The Innovation Impact of UK Budget Cuts

Budget cutting fever has officially reached the UK.  Last week Chancellor of Exchequer George Osborne announced that the government would be cutting spending by £83 billion (on average 19 percent of agency budgets) and increasing taxes by £29 billion a year to reduce Britain’s £245 billion deficit.  As usual, there is no consensus amongst economists what the economic effects of the budget cuts will be.  Some argue doing so is a timely and necessary step towards austerity while others warn with the UK economy expected to only grow at a lackluster rate of 1.2 percent this year now is not the time to risk damping demand through budget cuts and the job cuts associated with them.  But as ITIF has argued in the past (here, here and here), when it comes to deficit reduction, the devil is in the details.  While fiscal discipline can help spur growth, it’s only if it doesn’t come at the expense of key investments to support innovation and productivity growth.  Sacrificing programs and policies that support innovation does more harm than good.  So how will the recent budget cuts impact innovation in the UK?

The majority of the cuts are in social programs, including increasing the retiring age to 66 and reducing welfare benefits, and military budget cuts.   (Depending on how the latter are structured they could harm innovation if they cut defense technology and research.)   However, the Department of Business Innovation and Skills (BIS) – which provides the lion’s share of science and research funding– will see its budget cut by around 25 percent by 2015.  It’s difficult to know exactly what the impact decreasing BIS’ budget will be on British innovation because BIS has a number of responsibilities, not all of which are directly associated with science and innovation.  For example, the largest share of the budget cuts is directed at BIS’ higher education spending.  The department’s direct commitments to universities will be cut by 40 percent or £2.9 billion, yet these funds were created to reduce the cost of tuition not specifically to spur innovation.  Essentially the funds served as a subsidy to students which will now be eliminated.  It’s not clear what the impacts on innovation will be.  If fewer students go into science fields or universities have to cut research spending the impact could be significant.  If on the other hand students end up just paying higher tuition the impacts could be small.   Moreover, funding is allocated by subject and the government has committed to maintaining current funding levels for STEM fields. 

Science and R&D funding have also been spared from the heaviest budget-cutting axe.  While some predicted BIS’ R&D budget would be cut by as much as 20 percent, the new government has proposed keeping it constant at £4.6bn over the next four years (although after adjusting for inflation this equals a decline in real dollars by 10 percent).  Even these cuts though are likely to negatively affect the UK economy: the UK government already invests less than several other countries on R&D.  A recent study by ITIF found that the UK ranks 18^th out of 41 developed and developing countries for government funded R&D.

It is less clear how other budget cuts will affect BIS, for example the department’s administration budget has been reduced by 40 percent in order to “eliminate low-value expenditures”.  What actually constitutes “low-value expenditures” is up in the air.  If grant application practices are streamlined and BIS moves content online to bring down costs, all the better.  But much of BIS’ work is to provide small businesses with information on training grants, R&D tax credits and public-private partnership opportunities.  Budget cuts that impact BIS’ ability to promote research and innovation amongst England’s small businesses are likely to hurt England’s ability to compete globally. 

Other programs cuts are likely to impact the UK’s innovation capabilities.  “Train to Gain”, a program created in 2007 to help cover some of the costs of employee training, is scheduled to be completely eliminated.  While the government plans on increase funding for direct apprenticeships and other forms of worker training, Train to Gain has played a sizeable role in increasing the skills of the British workforce.  Over the last two years the program has helped over 143,000 businesses and almost one million workers.  With developed countries like the UK losing low-skilled employment to fast-growing developing countries, it is a poor strategy to reduce worker training expenditures on behalf of budget concerns.

The harsh reality is that it is likely most developed nations will face budget pressures for as far as the “eye can see.”  But cutting investments in the future to cut budget deficits can hurt, not help future generations if the investments would be likely to produce a significant return on investment.  As ITIF has shown, expanding the U.S. research and development tax credit would actually be budget neutral over the next 15 years, but would create jobs and added incomes for workers.  Sacrificing investments like the R&D tax credit and investments in research and other foundations of innovation would be penny-wise and pound foolish.