The Budget: from capital funding cuts to UKRI big bets
June’s Defence Investment Plan left a number of landmines for the incoming Burnham government to navigate – and a challenging outlook for the research and innovation sector.
First was the question of how the one per cent cut in all departments’ capital budgets over four years (saving £4bn) would be found. Remember, in government spending terms capital is the money that is meant to create growth in the future. This is where R&D sits in the national accounts.
The next challenge was the final line item in the accompanying funding explainer: £4.7bn more in savings to be set out at the Autumn Budget.
New Chancellor of the Exchequer John Healey’s red book has now provided the answer:
“This Budget confirms that the residual £4.7 billion will be funded through reprioritisation of capital budgets. This will be achieved by further reducing departmental capital budgets by 1% from 2027–28 to 2029–30 to raise £3 billion.”
Which is to say, an additional one per cent cut to departmental capital budgets, meaning a two per cent cut in the three financial years up to 2030.
When BIST secretary Jonathan Reynolds said a couple of weeks ago that there is “an element of funding for the defence package that we had to find from the former Department for Science, Innovation and Technology budget,” it was unclear whether this represented the existing defence commitment or something further. We now have the answer.
The Budget annex puts BIST’s capital allocation over the next four years at £62bn, though some of the exact post-DSIT changes are still being negotiated within government. Finding one per cent savings for the whole period, and another one per cent for the latter three years, is likely to amount to around £1bn less to play with.
What we don’t have, and likely will not until next year’s spending review, is a better sense of how this will play out in practice. And indeed, by its own admission the department is still working out the details. But the record spending review settlement for R&D which Labour has been so keen to celebrate is now under threat, as BIST will need to find savings – and its allocations to UKRI represent the lion’s share of its capital outlay.
Big bets
The question of how the capital funding cuts will fall is one of the big open questions in research policy – and arguably the other is how the £1bn of UKRI funding that the Prime Minister has announced will be redirected to world-leading clusters will shape up (for clarity, this is a different £1bn to the one mentioned above).
Funnily enough, this is another issue where the detail is being thrashed out behind the scenes. What we did learn at the Budget was a handy new piece of nomenclature:
“UKRI big bets: UKRI will concentrate £1 billion of investment on “big bets,” channelling funding towards priority clusters across the country, in alignment with the Industrial Strategy sectors.”
Given that it’s previously been intimated that this will involve a reprofiling of “bucket two” and “bucket three” (research for government and societal priorities, and innovation funding) our working assumption would be that UKRI will now be thinking about how to rebadge and refine its existing ideas about industrial strategy priority programmes as well as Innovate UK spend – to ensure that these can be said to be targeted at “world-leading clusters,” once such clusters have been suitably defined.
But the “big bets” terminology is interesting – albeit in keeping with what we already know about the priority programmes – in that it at least hints at more ambitious programme management and a greater risk appetite, as well as the “fewer, longer awards” which science minister Chris McDonald has valorised.
This aside, it’s also worth nothing that the Budget announcements which were made on science and technology largely steered clear of UKRI’s remit. This will have disappointed those who were pushing hard for Wednesday’s statement to be the moment where the Burnham government stepped in on Jodrell Bank or other matters related to the STFC portfolio. But maintaining the division between the government’s R&I decisions and UKRI’s is an important principle, and one that appears to be holding up.
Squeeze every penny
Healey’s first Budget has been widely described as “fiddling” and “tinkering” rather than radical change – it’s notable that despite the lack of macro fiscal changes there were many more individual policy announcements than in Rachel Reeves’ version last autumn (our sister site Wonkhe has a readout of the upshot for higher education).
Much of what’s important for the research system takes place away from direct science and technology investments, though there are plenty of these, in life sciences and AI in particular. But devolution, business vitality, and the work of public finance institutions are where the real action is, for now at least – and there’s a recurring emphasis on managing the relationship between the three.
