Infrastructure spending is only one part of the solution

An investment-led recovery is crucial, but business funding must be part of the picture, says Stephen Welton, executive chairman at BGF.

In the Comprehensive Spending Review, announced on Wednesday, Chancellor Rishi Sunak laid out his plan to fuel economic growth in the wake of the Covid-19 crisis. Sunak is putting his faith in infrastructure, promising some £100 billion of capital spending – a substantial increase on the previous year – on a range of projects, many of them tied to the prime minister’s ten-point green plan, which we welcome. They include new homes, roads, railways, hospitals, schools, cycle lanes and zero emissions buses. Some of this spending will be coordinated by a new national infrastructure bank, while a £4 billion fund has been earmarked for “place-based projects” in local areas, which ought to help with levelling up the UK economy by investing in the regions. Importantly, Sunak promised that some £15 billion of the capital spending would be on research and development recognising the critical role this plays for our future success.

In effect, the chancellor is proposing an investment-led recovery, and at BGF, we are particularly pleased that R&D spending has been highlighted, essential to meeting the 2.4% of GDP commitment to allow us to catch up our R&D spending with the average of the G7 nations. A successful economic recovery depends on stimulating and unlocking the innovations of researchers, scientists and inventors up and down the UK. In areas such as life sciences, UK research is world-leading – it makes perfect sense to support these innovators and to drive forward in other key emerging sectors, notably the environment.

From start-up to scale-up

Unfortunately, Sunak’s announcement of the spending review was silent on the question of what happens to innovative ideas and discoveries once they leave the lab. We’ve said before that the UK is a world leader at giving birth to start-ups. Where we fall down is in providing the right conditions to help turn start-ups to scale-ups. To put it another way, we excel at producing early stage businesses with innovative ideas, but we do not do enough to support these firms as they grow to mid-sized businesses employing tens or hundreds of people. That’s partly a role for the public sector, and we’d like to see more funding allocated to Innovate UK to do just that, but the private sector must also step up. Without support for fast-growing, mid-sized businesses – a segment we at BGF refer to as the growth economy – these companies cannot flourish into global champions and the economy will not only struggle to recover to pre-pandemic levels, it will miss the opportunity to leapfrog ahead, as others will surely be trying to do.

The Office for Budget Responsibility (OBR)’s forecasted fall in GDP of 11% is absolutely staggering – the biggest drop since 1709. Faced with this, it is absolutely imperative that we find innovative and creative ways to support the growth economy of tomorrow. We need to accelerate business investment, more actively promote and reward entrepreneurs, and crowd in more capital.

That’s why we will continue to call for government backing to fund the growth economy. Our recent report, co-authored by the historian Sir Anthony Seldon, made the case for a £15 billion fund made up of contributions from pension schemes, insurers, listed investment vehicles and government spending. This fund would support mid-sized businesses by providing equity finance, solely on commercial terms, to those firms with the greatest potential to grow.

We think such a fund has an essential role to play and, it might be added, would not come at a high cost to the taxpayer. In our proposal, only £3 billion of the £15 billion growth economy fund comes from the government, and, critically, it is an investment. The remainder is supplied by private investors, whose participation can be encouraged by the use of smart regulatory initiatives and government influence.

Part of the puzzle, not the whole

To summarise, the chancellor has made an important commitment to an investment-led recovery. We are pleased by the emphasis on levelling up and on R&D. However, it is crucial that infrastructure spending is not seen as a panacea. Infrastructure spending is a crucial part of the puzzle but it is not the only piece, rather it is an enabling piece. As well as building roads, railways and schools, we must also support growing businesses across all four nations of the UK. We must ensure that the companies that are commercialising pioneering research have the support they need to grow, in particular equity capital, as we cannot build the future on a mountain of more debt. These businesses will be the major employers of tomorrow. They are crucial to our future prosperity.