal or national level, will grow. Governments don’t repay the national debt – they hope the economy will grow fast enough to keep the interest payments manageable. If our assumptions about income growth turn out to be over-optimistic the ramifications are likely to be unpleasant. The slow unravelling of the 2012 student finance settlement is just one example.

    UK science after the spending review

    On October 27th, the UK government set out its spending plans for the next three years, in a Comprehensive Spending Review. Here I look at what this implies for the research and development budget.

    The overall increase in the government’s R&D budget is real and substantial, though the £22 billion spending target has been postponed two years

    The headline result is that real, substantial increases in government R&D spending have been announced. The background to this is a promise made in the March 2020 budget that by 2024/25, government R&D spending would rise to £22 billion a year. Of course, after the pandemic, the UK’s fiscal situation is now much worse, so it isn’t surprising that the date for reaching this figure has been set back a couple of years.

    I wrote earlier about the suspicions in some policy circles that the government might attempt to game the figures to claim that the target had been reached – On the £22 billion target for UK government R&D
    I’m glad the government hasn’t done this, and instead has set out a path which does deliver real, and substantial increases in R&D spending.

    This is made clear in my first figure, which shows the trajectory of R&D spending since 2008. The Comprehensive spending review delivers an increase next year very much in line with increases in previous years, but the increase from 2022/23 to 2023/4 is very substantial – and in fact would put R&D spending on the trajectory that would be needed to achieve the £22 billion target by the original date of 24/25. I understand that the slower increases after that date are connected with some technicalities about the path of the UK’s contributions to the EU Horizon R&D programme, but more on that below.

    Comprehensive Spending Review commitments for total government spending on R&D, in current money, compared with historical actual spending. Sources: ONS, October 2021 HMT Red Book.

    Of course, these figures are uncorrected for inflation – and given that we’re currently seeing a rate of price increases higher than we’ve seen for some time, this is likely to make a big difference. I’ve attempted to show the effect of that in the next plot, which shows both the historical and projected R&D spending expressed in constant 2019 £s. I’ve made the correction using the Consumer Price Index, and used the OBR’s latest central prediction of future CPI inflation (of course, this may turn out to be optimistic) to deflate planned future R&D spending.

    This plot shows that R&D spending stagnated in the early 2010’s, with a gently increasing trend beginning in 2015. In real terms R&D spending only recovered beyond the previous 2009 peak in 2018. The increase from 2022/23 to 2023/4, even after the inflation correction, is significantly greater than anything we’ve seen in the last decade.

    If we look ahead to 2026/7, by when the £22 bn nominal total is planned to be reached, we can expect the real value of this sum to have been significantly eroded by inflation. On this, rather uncertain, projection, we project a 47% real increase on the 2009 previous peak.

    Comprehensive Spending Review commitments for total government spending on R&D, correct for inflation by CPI, compared with historical actual spending. Sources: ONS, October 2021 HMT Red Book, OBR Economic and Fiscal Outlook October 2021 (future CPI predictions).

    All areas of R&D spending see real increases, but there’s slight shift in balance to applied and department research

    Even though most attention falls on the R&D money the government spends in universities through research councils and research block grants, this actually forms a minority of the government’s total R&D spending. Other departments – notably the Department of Health and Social Care and the Ministry of Defence – have significant R&D budgets focused on more applied research connected to their core goals. The Department of Business, Energy and Industrial Strategy holds the overall budget for the UK’s main funding agency, UK Research and Innovation, but this also includes the innovation agency Innovate UK, which has a more business focus, and various pots of money directed at mission-orientated research, most notably the Industrial Strategy Challenge Fund.

    This is illustrated in my next plot, showing planned R&D spending in real terms. This shows a gentle but significant rise in what the government now calls the UKRI core research budget – mainstream research supported by the research councils and national academies, and the block grant distributed to universities by Research England and corresponding agencies in the devolved nations. The innovation agency Innovate UK is part of UKRI, but has been helpfully broken out in the figures; although this is a relatively small part of the overall picture, as we’ll see this will see substantial increases.

    What isn’t clear to me, at the moment, is how the R&D spending currently ascribed to the rest of BEIS will be allocated. I believe this includes funds currently distributed by UKRI, but not included in the “core research” line, which would include the Industrial Strategy Challenge Fund and the Strength in Places fund. It also includes various public/private collaborations like the Aerospace Technology Initiative. We await details of how these funds will be allocated; as the plot makes clear, this is a very substantial fraction of the total.

