Finance (No. 2) Bill (Third sitting)

Laura Pidcock Excerpts

Thursday 11th January 2018 Public Bill Committees

[Laura Pidcock (North West Durham) (Lab)]

Will the Minister explain the severe imbalances in research and development across the country and how he will address them?

[Mel Stride]

As the hon. Lady knows, several announcements were made in the Budget about productivity, not least of which was the announcement about the national productivity investment fund; billions more pounds will be put in, raising its total investment level to around £30 billion. Initiatives such as the northern powerhouse and the infrastructure that will be put in place in the north and the midlands are evidence of our intent to make sure that productivity is levelled out across the country. We recognise that productivity is stronger in London, the south and the south-east, so particular attention is being placed on the midlands and the north of England.

There are two schemes for claiming R and D tax credits: the research and development expenditure credit—RDEC—scheme, and the small and medium-sized enterprise—SME—scheme. The SME scheme is more generous than the RDEC. The RDEC was introduced in 2013, featuring a new above-the-line credit. Businesses value it for several reasons, including because they can benefit from it whether or not they make a profit in the year in which they claim the credit. As R and D is often risky or pays back years after investment, this is a well targeted initiative. In 2015-16, the Government provided innovative businesses with more than £1.3 billion through the RDEC, which supported almost £16 billion of research and development.

In spring Budget 2017, it was announced that a review of the R and D environment had concluded that the UK’s R and D tax credits regime is an effective and internationally competitive element of the Government’s support for innovation. The changes made by clause 19 will provide around £170 million of additional support for innovative businesses every year from 2019-20. Increasing the rate of RDEC will make the UK even more competitive.

New clause 4 seeks to commission a review of the effect of this change on companies’ research and development spending, and of the effect of the increase on any changes to companies’ R and D spending as a result of the UK leaving the European Union. Since 2010, the amount of support that the Government have provided through R and D tax credits overall has more than doubled, reaching £2.9 billion in 2015-16.

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[Peter Dowd (Bootle) (Lab)]

Again, it is a pleasure to serve under your stewardship, Mr Owen. I want to speak first to the points made by the hon. Member for Aberdeen North and then go on to my substantive comments on our amendment. It is worth noting what the hon. Lady says about funding research. Bill Gates, who knows a thing or two about research and development, said:

“I believe in innovation and that the way you get innovation is you fund research and you learn the basic facts.”

Are the Government funding research and development sufficiently? The answer, quite simply, is no. Neil Armstrong said:

“Research…is creating new knowledge.”

When set against that, the amount of research and development that the Government are funding, or indeed encouraging, is not creating that much more new knowledge.

Following on from the comments of the hon. Member for Aberdeen North about new clause 4, I am deeply concerned about the level of the Government’s research and development expenditure, particularly once we have left the European Union. The important question is not whether we are in or out—we are moving out; we recognise that—but how we fill that gap.

There is a rightly held concern that as a result of Brexit, the UK risks losing its reputation as a scientific powerhouse. In November, the Chair of the Public Accounts Committee stated that we are “sorely lacking” in leadership from the Government to maintain Britain’s position as a leader in robotics and in research to tackle climate change. She was responding to a National Audit Office report that highlighted that between 2007 and 2013, the UK was a “net recipient” of EU research funding and received more than £7.9 billion. In 2015, the UK Government’s expenditure on research and development was £8.7 billion, so it is almost equal.

The Government will have to make up the funding shortfall once we leave the European Union if the UK is to keep its status as a world leader in research and development.

[Laura Pidcock]

Even within the European Union, the north-east has suffered grave inequalities when it comes to research and development jobs, of which there are 5,300 compared with 36,000 in the south-east. Does the hon. Gentleman agree that the Bill does nothing to get rid of that disparity? The worry is that outside the European Union, it will be further exacerbated.

[Peter Dowd]

That is an important point. As I said, it is irrelevant—academic—where someone stands on Europe or whether they were in or out, because we are moving out of the European Union. There are all sorts of debates about the customs union, the single market and all the rest of it, but the bottom line is: what will the Government do to plug that gap? Will they give the commitment that they have given to other industries, such as agriculture, to plug that gap?

