Productivity has flatlined across the UK since the 2008 financial crisis, costing the economy tens of billions of pounds annually. Bucking that trend is central to the government’s primary mission of increasing economic growth – and with it, people’s living standards.
In its general election manifesto last year, Labour argued that the route to raising both productivity and overall growth starts with “fresh thinking and new ideas”. In other words: innovation.
Our latest report, Rebuilding the Nation 05 looks at what government can do to spur that innovation right across the country.
The prize here is enormous – particularly in high-growth sectors where the UK has a competitive advantage. AI alone is a £550 billion opportunity for the UK, with the potential to boost productivity by 1.5% annually. Globally, the quantum computing and space industries are on track to hit $2 trillion by 2035 and $1 trillion by 2040 respectively.
Yet while the UK boasts a world-class research base, firms often struggle to translate early-stage ideas into commercial success. Stubborn barriers exist across the innovation landscape: in the institutions and funding that shape and enable innovative activity; the regulatory regime internationally mobile firms weigh so carefully; and the overall government strategy underpinning all of them.
Strategy
The government has outlined a vision for a more strategic state – one that actively shapes markets rather than only intervening to fix them when they fail. As we argued in our first Mission Critical paper, written by Professor Marianna Mazzucato, this requires ‘leading with purpose’, by setting a clear strategic direction, and ‘governing in partnership’, by galvanising action across sectors and across society.
We now have some indications as to what the government believes this will mean for innovation in policy, be that via the industrial strategy green paper or the Budget announcements of a record £20.4bn of R&D spending for 2025-26 and a £25mn ‘R&D Missions Programme’.
For those initiatives to have an impact, they need to be accompanied by tough political choices. The government needs to direct resources ruthlessly towards areas where the UK has a competitive edge, and intervene where the state can add most value – even if that means disappointing influential stakeholders. AI, quantum, and space are areas where the UK has clear strengths, each offering a strategic, time-bound opportunity that government must seize.
Regulation
The UK’s regulatory environment too often acts as a barrier to innovation, a bottleneck just at the moment before commercialisation. This is an area where the government has significant room to act – making impactful changes with little spending and unlocking benefits quickly.
The government has shown it is alive to this fact, moving quickly to establish a new Regulatory Innovation Office (RIO) in the Department for Science, Innovation and Technology. The unit must be tasked with fostering a more pro-innovation regulatory environment – especially vital for frontier technologies where progress depends on continuous experimentation and iteration.
But striking the right balance between risks and benefits will be essential – ensuring regulation is both agile and predictable while upholding accountability, managing the potential risks of new technologies, and avoiding a race to the bottom on standards.
Experts we spoke to also emphasised the particular challenges posed by fast-moving technologies. To provide effective oversight, regulators themselves need to be better resourced – and that is as much about skills and expertise as it is about funding. It is important to bring in greater sectoral expertise and strengthen collaboration and insight-sharing across regulators, government and industry.
Institutions and funding
The government has resisted major structural upheavals since coming to power, recognising that – as one of the contributors to the report put it – “political churn is death to innovation”. Even so, there remains significant scope to enhance both how institutions operate and how they engage with the outside world.
To do this, Whitehall should embrace the same innovative mindset it wishes to foster in the private sector to modernise its own operating model, building a more tech-savvy state with science and technology integrated into day-to-day Whitehall activity. Agencies should also open up culturally, with more interchange with industry and placing greater value on stakeholder engagement, making the institutional landscape easier to navigate and offering clearer lines of communication.
The government’s proposed ten-year budgets for “certain R&D activities” signals a similar and welcome shift towards long-termism on the funding side. The upcoming Spending Review in June meanwhile is an opportunity to go further and provide some much-needed definition, as well as embedding innovation within departmental budgets rather than viewing it in isolation.
Meanwhile taking a more outcomes-driven approach to procurement while opening the door to smaller, high-growth firms would help ensure the £300bn the government spends via procurement every year – £1 in every £3 of state spending – supports technological advancements and spurs innovation.
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With its political fortunes and wider reform agenda staked on lifting growth levels and raising living standards, the government cannot afford to leave any stone unturned in the pursuit of raising productivity. As Lord Willetts, Chair of the UK Space Agency, writes in his foreword to the report, “There is a big prize of promoting new technologies to boost the growth rate and enhance public services as well. The proposals in this report could help achieve that great prize.”
