Research & Development Expenditure

During a period of post-financial crisis downturn in the wider UK economy, many businesses determined that the long-term cost of reducing R&D expenditure would outweigh the short-term benefits. In some incidences, R&D expenditure cuts would have meant postponing or cancelling prospective or ongoing projects at the time, which would have ultimately risked wasting a large amount of capital already committed to said projects. Conversely, some organisations felt the need to reduce business expenditure in order to safeguard margins and stockpile capital so as to avoid insolvency, spiralling debt and so forth. However, depleted expenditure in the business sector was largely offset and balanced out by rising expenditure by the government, subsequent to an immediate period of post-crash austerity; higher education research departments; and PNPOs. However, total R&D expenditure declined by 0.7% in 2012 as the UK economy deteriorated further; this was, notwithstanding what will presumably be a drop in R&D spend amid the COVID-19 (coronavirus) pandemic, the second recorded annual fall in R&D expenditure since the turn of the millennium. In absolute terms during 2020, business enterprise R&D expenditure declined by 2.1% while expenditure by research councils plummeted by an exceptional 21.8%. While expenditure from the government rose, as departmental bodies attempted to offset economic downturn by investing in R&D initiatives, and while spend by PNPOs correspondingly rose, this was not enough to inflate total R&D expenditure and prevent a collective decline over the year.

In 2013, the UK economy entered a recovery stage and a consequent surge in business confidence restored organisation's faith in the UK's investment landscape, resulting in a propensity to spend on R&D; R&D expenditure grew by 6.6% in 2013 alone. This trend continued through 2014, with R&D expenditure rising by 5.3% as more businesses became more confident, resulting in more organisations investing in the development of avant-garde products. In 2015, 2016 and through 2017, R&D expenditure grew for a further three consecutive years, at respective annual rates of 3.9%, 5.4% and 4.8%; this growth was once again primarily driven by the growth in R&D expenditure within the business sector. The business sector’s spending on performing R&D totalled £23.7 billion in 2017; hence, the business sector accounted for approximately 68.1% of total UK R&D expenditure in 2017 (£34.8 billion). As per latest available ONS data at the time of publication, total R&D spend in the United Kingdom in 2018 totalled just shy of £37.1 billion, equal to £558 per head or the equivalent of 1.7% of Gross Domestic Product (GDP). The business sector was the largest funder of R&D performed in the United Kingdom in 2018, accountable for £20.3 billion (54.7%) of total expenditure, while the public sector amassed £9.6 billion (25.9%).

Despite Brexit-related uncertainties casting doubt over the UK's economic outlook, which theoretically would disincentivise businesses from investing significant amounts of capital while their respective operating environment remains ambiguous as terms of withdrawal are negotiated by UK and EU policymakers, the government and businesses have continually stressed the importance of innovation to secure long-term growth prospects. In its long-term plan to boost productivity and earning power of people throughout the UK market, the government's "Industrial Strategy", first announced in 2017, set out ambitions for the United Kingdom to increase total R&D expenditure to 2.4% of GDP by 2027, and 3% in the longer term, via a range of supportive and funding measures. With the Industrial Strategy in motion, investment to enhance the creative and systematic work undertaken to increase the stock of knowledge accelerated, translating into 7.2% year-on-year growth in total R&D expenditure in 2018; growth is presumed to have continued through 2019, at a rate of 3.4% year-on-year and buoyed by public- and private-sector efforts to align the UK's R&D environment with that of international counterparts; in 2018, the UK R&D expenditure of 1.7% of GDP was significantly below the OECD average of 2.4%.

In 2019, the UK’s total expenditure on R&D was £38.5 billion, or the equivalent of 1.74% of GDP. The business sector was the largest funder of R&D performed in the UK, funding £20.7 billion (54%) of R&D. The public sector funding for R&D was £10.45 billion in 2019, 27% of the total. In terms of performing R&D, the business sector performed 67%, higher education 24% and the public sector 7% of the total in 2019.

The Budget 2020 policy paper, published in March 2020, stated "the UK's success in the global economy will be rooted in innovation and cutting-edge technology" and committed to measures intended to drive R&D spending. For instance, the government increased the rate of R&D tax credits, with the hope of boosting private-sector innovation activity, and also provided the British Business Bank with additional resources to launch a dedicated £200 million investment programme, expected to enable £600 million of investment in life sciences. However, in 2020, total R&D expenditure fell by 4.3% year-on-year, falling to £37 billion. Despite R&D tax credits, patent box schemes - these tend to offer tax rebates and reductions in corporation tax for all R&D activity - and new money for innovation, the UK economy was mired by an exogenous economic shock associated with the coronavirus pandemic. Severe supply chain disruption, as a result of public health restrictions implemented to mitigate the spread of coronavirus, ultimately led to below-capacity operations in a multitude of market sectors, while much capital spending in the pipeline has been reallocated towards current spending, so as to alleviate short-term financial pressures. Yet, an inability to conduct "business as usual" significantly hit cash balances and, as a result of damaged balance sheets and lacklustre economic prospects, many businesses were presented with the threat of insolvency amid economic uncertainty. In turn, many businesses across the economy deferred, or otherwise cancelled, big-ticket and or non-critical R&D expenditure.

However, the UK’s level of R&D expenditure is expected to have rose by 0.9% in 2021 and is expected to continue over the current year, with a projected expansion of 1.9%. This is because, the aforementioned coronavirus complications began to subside through 2021. This was facilitated through the reopening of the domestic and global economy, which has been made possible through the reduction in severe coronavirus cases and deaths through the rollout of the COVID-19 vaccines. Overall, total UK R&D expenditure is forecast to increase at a compound annual rate of 1.7% over the five-year period through 2022, to reach £37.8 billion. This five-year trend has no doubt been diluted by a drop in new investment in 2020 and thereby been dampened by coronavirus ramifications.