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[Peter Dowd]

It would, and I will come to that in my final comments in relation to the speech by the hon. Member for Aberdeen North. There is a wider point, which the hon. Lady has highlighted perfectly. How much difference will raising the expenditure credit by one percentage point make to companies investing in the UK? That is the question, and we need to know the answers to it, hence the proposal for a review. I sound like a stuck record, but this issue is very important. It is only right that the Minister should come back to the House at a later stage and provide it with that information.

[Laura Pidcock]

Does my hon. Friend think that the Government have calculated the one percentage point figure on the basis that we are exiting the European Union and on formal calculations about what the net consequence of removal from the EU will be, or is this just an arbitrary figure?

[Peter Dowd]

The honest answer is that I do not know. If I can be the postperson for that question, I will pass it on to the Minister and perhaps he will answer it. I am sure that he will be able to do so, if not today, certainly in due course.

On new clause 9, the research and development expenditure credit gives corporation tax relief to companies that undertake research and development, as the Minister said, as well as to small and medium-sized enterprises subcontracted to undertake work of that nature. The current rate of relief for those companies is, as everyone knows, 11% of their qualifying expenditure, through either reduced liabilities or cash payments. As the Minister set out, clause 19 increases that to 12% of qualifying expenditure.

On Second Reading and today, the Minister has talked about the contribution that research and development makes to our nation’s productivity. It is worth our while to reflect on the Government’s record when it comes to productivity, because that goes to the heart of the matter. If we are to raise productivity, how do we know that it is linked somehow with research and development, or vice versa? If the figure is being moved from 11% to 12%, how do we establish the interaction, the causal links and the correlations? How do we do that? We do not do it, which is why we need a review.

As you know, Mr Owen, productivity has flatlined, and it has remained lower than its peak under the last Labour Government for the full eight years of the current Government and the coalition. The Office for National Statistics has found that since this Government took office, they have presided over the worst period of productivity growth since the Napoleonic wars. I think that was the last time we came out of Europe—well, perhaps not the last time, but one of the times. [Laughter.] That was a dodgy link, I have to say.

At present, UK productivity lags behind that of most of the G7 nations, notably the United States, France, Germany and Italy. What the Germans produce in four days, Britain achieves in five. We have heard that so many times, and the question that arises is: does the Government’s proposal do anything to enhance productivity? We do not know. Do the Government have any proposals for us to suggest how they might do that via a review? No, they do not. That is why we want a review.

This is not a mere technicality; it has serious consequences. As the Nobel prize-winning American economist Paul Krugman once said,

“Productivity isn’t everything, but in the long run it is almost everything.”

More than many other indicators, our productivity has a huge impact on both our future economic growth and the living standards of millions of British workers, who rely on productivity gains to improve their pay and conditions. We know that investment in research and development can, and does, enhance productivity. The question is: do the proposals do that? We do not know. Why do we not know? Because the Government—I suspect—will not agree to our review today. We will persist on that. As far as I can see, we do not have any information from the Government on the correlation.

Sadly, we are heading in the wrong direction. The Office for Budget Responsibility predicts that the Government’s plans will leave us with a 17-year period of wage stagnation. The Institute for Fiscal Studies agrees, arguing that we face two decades of lost pay growth. Will the Government’s proposals do anything significant to deal with that? We do not know, but we do not think so.

Time and again, the Chancellor has watered down the Government’s promise of increases in the wage floor. That will not help, either. We know that the most sustainable way to ensure a return to wage growth is to boost productivity, as well as ensuring that there is a strong framework of other worker representation to make sure that gains are shared evenly across any enterprise. That is also important. Research and development not only helps companies to grow, helps profits and helps income tax and tax generation, but helps workers and wage growth. Are the Government doing anything in the proposals to assist with that? No.

The Prime Minister recognised the importance of economic democracy and worker representation all the way back when she became Prime Minister. It is also important that workers can see what research and development investment there is, and what the Government’s proposals on it will do to help. It is difficult to establish what gains there will be under the proposals, and that is why we need to check and challenge the Government time after time on this one.

Of course, while research and development investment is not going into businesses, companies can rely on large pools of pretty cheap and expendable labour. That is important. In the past, the Minister has referred to us having quite high levels of employment, but we come back to the issue that the levels of employment per se—

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[Laura Pidcock]

That disparity in investment does not make sense, because economic growth, employment rates and average earnings are all worse than average in the north-east. I do not see any mechanism to redress that disparity; I wonder whether my hon. Friend does.