Innovation priorities for the spending review

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Last week Rachel blogged about some of the trade-offs the government faces in the upcoming Spending Review. She argued that more government spending must be prioritised towards those areas that drive growth and boost the long-term competiveness of the UK. One of these areas is innovation.

Innovation is vital to the long-term competitiveness of individual firms, and the UK economy as a whole

But innovation is risky, and requires resources that companies – particularly SMEs – do not always have access to

As a result, Government must step in as an active partner

This is something that government already does, and the focus of support is right, but the level is insufficient

Despite recent new initiatives, the level of support for innovation is low, especially when compared with support for science.

Both science and innovation require some public investment to deliver the optimal level of total investment. But while the UK's science base is highly successful, as an economy we have not always succeeded in capitalising its outputs. Innovation is necessary to do this. Without sufficient support for innovation, we risk an economy that is “all engine, no transmission”.

Recommendation: The TSB – and its budget – should be moved into the science ring-fence to create a protected “science and innovation” pot of approximately £5bn at current levels of funding. We would advocate a modest increase to the TSB's budget of £43mn resource funding p.a., but at the very least the innovation budget should be protected.

Additional money for innovation should be used to strengthen the Catapult centres and increase support for SMEs:

Two of the key barriers companies face when innovating are access to facilities and expertise. Catapult centres help address this, but we have concerns that they neither have sufficient funding to keep their facilities at the cutting edge, nor to keep their research focused on innovation (rather than focusing on more commercial projects).

Recommendation: Double operational funding for the High Value Manufacturing Catapult

Almost all barriers to innovation are felt most acutely by smaller companies; as such it is important that there is sufficient support directed towards SMEs. The Smart grant successfully boosts innovation in smaller companies, but despite recent increases in budget – the grants are oversubscribed, “highly competitive” and consequently have a low success rate of only around 20%.

Recommendation: The funding for Smart should be increased from £40mn to £50mn to make the success rate more comparable with other TSB schemes.

Universities, Catapult centres and other research institutes offer facilities and expertise and can be a vital support for innovative companies. Innovation vouchers are an effective way to increase SMEs' access to the research base. The scheme has recently been reintroduced but it could be better aligned with other innovation support.

Recommendation: extend Innovation Vouchers to align them more closely with the technologies currently covered by Catapult centres; the budget should be increased by ½mn p.a. for each of the Catapult areas not currently covered, at a total cost of £3mn p.a.

The TSB must remain the responsible agency for innovation support

The TSB is currently the primary agency for dispensing innovation support. In general it does so successfully, despite some concerns about relatively complicated application processes. As such we have some concerns about possible changes to the innovation support landscape.

Proposals to integrate the TSB into the Business Bank risk adding an unnecessary additional layer of bureaucracy to application processes for innovation support if access to support was dependent on a generic diagnosis of needs.

The TSB is not a natural candidate for inclusion within the Business Bank. It offers different support from some of the other programmes that might be included, meaning it is not clear how companies would benefit from a unified front end.

Recommendation: The TSB should remain separate from the Business Bank

The move towards delivering innovation support through a national agency was a positive one, as it removed confusing regional support and reduced the potential for duplication of efforts – something that is particularly important given the small budget for innovation. As such, we are concerned that innovation funding could be channelled through LEPs. LEPs are likely to develop expertise that could help to shape and inform how the TSB allocates its funding, but the ultimate decision should lie with the TSB, which has oversight of national priorities.

Recommendation: Innovation support should be distributed at a national level

Future sector strategies must deliver maximum value for money

The growth partnerships and resultant sector strategies are an important component in addressing some of long-term challenges faced by UK industries. But we need to ensure the spending prioritised through sector strategies delivers maximum value money for the economy as a whole. A budget of £1.6bn has been set aside for sector strategies, but – after the release of only four out of eleven strategies – most of this has already been committed, leaving very little in the pot for the remaining strategies.

Recommendation: Decisions around sector strategies will face the same squeeze as everything else. Unless it is prepared to increase the funds available to sector strategies post 2015/16, the government should wait until all strategies have been produced to understand which proposals will garner the highest return for the economy and make some tough prioritisation decisions.

It is right that sector strategies should interact with the support the TSB offers and that some of the TSB's competitions should be influenced by these priorities, but the strategies should not imply new constraints on the competitions the TSB runs. In order to provide flexibility for the TSB to support new technologies and supply chains that are not directly covered by sector strategies, decision-makers at the TSB must ultimately be the ones who allocate competitions.

Recommendation: The TSB must also be allowed to run its competitions independently of the government's sector strategies


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