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Budget 2024: the Treasury should not underestimate the power of public R&D spending

  • 24 October 2024
  • By Sarah Stevens

This HEPI blog was kindly authored by Sarah Stevens, Director of Strategy at the Russell Group.

It is no secret that the fiscal envelope for the upcoming Budget and 1-year Spending Review is looking extremely tight. Ever since the election, the government has been at pains to emphasise the difficult decisions that will be needed to get a grip on public spending and address the £22bn overspend identified by the Treasury.

Investment in ‘unprotected’ areas, which might include higher education and research, is likely to be particularly vulnerable. A range of sectors will be making the case about why further investment is crucial to supporting the new government’s priorities, but few will have as strong a case to make as universities about the role they can play in transforming the UK’s economy and society for the future. From training a resilient workforce for the future, to harnessing new technologies and innovations effectively, and delivering research breakthroughs to advance health care, tackle climate change and rejuvenate business, universities can be the engine of the UK’s growing economy.

The sector should be particularly confident about emphasising the positive returns of public research and development (R&D) investment which are well-documented. But there is a risk the impact of R&D investments is being under-valued in the government accounts – with knock-on implications for ministers’ decision-making on where to invest to achieve a maximum return.

A recent report, which the Office for Budget Responsibility (OBR) put out in August, sets out how public investment is accounted for in the OBR’s fiscal forecasts. It is a highly technical topic, but important. The report describes how the OBR treats any capital investment the government makes (from filling in potholes to funding new research labs) as having a rate of return not much different to that in the economy as a whole (at around 9%).

Yet the research evidence shows R&D is recognised as having a much higher rate of return than average across government spending lines. A definitive literature review by Frontier Economics and commissioned by the Department for Science, Innovation and Technology (DSIT) found that the average rate of return to public R&D is around 20%, a comparatively high return for public projects.

In addition, the OBR report assumes that the bulk of government spending does not ‘crowd in’ private sector investment. But new research from the National Centre for Universities and Business shows £1 of public R&D investment stimulates between £3.09 to £4.02 of private R&D investment in the long term, a much greater leveraging effect than previously calculated. Importantly, around 60% of this ‘crowding in’ effect is realised in the first three years, so early public investment in R&D by this government will have a significant impact on stimulating private investment, with knock-on consequences for economic growth and productivity. The latest Higher Education Business and Community Interaction (HEB-CI) data show that Russell Group universities are especially effective at catalysing this private investment, directly leveraging £4.3bn from the private sector in 2022-23.

Continued investment in public R&D will be key to delivering the government’s growth mission as well as its new Industrial Strategy. Future Ready, our latest report on the role of research-intensive universities in delivering the Industrial Strategy, describes how universities provide a bridge between public investment in R&D, infrastructure and skills, and private innovation, creating thriving knowledge-based clusters across the regions and nations.

As the government prepares for the Budget and for the longer-term Spending Review next year, we urge them to recognise the impressive return on investment that public R&D provides, and how this could play a pivotal role in delivering on the government’s stated missions. 

Harnessing the full capabilities of the higher education and research sector would incentivise more private investment into R&D, create more high-growth spinout companies, provide a high-quality skills pipeline for industry and the public sector, and leverage universities’ global reach to attract new FDI into their localities. In a nutshell: it would create more opportunities, better jobs and higher quality public services supported by a dynamic, more productive economy.

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1 comment

  1. albert wright says:

    I think Sarah Stevens is being a bit too confident when claiming the crown for public sector Research and Development performance saying “… the positive returns of public research and development (R&D) investment which are well-documented.”

    It seems to me, private sector investor performance outpaces public, both in terms of its size and success.

    The claim that “£1 of public R&D investment stimulates between £3.09 to £4.02 of private R&D investment in the long term,” seems hard to prove and I wonder whether the figures need to be reversed. The National Audit Office often produces reports that indicates public sector investment has a very low return and sometimes no return at all.

    However, I do agree that much more can be achieved when public and private work together.

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