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GovGrant CFO Steve Phillips reflects on the 2018 Budget and its impact on innovation and R&D

As is usual, politics took centre stage following the 2018 Budget. Labour was under scrutiny after the Shadow Chancellor, John McDonnell, indicated that, unlike his boss, he would not oppose the government’s personal tax changes. In the Times, leading economist David Smith noted that while the budget ‘must be judged as a political success,’ the level of public debt continues to be a cause for concern.

The negative effect of Brexit on growth, with GDP 2 per cent to 2.5 per cent lower than it would have been, as well as a gloomier productivity plus extra cash for the NHS has produced a lot more red ink for borrowing, adding up to nearly £120 billion of additional borrowing over four years.

The UK’s poor productivity compared to peers has long been a bugbear of David Smith and many other economists and policymakers. In 2016 (latest figures) the UK lagged the G7 by 16.3%. Solving the UK productivity puzzle has long been an aspiration for the Chancellor, and some of his budget measures are clearly designed to help.

On enterprise taxes, the Chancellor is to increase the annual investment allowance to £1m for all investment in plant and machinery between Jan 2019 and December 2021, in order to encourage investment and stimulate productivity. However, the measure is a curate’s egg, as according to the IFS, fewer than 30,000 businesses spend more than the current £200K threshold anyway.

New non-residential structures and buildings will be eligible for a 2% capital allowance where all the contracts for the physical construction works are entered into on or after 29 October 2018. This is designed to improve the international competitiveness of the UK’s tax system and encourage investment.

Turning to innovation, there were some subtle indications form the Chancellor around driving technology and the value of intellectual property, which are hopefully laying the groundwork for further action post-Brexit.

Additional support for cutting edge science and technologies came in the form of £1.6 billion to, as ministers said: “strengthen the UK’s global leadership in science and innovation and reinforce the UK’s commitment to international scientific collaboration. This forms part of the government’s £7 billion investment in research and development since 2016.

The government singled out a number of specific projects:

  • £121 million for Made Smarter to support the transformation of manufacturing through digitally-enabled technologies, such as the IoT and virtual reality
  • £78 million for the Stephenson Challenge, supporting innovation in electric motor technology, making vehicles lighter and more efficient than ever before
  • £235 million to support the development and commercialisation of quantum technologies, including £35 million to support a new national quantum computing centre.

One felt that this highly fiscally conservative Chancellor was inherently happier announcing investment in R&D and innovation, where the ROI is clear, than he was acceding to Number Ten and finding a further £20bn a year for the NHS.

A tweet from the IFS shortly afterwards said that by 2023, the NHS will account for 38% of public spending. As one wag pointed out, the UK is becoming a health service with a State tacked on.

Nevertheless, with a potential General election in the offing next year, and despite the Chancellor’s misgivings, this budget was firmly aimed at the consumer, with measures aimed to create a ‘feel good’ factor rather than one that strategically places the UK economy at the heart of global innovation.

With the backdrop of Brexit, now is the right time for bolder moves from the Government. The new funding for business and innovation in the budget was focused on funds and grants which is a more expensive and less transparent delivery mechanism than some of the existing channels such as the R&D Tax Credit scheme.”

HMRC ‘s own research found that £2.9bn of tax relief claimed in 2015-16 stimulated up to £6.8bn of additional R&D investment. In other words, it makes sense to invest in R&D, especially as the UK need to work harder than ever after Brexit to remain a destination of choice for the technology businesses of the future.

For those of us who believe that the UK’s economic future is predicated by its reputation for nurturing and enhancing innovation and technology, more substantive action is required next year.

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