Brexit is hurting UK innovation

Despite the enormous pressure for spending cuts, the UK government’s autumn statement earlier this month reaffirmed the pledge of Boris Johnson’s government to increase R&D spending to £20 billion in 2024-25. The chancellor, Jeremy Hunt, said he wanted to turn the UK into the “next Silicon Valley”.

However, beyond a few sectors such as fintech and pharma, UK businesses are not capitalising on the country’s academic strengths, and Brexit is proving to be an innovation headwind. More money will help, but just as important are cheaper visas for high-skilled workers, stable innovation policy and regulation, and settling the stand-off over the Northern Ireland protocol so that the UK can join the €95 billion (£81.8 billion) Horizon Europe research programme.

Another way that Brexit is holding back the development and deployment of new tech is that the end of free movement cut the number of skilled European scientists, technicians and engineers taking jobs in the UK. The government has tried to mitigate this problem with a fairly liberal immigration system for high-skilled workers. But we have crunched the numbers and found that the government’s reforms only partially make up for the end of free movement. It must provide about a fifth more visas in high-skilled sectors to make the UK as open as it was before Brexit.

One big problem is that the government still sees skilled migrant workers as cash cows rather than economic assets. They and their employers can sometimes face immigration fees and charges of more than £10,000 – or even more if they want to bring family members. The result is that many of the most-skilled workers look for jobs elsewhere.

Last week, the prime minister, Rishi Sunak, tried to placate the anti-immigration wing of his party by telling the Confederation of British Industry that innovation can replace the need for more foreign workers. That would be politically convenient – but it is wrong, at least in the short term. Businesses won’t adopt technology without skilled workers who can deploy and use it, and Sunak’s plans to increase the skills of Britons will take years to bear fruit.

Another problem is that Brexit has caused high-tech sectors to scale back investment. After the 2016 vote to leave the European Union, business investment in these sectors stagnated, and then dropped significantly during the pandemic and the exit from the single market. That means firms are not adopting technology as quickly.

To fix these problems, the government needs to create stable and well-funded policies at each stage of innovation, from university research to incentives for businesses to invest in new software and machinery. Technology investments take time to pay off, so predictable regulations, taxes and subsidies are needed – and businesses also require certainty about the terms on which they can access big markets such as the EU’s.

But Brexit has also encouraged the government to tinker with sensible EU rules in a hunt for “Brexit dividends”. In many cases, the costs of instability greatly outweigh any benefits from change, especially when reforms are the result of ministerial whim. The Retained EU Law Bill is the worst example: it would remove thousands of EU laws from the UK statute book by the end of 2023, except those that ministers specifically decide to keep. Nearly as bad, the government has sought to undermine the independence of the UK’s financial services and data protection regulators – which might make regulation even more politicised and less predictable, putting the free flow of data between the EU and the UK at risk.

The UK’s chaotic post-Brexit politics is not helping. There have been nine science ministers since 2016, serving four prime ministers. Government strategies and reviews on science and innovation have proliferated. Policies are announced and never implemented, such as new digital competition laws that were originally mooted in 2019 but have not yet passed the House of Commons.

Germany provides a model for the UK to follow. Its main parties agreed to a pact on research and innovation in 2005, which led to guaranteed increases in research budgets over many years. These have recently been extended to 2030. Germany’s Fraunhofer-Gesellschaft institutes, which stimulate partnerships between universities and businesses, are given time and money to design and deliver on their strategies. The UK’s equivalents, the Catapult centres, are underfunded, even after Hunt’s announcement in the autumn statement that their funding would rise by a third. Between 2011 and 2021, Catapult centres oversaw £2.5 billion of public and private investment; the Fraunhofer-Gesellschaft centres had a turnover of €3 billion (£2.6 billion) in 2021 alone.

The major UK political parties could agree multi-year targets for science and innovation funding. They could promise to raise the Catapult centres’ annual budgets to German levels and pledge not to conduct unprompted reviews into their governance for a certain period, irrespective of which party or parties form the government. A cross-party migration policy would probably prove impossible, but Sunak could cut visa fees for skilled migrants, and Labour would be unlikely to put them back up.

Without such consensual government, the UK has no hope of becoming the “high skill, high wage” economy that Boris Johnson promised as prime minister. Cross-party deal-making might not come naturally in such an antagonistic political culture – but becoming a bit more European in its politics might be exactly what the UK needs.

Zach Meyers is senior research fellow and John Springford is deputy director at the Centre for European Reform.