Emerging technologies in the 2023 British budget

It was easy to miss amid headlines on childcare and energy, but the United Kingdom’s (UK) Budget last week also quietly showcased how serious Britain is about the global technology race, and in the only way a middle-sized country can be. Instead of leaning on attention-grabbing subsidies, the British weapons of choice have turned out to be smart tax incentives, targeted investments, and a plan to influence the future of regulation. 

For obvious reasons, the UK could never match American, Chinese or European pockets or their appetite for spending. In addition, dire medium-term growth forecasts mean the public purse has very little to spare. But that does not mean that the UK is doing nothing on technology and, particularly when viewed as a proportion of economic activity, some of last week’s policy announcements are more impressive than they look. 

For industrial policy, the centrepiece of Wednesday’s Budget was the introduction of ‘full expensing’, a new scheme that permits companies to write-off types of capital investment from their tax bills entirely, and introduces a more generous tax subsidy for research and development (R&D) by small and medium enterprises (SMEs). Official documents give the total cost for both schemes to average £9 billion annually for the next three years. Converted into United States (US) dollars and scaled to the size of the American economy, that’s equivalent to an annual tax break of US$81 billion (£66 billion).

By comparison, the direct tax incentives in the CHIPS Act and Inflation Reduction Act (IRA) average at US$22 billion (£18 billion) per year for the next five years or so. In other words, as a percentage of Gross Domestic Product (GDP), the UK’s tax giveaways are almost four times the size of those of the US. This comparison matters, because a larger economy means more corporate mouths to feed with incentives. 

Obviously, large portions of Britain’s R&D or capital spending support will not go near semiconductors or the green technologies most impacted by America’s IRA. However, these incentives are disproportionately geared towards the kinds of capital-heavy industries, such as advanced manufacturing, cars and energy generation, that US policies are intended to help. Moreover, roughly two thirds of the UK’s R&D tax support goes towards manufacturing, scientific or computing firms. Even accounting for the fact it is not as well targeted as the US, Britain’s commitment to supporting tech innovation and investment is substantial.

But where the UK is making direct investments, it is doing so in a targeted way. This approach was set out earlier this month in His Majesty’s (HM) Government’s Science and Technology Framework, which explains how British activity in emerging technology will be focused around five key sectors: semiconductors, quantum, artificial intelligence (AI), engineering biology and the future of telecoms. Ministers and officials have confirmed the view that the UK should not – and can not – try to do everything, but instead pick arenas where Britain can be a genuine global competitor. 

This is the correct – and indeed only – approach for a mid-sized country. British policymakers would be kidding themselves if they imagined that the UK could develop an end-to-end silicon chip ecosystem, or match the depth of the US’ electric vehicle supply chain. Instead, the UK should be positioning itself to capture emerging industries as they develop, not trying to onshore existing ones.

A cohesive approach to domestic rule-making in priority technologies is also emerging.

The National Quantum Strategy, published alongside the Budget, is a case in point. Accompanied by sensible, clear targets about Britain’s ten year ambition was a public spending commitment of £2.5 billion over the next decade into the UK’s quantum sector. 

Taken at face value, the spending commitment alone would make the UK the third largest government funder of quantum technologies in the world. But when scaled to the US economy, it is equivalent to US$2.2 billion (£1.8 billion) annually: two and half times what the US is actually spending on quantum technologies (the US National Quantum Initiative’s most recent annual report shows the US government spending roughly US$900 million (£735 million) per year on the sector). 

More British commitments are likely to come. Announcements are expected later this month as part of a Government ‘Green Day’ to respond to the IRA, as well as further fiscal announcements in the Autumn. The UK’s long-awaited semiconductor strategy is also expected to have some cash, although there have been conflicted reports on how substantial it will be. 

In addition to financial support, the scale of the British effort to unlock private investment is also significant. A technical document published alongside the Budget shows plans to funnel more of the trillions in British private pension wealth into venture capital and infrastructure. If successful, this could result in tens of billions of pounds invested into the heart of the UK emerging technology ecosystem. 

In addition, the Treasury is also considering using regulatory powers to direct some of the £364 billion invested in local government pensions into these sectors. If even 3% of this cash ended up in UK venture or infrastructure, roughly on par with Canadian or other European pension pots, that alone would be equivalent to the US allocating an additional US$100 billion (£81.6 billion) into its own key industries: an injection roughly the size of the four largest US venture capital funds.

The fact that this money does not come from borrowing or taxes is besides the point: HM Government interventions could mobilise total investment worth several percent of GDP into growth sectors that otherwise would not be taking place. 

A cohesive approach to domestic rule-making in priority technologies is also emerging. The UK is committed to establishing a looser regulatory approach for testing both AI and quantum technologies, with ongoing reviews into the regulatory environment for advanced manufacturing and life sciences. The Budget announcement that the UK’s medicines regulator will accelerate approval for drugs that have already cleared American, European or Japanese regulators will mean officials will not need to waste time replicating work already completed in other jurisdictions. 

Stepping back, the through-line of the Science and Technology Framework can be seen: try to shape new rules in the few areas where the UK has a real chance of being influential, and do not shy away from relying on the efforts of others where it can not. The International Technology Strategy expands on this view further.

Overall, this is the only credible way that a country like the UK could seek to compete in the emerging technology space. Outgunned both financially and in market size by its neighbours on the other sides of both the Channel and the Atlantic, the only way forward is to identify a few key areas and relentlessly focus on interventions of substance. 

That is not to say there are not still large problems: the lion’s share of British tax reforms only last for three years, and substantial progress needs to be made in simplifying infrastructure construction and plugging longstanding skills shortages. The programme of work to reform the UK’s ability to attract capital and listings and to shore up the UK’s science and technology research – which may not be as world-leading as policymakers assume – must actually be completed. 

But given cross-party support for the overall approach, the question for HM Government, and any future one, is whether they will have the attention span and willpower to deliver.

Zachary Spiro is a Manager at the business consultancy Flint Global, specialising in emerging technology, research and development and the politics of the UK-China relationship.