    The other uncertainty surrounds the cost of associating to the EU’s research programmes, particularly Horizon 2020. The UK’s withdrawal agreement with the EU agreed to associate with the EU’s R&D programmes, as widely supported by the UK’s scientific community, the UK government, and our partners in Europe. But the final agreement with the EU has not yet been signed by the Commission, who are linking its finalisation with all the other outstanding issues in dispute between the UK and the EU, notably around the Northern Ireland protocol.

    I understand that the commitment has been made that, if association with Horizon is stymied by these entirely unrelated problems, the full amount budgeted for the Horizon association fee will be made available to support R&D in other ways. It’s no secret that some in government would prefer this outcome, and the significant scale of the funds involved may tempt some in the scientific community to support such alternative arrangements, though it may be worth reflecting on the likely solidity of that commitment, as well as stressing the non-monetary value of the international collaborations that Horizon opens up.

    Breakdown of Comprehensive Spending Review commitments for government spending on R&D by department/category, corrected for inflation. Source: October 2021 HMT Red Book, OBR Economic and Fiscal Outlook October 2021 (future CPI predictions).

    The relative scale of the increases becomes more clear in my next plot, where I’ve plotted the real terms increase relative to the 2021/22 starting point. This emphasises that in relative terms, the big winners from the budget uplift are the other departments – dominated by the Ministry of Defense – and the innovation agency Innovate UK. The Department of Health and Social Care – which holds the budget of the National Institute for Health Research – also does well.

    The increase in the UKRI core research line is real, but significantly smaller. This does indicate a shift in emphasis to applied research and development, including R&D in support of other government priorities. However, one shouldn’t overstate this – there’s a lot of inertia in the system and the UKRI core research budget is still a very large proportion of the total. As a fraction of total government R&D, UKRI core research is planned to fall slightly from 32% of the total to a bit less than 30%.

    Increases in spending on R&D by department/category, corrected for inflation, relative to 2021/22 value (index=100). Source: October 2021 HMT Red Book, OBR Economic and Fiscal Outlook October 2021 (future CPI predictions).

    R&D spending, place, and the “levelling up” agenda

    Government R&D spending in the UK is currently highly concentrated in those parts of the country that are already most prosperous – the Greater South East, comprising London, the Southeast and East of England. In our NESTA paper “The Missing Four Billion, making R&D work for the whole UK”, Tom Forth and I documented this imbalance. For example, London, together with the two subregions containing Oxford and Cambridge, account for 46% of all public and charitable spending on R&D, with 21% of the UK’s population.

    A large part of the focus of the government’s “levelling up” agenda should be on the problem of transforming the economies of those parts of the country where productivity lags. Government spending on R&D should contribute to this, by supporting private sector innovation and skills. Currently, though, the UK’s R&D imbalances work in the opposite direction.

    The Comprehensive Spending Review makes a welcome recognition of this issue, stating in paragraph 3.7:

    “SR21 invests a record £20 billion by 2024-25 in Research and Development (R&D). The government will ensure that an increased share of the record increase in government spending on R&D over the SR21 period is invested outside the Greater South East, and will set out the plan for doing this in the forthcoming Levelling Up White Paper. The investment will build on the support provided throughout the UK via current programmes such as the Strength in Places Fund and the Catapult network.”

    This is an important commitment. It is the substantial real increase in R&D spending that gives us the opportunity, for the first time for many decades, to have the prospect of raising the R&D intensity of the UK’s economically lagging cities and regions without compromising the existing scientific excellence found in places like Oxford and Cambridge.

    How much money should be involved? The £20 billion R&D spend planned for 2024/25 represents a £5 billion increase from the current year; the business-as-usual split would suggest a bit more than half of that increase would go to the Greater South East. So, to ensure that an “increased share” goes outside the greater South East, we should be aiming for an uplift of order £3.5 – £4 billion. As the title of our paper suggests, that is a sum on a scale that could make a material difference.

