06What needs to change
Creating the conditions for new economy firms to start and grow – both in manufacturing and services – is central for the success of a UK economy that has seen investment and productivity flatline in recent years. While there has been a long list of policies designed to encourage innovation, many of these have been poorly designed, with the focus too narrow in terms of sectors and approaches to innovation. They have also largely ignored the role of place.
Cities are where the UK’s new economy is concentrated. This is because of the benefits they offer to emerging sectors – namely access to large pools of skilled workers and tacit knowledge through face-to face interactions. But a number of large cities outside London are not offering the benefits they should to new economy businesses. Given this, policy needs to have a much greater focus on making them, and their city centres in particular, more attractive places to do business to encourage the creation and exchange of knowledge. The aim should be to get skilled people to interact and share this knowledge.
Given the limited public funding available, the Government should build on its selection of Birmingham, Manchester and Glasgow as the Innovation Accelerators by focusing on improving the performance of these three places. Following the approach of the CHIPS and Science Act, which will allocate $10 billion to increase innovation in 20 places,58 the UK should create a £14.5 billion growth package for these three cities over 10 years. This would help achieve the Levelling Up White Paper’s ambition of making them internationally competitive and should include:
- Allocating £1 billion from the proposed £7 billion increase in annual R&D spend outside the Greater South East to these cities. The money should be used to increase funding for research in the highest-performing university in each city, so continuing to back excellence – the leading universities are all in the top 15 in the 2021 rankings of the research excellence framework. It would also build capacity to help increase the flow of knowledge from the universities to the private sector. Given the lack of understanding about how these mechanisms work to boost new economic activity, evaluation should be incorporated into this policy from the beginning.
- A £500 million package of support to expand the amount of commercial space in these cities’ centres, funded from the Strategic Programmes budget (previously the National Productivity Investment Fund). This should be used to overcome market failures that have prevented the private sector from developing this space, so unlocking private investment.
- Giving all three places TfL-style powers so they have greater control over services and the ability to use revenues to invest in improving their transport systems.
- For Greater Manchester and the West Midlands, extending the City Region Sustainable Transport Settlement beyond 2026/27 for a further five years (an additional £1 billion each), plus a similar commitment to Greater Glasgow. This should be combined with money to bring forward development of brownfield land to increase residential densities and support the viability of public transport networks.
- Beginning negotiations on creating a similar combined authority structure in the Greater Glasgow area, headed up by a metro provost.
- The Scottish Government should work with this new Greater Glasgow combined authority to set out a single departmental-style spending settlement for the city region, in the way the UK Government has committed to explore for Greater Manchester and the West Midlands. Legislation should also be amended to allow all areas to introduce local taxes, such as a tourist tax. If introduced, evidence should be collected on these changes with a view to rolling them out across other areas if they are successful.
To support the new economy in these cities and elsewhere, the Government should also:
- Increase both public and private investment in skills spending, and ease restrictions on skilled immigration, by:
- Reversing the cuts to public skills spending seen over the past 12 years and setting a target, as has long been on with R&D spending, to increase skills spending from 5 per cent of GDP to 7 per cent, as is currently the case in Sweden.
- Introducing a human capital tax credit to match the well-established R&D Tax Credit, which would attempt to reverse declining business investment in training.
- Designing future changes to the apprenticeship levy to encourage further business investment in skills. This should include introducing greater flexibility for reskilling as well as upskilling, spending on pre-apprenticeship training and reducing administration for SMEs.
- Expanding the period of the ‘graduate visa’ from two to five years and guaranteeing the policy will not be reverted in the next decade. This would make the post-work visa more competitive compared to international peers like Australia (up to four years).
- Deliver its commitments to increase R&D spending, and set out a spatial strategy to guide this, by:
- Increasing its R&D target from 2.4 per cent of GDP to the OECD average of 2.7 per cent by 2027.
- Setting out a strategy for where and how it will spend the remainder of the increased R&D money outside of the Greater South East.
- Extending the Strength in Places Fund to continue providing specific support for innovative activities across the country, with funding continuing to come from the Strategic Programmes budget.
- Expand the R&D-style tax credits to expenditures associated with innovative services. The inclusion of data and cloud computing in the R&D definition in 2021 was a step in the right direction. However, the Government should broaden this definition to include innovative service activities that depend on software and other intangibles.