Forget the budget, we need to be thinking longer-term

The UK’s impending general election comes at a time minimal economic growth, with forecasts predicting anything from stagnation to modest growth.

The Bank of England (BoE) and other economic forecasters anticipate a challenging period ahead, with growth projections significantly lower than the pre-financial crisis average.

Amidst these conditions, political parties are focusing on revitalizing the economy, with each party due to be presenting their manifesto as a blueprint for prosperity. The economic strategies of these parties, including their growth plans and innovation policies, will be central to their campaigns​​.

Strategic Bets for Economic Growth

The UK’s economic landscape is marked by challenges, including inflation, unemployment, and the impact of higher interest rates on homeowners. Despite these hurdles, there are opportunities for growth, particularly in sectors prioritised by political parties, such as technology, green energy, manufacturing, and services.

“The Conservatives seem on the backfoot right now so have the opportunity to be bolder in their growth pledges,” says Luke Hamm, UK Managing Director at Source Advisors, previously known as GovGrant in the UK.

Source Advisors, who has been in the market providing R&D tax relief and Patent Box support since the early days of the schemes, is well placed to understand the innovation ecosystem and how government policy can influence how businesses invest for growth.

Hamm points out that the current political discourse is heavily “slogan-driven” without much detail on specific policy commitment ahead of the manifestos. He predicts that innovation will likely feature in all parties’ narratives as the election approaches but notes a lack of clarity regarding the sectors or technologies each party aims to prioritize.

‘We need the parties to signal far more strongly what the best bets are going to be instead of headline grabbing waffle. My guess is Rishi ‘sticks to the plan’ of high skilled workers and Kier continues ‘the plan has failed’ so let’s build and be green’.

The current government has made efforts to address economic stagnation through initiatives like the cut in social security contributions and the nearly 10% increase in the minimum wage, aimed at boosting household incomes. The government’s transition from its Industrial Strategy to a Plan for Growth also signifies a shift towards supporting job creation and fostering growth in emerging industries.

However, specifics on how the Conservative Party plans to create high skilled, high paid jobs is not there whereas Labour’s outlined mission give some clues.

Labour Party strategy

The Labour Party, under the leadership of Keir Starmer, has proposed a range of policies aimed at revitalizing the UK economy. Their focus is on scrapping zero-hour contracts, building more homes, and significantly investing in green technology, even though this has now been watered down.

The party plans to introduce a Green Program Priority Plan, which involves borrowing an additional £20 billion annually to fund capital spending on net zero priorities. This ambitious initiative reflects Labour’s commitment to addressing climate change while creating jobs and stimulating economic growth.

Furthermore, Labour intends to increase taxes on non-domiciled residents to fund public services, showcasing a strategy that leans towards greater equity in tax contributions. Another notable policy is the proposition to apply Value Added Tax (VAT) on private school fees, aimed at raising funds for public services.

Akshay Thaman, IP & Policy Lead at Source Advisors, says Labour is “keeping their cards close to their chest”.

“They are treading carefully whilst being ahead in the polls. They do not want to risk losing this election and the slight row-back on climate policy is an indication of that, as the public are more concerned about short-term energy security than long-term emission control,” he says.

“We know that the Labour Party intend to make their first 100 days in power count (should they be elected) and their manifesto will hopefully reflect their intentions.”

Innovation as the Engine of Growth

Innovation is poised to play a pivotal role in economic recovery, with political parties outlining various strategies to support research and development (R&D), digital infrastructure, and education.

The debate over funding innovation, whether through direct government investment or alternative mechanisms, alongside the use of tax incentives and financial instruments to encourage private sector R&D, could become an interesting differentiator in both parties’ strategies.

The Labour Party has outlined several strategies emphasizing innovation, R&D, and education to propel economic recovery and growth. The party aims for at least 3% of GDP to be invested in R&D across the public and private sectors and proposes the establishment of a new Industrial Strategy Council to inform policymaking. ​

“Labour is likely to choose a funding option that supports innovation that wouldn’t have happened otherwise which may create a greater emphasis on funding through higher education and grants,” says Hamm.

At their annual conference, Labour pledged to increase business investment as a share of economic output and create a national wealth fund to leverage private investment, aiming to fast-track planning processes for priority growth areas such as battery factories and 5G infrastructure.

The government, meanwhile, has focused its R&D efforts around support for entrepreneurship, creating a conducive environment for business investment, and enhancing the nation’s global standing as a science superpower.

Additionally, the Conservatives have overhauled the R&D scheme to ensure taxpayer money is spent wisely and  broadening the definition of R&D to better support future R&D needs such as cloud computing.

“The Government will have to balance business and public investment in the short-term given the cost-of-living crisis and poor economic growth. That tension is starting to manifest and may intensify if economic conditions continue to stay stagnant or worsen.,” adds Thaman.

How will it all be funded?

The UK government employs various mechanisms to fund innovation, with two primary approaches being direct government investment such as Innovate UK and indirect methods tax incentives.

Government Investment through HMRC involves tax incentives such as R&D tax credits, where HMRC play the vital role of keeping the money moving with the right balance of speed, process and effectiveness.

“That R&D reliefs are more accessible, without the need of a competition style application, relatively tech agnostic and historically gives more certainty in funding. There has been a needed change to how the incentives is policed and now feels a safer strategy for either party,” says Akshay Thaman.

Then there is Innovate UK. As part of UK Research and Innovation (UKRI), Innovate UK is the national funding agency investing in science and research in the UK.

It provides grants, loans, and other financial support to encourage innovation that will drive productivity and economic growth. Innovate UK focuses on supporting businesses in developing new products, processes, or services that have the potential to generate significant economic impact.

Grants provided by entities like Innovate UK represent direct financial support to businesses for specific innovation projects. These grants are particularly important for early-stage companies that may not have sufficient resources to invest heavily in R&D.

“In addition to what we already see, if feels like the British Business Bank will be a chip that could get played here and thinking how the government uses them as a deployment mechanism,” says Luke Hamm.

“[The bank] has the opportunity to take learnings from the grant system, particularly Innovate UK where we need to avoid bureaucracy as well as HMRC to avoid fraud and abuse.”

Trusting the Data and Future Projections

Economic forecasting and policy planning rely heavily on credible data sources. The accuracy of these forecasts, including GDP growth rates and productivity metrics, is critical for developing effective growth strategies.

As parties leverage economic data to justify their policies, the assumptions underlying long-term projections will be scrutinized for their feasibility and reliability​​.

“My greatest fear in the next election is that so often the data and statistics are flawed. Even when they have them, they are engineered for a purpose and the spin factor makes it impossible for good solid policy or public opinion to be made,” says Hamm.

Hamm cites R&D fraud stats as one example. “They are a complete nonsense but have now been agreed by the National Audit Office, The Government have and always will be, regardless of which party it is, pivotal to economic health and investment so we must get to a point where the data is better.”