    How should the money be spent in a way that delivers the outcomes we want – more productive regional economies, leading to more prosperous and flourishing communities? Paragraph 3.7 mentions two existing programmes – “Strength in Places” and the Catapult Centres. I think these are good programmes that can be built on, but they are not likely to be sufficient in scale by themselves, so more will be needed. Here are some concrete suggestions:

  • Double the size of the Strength in Places fund, and streamline the administrative processes surrounding it.
  • Expand the existing Catapult Network, creating new centres to support innovation in a wider range of industries and sectors across the country, stimulating more demand from industry across the whole country to participate in an expanded range of Innovate UK programmes.
  • Earmark the entire uplift in the budget of the National Institute of Health Research to be spent outside the Greater South East, with a single focus on reducing the shocking health inequalities between and within regions of the UK.
  • Ensure that the majority of R&D in support of the Net Zero goal takes place outside the Greater Southeast, supporting the development of productive new industries, for example in hydrogen for decarbonising heavy industry, new nuclear power, carbon capture and storage including direct air capture, development of zero-carbon fuels (e.g. e-fuels) for aviation and shipping, and large scale retrofitting of housing and adaption of new build to zero-carbon standards.
  • Use the uplift in R&D in support of defense and the security services – particularly in artificial intelligence and cybersecurity – to nucleate new digital clusters outside the Greater Southeast.
  • We await further details of the government’s proposals in the forthcoming Levelling Up White Paper. In my view, to achieve the government’s goals, we need to reconsider how decisions are made about R&D spending. Good decisions about the kinds of R&D support that work with the grain of existing local and regional economies need local knowledge of the kind that it is unreasonable to expect policy makers based centrally in Whitehall to have.

    Instead, I hope that the Levelling Up White Paper will create structures through which policy makers in central government and its agencies can work with more local and regional organisations in “Innovation Deals”, to co-create and research priorities that are both appropriate for specific places but also contribute in a joined-up way to national priorities. The local partners in these Innovation Deals should be credible, representative organisations bringing together the private sector, local government (e.g. Mayoral Combined Authorities in our big cities), and public sector R&D organisations, including universities.

    What should government R&D be for?

    By focusing too much on whether the government is going to hit or miss its target of £22 billion R&D spending, we forget that the purpose of R&D spending isn’t just to hit a numerical target, but to support some wider goals, to help solve some of the deeper problems that the country faces. I’d list those goals, not necessarily in order of importance, as follows.

  • Restoring productivity growth to the economy as a whole. Since the global financial crisis, productivity growth has dramatically slowed down, leading in turn to stagnant wages and living standards, and to a difficult fiscal situation that produces pressure on public services.
  • Raising the productivity of the UK’s economically lagging cities and regions. In particular, the UK’s second tier cities underperform relative to their counterparts in Europe, and their economies are not strong enough to drive the economically failing de-industrialised towns in their peripheries.
  • The innovation needed to make the wrenching economic transition to a net-zero energy economy by 2050 economically affordable and politically viable.
  • The health-related research that’s needed to underpin a health and social care system that is affordable, humane and sustainable for an ageing population, learning the lessons from a pandemic which is not likely to be the last one.
  • The research needed for our defence and security services to maintain a technological edge, to keep the nation secure in an increasingly hostile world.
  • I think the settlement of the science budget in the Comprehensive Spending Review takes us in the right direction. It’s a good settlement for the science community, but they aren’t its ultimate beneficiaries, and to achieve these goals we will need to do some things differently. In the words of Anthony Finkelstein, “We – ‘the science community’ – have done a deal. The sustained increase in R&D funding we have secured over several budgets is firmly based on a reciprocal promise: that we will deliver for UK prosperity.”

    Edited 8 November, to correct graphs 1 & 2, which originally had 2027 rather than 2026 for the new target date for £22 bn

    With the Commons Science Select Committee on “The role of technology, research and innovation in the COVID-19 recovery”

    The House of Commons Select Committee on Science and technology visited Manchester on 21st September, and I was asked to give oral evidence, with others, to its inquiry on “The role of technology, research and innovation in the COVID-19 recovery”. The full, verbatim, transcript is available here; here are a few highlights.

    My opening statement

    Chair: Perhaps I can start with a question to Professor Jones. Everybody around the world associates Manchester with technology over the ages, but if we look at the figures, the level of research and development spending investment, in the north-west at least, is below the national average. Give us a feeling for why that might be and whether that is inevitable and reflects things that we cannot help or what we should be doing about it, bearing in mind that we will be going into a bit more detail later in the session.

