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Briefing note: Secretary of State CST meeting
Background
e On 29th September you wrote to the Chancellor with the BEIS Budget Bid (Annex
A). In your letter you focused on:
o funding for access to finance and business support;
© a commitment to the 2.4% R&D target (baselining the AS16 uplift and
announcing a trajectory of public investment for the next spending review);
o lifting the rate of the large company R&D tax credit rate and consulting on the
definition of allowable expenditure for R&D tax credits, and
o increased funding for local areas to support local industrial strategies.
e In total you bid for: £2.45bn to improve access to finance for SMEs, £2bn to drive
improvements in business productivity, and, in support of DCLG, for the allocation
of £1bn of structural funds for local investment.
e You did not bid for a specific figure in relation to meeting the 2.4% R&D target, but it
is estimated it will cost cCE10bn in 2027/28 above the Autumn Statement baseline.
e Following your trilateral with the Prime Minister and Chancellor on the 17 October,
the CST has asked you for a meeting to discuss the BEIS budget bid.
¢ HMT officials have indicated that the CST would like to focus the discussion on the
BEIS budget pressures, and the potential to reprioritise BEIS budgets to fund these
and any other budget bids. They have reiterated the CST’s operating principle that
Departments should be funding any new proposals from within their own budgets.
e Our line to HMT officials to date has been that we cannot fund the proposals from
within BEIS budgets, and that we have provided the minimum viable options.
e HMT officials have informally given us their view of BEIS pressures and how these
may be resolved from existing BEIS budgets. Further detail is included in the first
part of this briefing.
e The second part of this briefing outlines your key asks from the budget letter, at this
stage we have focused on the full asks, should you wish to discuss scaling the
BEIS budget package, your officials can provide further advice on how we could
reduce the size of the proposals.
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Part 1: Existing BEIS budgets and pressures
e As your Budget letter to the Chancellor noted, we have been in discussion with
HMT in recent months about a number of shared, inherited problems, which are
placing pressure on the BEIS budget;
e We understand the Chief Secretary's view is that existing budgets should be
reprioritised to fund new priorities and existing pressures, and that pressures are
resolved alongside the Autumn Budget;
BEIS/HMT broadly agree on the issues to be addressed:
e Post Office Limited: £210m in 2018/19, with potential option of funding 80% in
2018/19 and 20% in 2019/20.
HMT offi advice to the CST recommends funding the pre
e Repurposing R&D unallocated budgets (c£125m in 2018/19, 2019/20 to be
confirmed)
o BEIS view is that any proposal is a cut to R&D undermines the ambition set out
by the CX at AS16 and by the Industrial Strategy.
o A cut to R&D is a poor signal to send to industry, especially those seen as
crucial for retaining internationally mobile businesses.
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e Efficiencies each year from 2018/19 (cE30m per annum)
o HMT view is we have said we can make 3% efficiency savings in our letter to
CX on efficiency review in June.
o However we made clear that some of these options would have an impact on
BEIS objectives and wider Government policy (e.g. scaling back of some policy
areas such as shale gas monitoring and support). We have not had a response
from CX to this letter.
e We recommend reaffirming our position that BEIS budgets are under significant
pressure in future years and we require HMT funding to resolve these pressures as
they are shared inherited problems which we as government need to resolve.
e If CST brings up the savings options in detail, we recommend:
o Pushing back strongly on R&D and efficiency savings;
o Offering to explore the Heat Networks, Oil and Gas Authority and Insolvency
Service options, with the caveat that we would need to work up the details
including the scale and timing.
e We can provide you with detailed lines to take on each saving suggested by HMT if
you would find that useful.
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Part 2: BEIS Budget Bid
Ideas
BEIS ask
e Government to commit to a 2.4% of GDP R&D target
e A commitment to baseline current innovation spending into the next SR and to
increase spending so that 0.8% of the 2.4% target is public investment (an increase
in spending of around £10bn a year by 2027).
e Increase R&D tax credits for small and large businesses
o Large business rates should be increased from 11% to 20%
o Enhancement rate in the SME scheme should be increased from 130% to
around 200%
Supporting facts
e Direct public investment attracts rather than displaces private spend in R&D —-
additional c£1.40 for every £1
e Nearly £1 in £5 of private sector research is funded from overseas
e R&D spend in the UK is second bottom in the OECD
e R&D intensive business consistently cite the strength of our science and research
base as a reason to locate in the UK
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Business
BEIS ask
Support business to be more productive:
e 468m over five years to overhaul the current business support provision. This
includes reform of Growth Hubs, £60m p/year support for high potential businesses,
and a ‘Business Basics’ fund to pilot interventions to improve small business
productivity in partnership with Be the Business.
e £928m over five years for a Business Investment Fund to allow us to secure high-
value investment from key internationally mobile businesses.
e £345m over five years for a supply chain productivity programme to improve
productivity through supporting training and enhanced business processes
e £247m over five years for an industrial energy efficiency fund to support energy-
saving investments and reduce energy costs for important manufacturing industries
Access to finance:
e £2bn over three years for replacement of European Investment Funding to provide
additional resources to the BBB to invest in equity and debt funds
e £450m of additional funding to the BBB for regional equity Intervention
e £195m over 15 years for the extension of the Enterprise Finance Guarantee to
support the BBB to lend to viable SMEs who are unable to raise external finance
Supporting facts
e Poor management is estimated to account for about a quarter of the UKs
productivity gap with the US
e Mayfield shows many firms are not adopting modern business practices (e.g. online
accounts). Small businesses tend not to access external advice and they are often
not part of peer networks.
e The UK has a historically thin market for patient capital for innovative firms, Damon
Buffini has identified a £3-6bn gap in availability of patient capital in the UK before
the withdrawal of European Investment Funds
¢ Pipeline of potential finding asks to the Business Investment Fund is now over
£270m.
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Place
BEIS ask
In conjunction with DCLG:
¢ Honour the total amount of EU structural funds each of the four nations would have
been allowed by the EU to commit between 2014 and the end of 2020.
e Decide how we deploy the guarantee to take advantage of the opportunity to make
efficiencies in the administration of those funds and strengthen the role local
institutions (such as LEPs and mayoral combined authorities) as a part of that
process.
e Strengthen the governance of LEPs as primary local institutions including aligning
geographies with Local Authorities and removing overlaps.
e Make LEPs responsible for developing their Local Industrial Strategy.
Supporting facts
e Regional disparity in rates of economic growth is starker in the UK than in other EU
countries
e Only six UK cities have higher productivity levels than the average of over 300
European cities