The Investment Offer to the Regions prospectus highlights how the British Business Bank is committing to work with local leaders to improve investment ecosystems, the National Wealth fund is continuing with its range of priority investments and place based partnerships, and UK Export Finance is going to spend its time “enabling investment that strengthens regional clusters, expands productive capacity, creates jobs and improves international competitiveness, while helping authorities attract investment and bring forward projects that support growth.”
The government is also making further reform to R&D tax credits. From April 2027 the government will remove the R&D tax credit claim notification form – the form that lets HMRC know a business intends to claim tax credits – and from autumn 2027 it will simplify the additional information form, which includes a range of information companies submit on their R&D tax credit claims. On the face of it, this is an odd measure as these measures were only introduced in 2023 as a means of minimising error and fraud. The Treasury is making this change “in light of customer feedback” – it is estimated to cost £70m a year by 2030–31 by encouraging more firms to claim relief.
Another important policy document released alongside the Budget is the updated Entrepreneurship in the UK prospectus, which among other measures sets out a new founder’s relief for capital gains tax. From 6 April 2027 eligible founders and early investors of high-growth, innovative companies will benefit from a 10 per cent rate of capital gains tax on lifetime gains of up to £10m.
The same prospectus also sees the government promise to be a “better customer for business”: reforms to procurement including its innovation marketplace and extended advance market commitments for the purchase of computer chips (clearly having taken inspiration from a recent Research Agenda essay).
Global talent
The Budget unveils various important changes to the visa regime under the wider “global talent” banner – and notably with an emphasis on supporting innovative companies, rather than the previous focus on scientific talent within universities and other research institutions.
The global talent visa will see a further expansion to R&D-intensive businesses, following the initial rollout of the idea in August. UKRI is tasked with working across the UK to identify additional organisations – in industrial strategy sectors – which could be profitably added to the endorsed funder pathway. The government also wants to scale up the high potential individual visa by a further 50 per cent, with more international universities’ graduates in scope for recruitment.
For those already in the country, there’s the welcome move to lengthen the so-called “curtailment period” of work visas, meaning that those who lose visa sponsorship will have up to six months to find new employment, rather than the typical 60 days currently. This is being badged as explicitly for “the highest skilled workers”, which may mean it is restricted to those in graduate-level roles, or even that it only applies on certain visa routes such as global talent.
For organisations looking to recruit international research staff, there’s mixed news. The Migration Advisory Committee’s recommendations on salary requirements are to be implemented from the spring, meaning that occupation-specific minimum salary thresholds will be lowered – but the “discounted” threshold that applies for those with PhDs is being scrapped. The committee argued that there was no evidence that those with doctorates are systematically paid less.
As ever, the implications for prospective international staff themselves are hard to predict. Lowering salary thresholds could mean that organisations are keener to recruit from abroad – but they will be able to do so at a lower rate of pay.
Where now?
The further one per cent reduction in capital is obviously not good news for a research sector that is already feeling the squeeze, and over time these kinds of cuts tend to compound into the removal of key capacity across the sector.
The things the government is prioritising – growth, resilience, and reindustrialisation – require investments in ideas, people and infrastructure. These kinds of contradictions are inevitable in a Budget exercise that must grapple with the messy trade-offs between meeting fiscal rules and keeping political promises.
The Budget came with the promise of “breathing space for today and fresh hope for the future.” The breathing space for today is clear with a number of tweaks to tax, savings from budgets, and redirections of government bodies.
The outlook for the future is less clear. All eyes may now turn to the spending review next year – but the ambitious announcements on devolution over the summer and in the Chancellor’s statement, including a share of income tax for mayors and accelerated work on creating new strategic authorities, are arguably just as transformational.
As we await the publication of the Rewiring the State white paper and the government’s ten-year plan, there are still more details to come on how funding will be devolved, and crucially how the Burnham administration will move from breathing room to a detailed plan for growing the economy. The research and innovation sector ought to form a central part of this – but it will have to do so with straitened investment and uncertainty over where exactly changes to the system will fall.