    Professor Jones: On the question of the concentration of research, this is something that has happened over quite a long time. The figure that I have in my mind is that 46% of all public and charitable R&D happens in London and the two regions that contain Oxford and Cambridge. There is no doubt—it is not just a question of Manchester—that the distribution of public research money across the country is very uneven.

    That has been a consequence partly of deliberate decisions—there has been a time when the idea has been, particularly when funding seemed tight, that it would be better to concentrate money in a few centres—but when it is given out competitively without regard for place, there is a natural tendency for concentration. Good people go to where existing facilities are. That allows you to write stronger bids and in that case there is a self-reinforcing element. That process is played out over quite a long time. It has got us to the situation of quite extreme imbalance.

    I have been talking there about public R&D. It is very important to think about private R&D as well. There is an interesting disparity between where the private sector invests its R&D money and where the public sector does. One finds places like Cambridge, which are remarkable places, where there is a lot of public sector R&D but then the private sector piles in with a great deal of money behind that. Those are great places that the country should be proud of and encourage. Particularly in the north-west, in common with the east midlands and west midlands, too, the private sector is investing quite a lot in R&D, but the public sector is not following those market signals and, in a sense, exploiting what in many ways are innovation economies that could be made much stronger by backing that up with more public funding.

    On excellence and places

    Graham Stringer: This is my final question on this section. The drift of great scientists to the golden triangle has been going on for a long time. Rutherford discovered the nucleus of the atom a quarter of a mile down the road in what is now a committee room, sadly. Rutherford left Manchester and went to the Cavendish afterwards. Do you think it is possible to stop that drift, because money also follows great scientists as well as institutions? The University of Manchester is a world-class university, but do you think it is possible to stop that drift and get University of Manchester, and some of the other great northern universities, up the pecking order to be in the same region as Imperial, Oxford and Cambridge?

    Professor Jones: Yes, there is scope to do that. You mentioned Rutherford. I used to teach in the Cavendish myself, so I have made the reverse journey.

    The point that is important, if we talk about excellence, is that people loosely say Cambridge is excellent. Cambridge is not excellent. Cambridge is a place that has lots of excellent people. The thing that defines excellence is people, and people will respond to facilities. If we create excellent facilities, we create an excellent environment, then excellent people from all over the world will want to come to those places.

    It is possible to be too deterministic about this. One can create the environment that will attract excellent people from all over the world. That is what we ought to aim to do if we want to spread out scientific excellence across the country.

    Graham Stringer: To simplify: the answer is for investment in absolutely world-class kit in universities away from the golden triangle?

    Professor Jones: It is world-class kit, but it is also the wider intellectual climate: excellent colleagues. People like to go where there are excellent colleagues, excellent students. That is the package that you need.

    On “levelling-up” and R&D spending

    Chair: As you say, clearly it would not be a step towards achieving the status of a science superpower if we were reducing core budget, so the opportunity to have a greater quantity of regional investment comes from an increase in the budget. Is it fair to infer logically from that that, of the increase, you would expect a higher proportion to be regionally distributed than the current snapshot of the budget?

    Professor Jones: Yes, absolutely. If we take the Government at their word about saying that there are going to be genuine increases in R&D, this does give us a unique opportunity because we have had quite flat research budgets for a couple of decades. Up to now we have always been faced with that problem: do you really want to take money away from the excellence of Oxford and Cambridge to rebalance? That is a difficult issue because, as I said in my opening remarks, Cambridge is a fantastic asset to the UK’s economy. But if we do have this opportunity to see rising budgets, if we are going from £14.9 billion to £22 billion—that is £7 billion of rise that has been pencilled in—it would be very disappointing if a reasonable fraction of that was not ring-fenced to start to address these imbalances, specifically with the aim of boosting the economy of those places with productivity that is too low needs to be raised.

    I think that tying it very directly to the Government’s goals of levelling up, increasing the productivity of economically lagging regions as well as their other very important goals of net zero, would be entirely reasonable.

    Chair: That is literally and specifically what you are describing, is it not—levelling up, in the sense that you have said you do not want to take down the budgets of existing institutions, you want to increase the others? That is levelling up.

    Professor Jones: Indeed.