Finance (No. 2) Bill (Third sitting)

Peter Dowd Excerpts

Thursday 11th January 2018 Public Bill Committees

[Kirsty Blackman]

I very much agree with my hon. Friend. A lot of these projects have been brought to fruition because of the benefits of EU money. The UK Government have not committed to filling the EU funding gap that there will be, particularly for universities and for the research and development of vital products that UK companies can sell on.

It is welcome that the Government are putting some focus on research and development expenditure. That is a positive thing. However, it is not in any way the end of the story. To simply stand still, the Government need to make significantly more commitments. We would appreciate the Westminster Government being much more positive about the innovation culture. They need to put their money where their mouth is and make sure they fund these things more appropriately.

[Peter Dowd (Bootle) (Lab)]

Again, it is a pleasure to serve under your stewardship, Mr Owen. I want to speak first to the points made by the hon. Member for Aberdeen North and then go on to my substantive comments on our amendment. It is worth noting what the hon. Lady says about funding research. Bill Gates, who knows a thing or two about research and development, said:

“I believe in innovation and that the way you get innovation is you fund research and you learn the basic facts.”

Are the Government funding research and development sufficiently? The answer, quite simply, is no. Neil Armstrong said:

“Research…is creating new knowledge.”

When set against that, the amount of research and development that the Government are funding, or indeed encouraging, is not creating that much more new knowledge.

Following on from the comments of the hon. Member for Aberdeen North about new clause 4, I am deeply concerned about the level of the Government’s research and development expenditure, particularly once we have left the European Union. The important question is not whether we are in or out—we are moving out; we recognise that—but how we fill that gap.

There is a rightly held concern that as a result of Brexit, the UK risks losing its reputation as a scientific powerhouse. In November, the Chair of the Public Accounts Committee stated that we are “sorely lacking” in leadership from the Government to maintain Britain’s position as a leader in robotics and in research to tackle climate change. She was responding to a National Audit Office report that highlighted that between 2007 and 2013, the UK was a “net recipient” of EU research funding and received more than £7.9 billion. In 2015, the UK Government’s expenditure on research and development was £8.7 billion, so it is almost equal.

The Government will have to make up the funding shortfall once we leave the European Union if the UK is to keep its status as a world leader in research and development.

[Laura Pidcock]

Even within the European Union, the north-east has suffered grave inequalities when it comes to research and development jobs, of which there are 5,300 compared with 36,000 in the south-east. Does the hon. Gentleman agree that the Bill does nothing to get rid of that disparity? The worry is that outside the European Union, it will be further exacerbated.

[Peter Dowd]

That is an important point. As I said, it is irrelevant—academic—where someone stands on Europe or whether they were in or out, because we are moving out of the European Union. There are all sorts of debates about the customs union, the single market and all the rest of it, but the bottom line is: what will the Government do to plug that gap? Will they give the commitment that they have given to other industries, such as agriculture, to plug that gap?

[Dan Carden]

One of the reasons that there is scepticism on this side of the Committee Room is because European money has been funnelled towards cities such as Liverpool. We have seen great investment from Europe, whereas this Government have cut council budgets in Liverpool and across the north by more than 70%. Does my hon. Friend share my scepticism?

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[Peter Dowd]

I appreciate that reminder, Mr Owen. My hon. Friend the Member for Liverpool, Walton makes a good point that goes to the heart of our wish to have a review of how the Government’s proposal will affect research and development. That is absolutely crucial.

Research and development expenditure credit is used to encourage companies to invest in technology and research in the UK. Will the Bill do enough for that? The 1% increase announced in the autumn Budget will not be enough. Historically, the Government’s investment in research and development as a proportion of GDP has been woeful. The UK spends less on research and development than many comparable nations do, which is why we need a review of the implications of the Government’s proposal.

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[Dan Carden]

This relief means a hell of a lot, especially to some larger companies, which sometimes make hundreds of millions of pounds from it. We have seen artificial schemes designed to secure the tax relief whereby it has not been appropriately used. Would not a review also help to sort out that problem?

[Peter Dowd]

It would, and I will come to that in my final comments in relation to the speech by the hon. Member for Aberdeen North. There is a wider point, which the hon. Lady has highlighted perfectly. How much difference will raising the expenditure credit by one percentage point make to companies investing in the UK? That is the question, and we need to know the answers to it, hence the proposal for a review. I sound like a stuck record, but this issue is very important. It is only right that the Minister should come back to the House at a later stage and provide it with that information.

[Laura Pidcock]

Does my hon. Friend think that the Government have calculated the one percentage point figure on the basis that we are exiting the European Union and on formal calculations about what the net consequence of removal from the EU will be, or is this just an arbitrary figure?

[Peter Dowd]

The honest answer is that I do not know. If I can be the postperson for that question, I will pass it on to the Minister and perhaps he will answer it. I am sure that he will be able to do so, if not today, certainly in due course.

On new clause 9, the research and development expenditure credit gives corporation tax relief to companies that undertake research and development, as the Minister said, as well as to small and medium-sized enterprises subcontracted to undertake work of that nature. The current rate of relief for those companies is, as everyone knows, 11% of their qualifying expenditure, through either reduced liabilities or cash payments. As the Minister set out, clause 19 increases that to 12% of qualifying expenditure.

On Second Reading and today, the Minister has talked about the contribution that research and development makes to our nation’s productivity. It is worth our while to reflect on the Government’s record when it comes to productivity, because that goes to the heart of the matter. If we are to raise productivity, how do we know that it is linked somehow with research and development, or vice versa? If the figure is being moved from 11% to 12%, how do we establish the interaction, the causal links and the correlations? How do we do that? We do not do it, which is why we need a review.

As you know, Mr Owen, productivity has flatlined, and it has remained lower than its peak under the last Labour Government for the full eight years of the current Government and the coalition. The Office for National Statistics has found that since this Government took office, they have presided over the worst period of productivity growth since the Napoleonic wars. I think that was the last time we came out of Europe—well, perhaps not the last time, but one of the times. [Laughter.] That was a dodgy link, I have to say.

At present, UK productivity lags behind that of most of the G7 nations, notably the United States, France, Germany and Italy. What the Germans produce in four days, Britain achieves in five. We have heard that so many times, and the question that arises is: does the Government’s proposal do anything to enhance productivity? We do not know. Do the Government have any proposals for us to suggest how they might do that via a review? No, they do not. That is why we want a review.

This is not a mere technicality; it has serious consequences. As the Nobel prize-winning American economist Paul Krugman once said,

“Productivity isn’t everything, but in the long run it is almost everything.”

More than many other indicators, our productivity has a huge impact on both our future economic growth and the living standards of millions of British workers, who rely on productivity gains to improve their pay and conditions. We know that investment in research and development can, and does, enhance productivity. The question is: do the proposals do that? We do not know. Why do we not know? Because the Government—I suspect—will not agree to our review today. We will persist on that. As far as I can see, we do not have any information from the Government on the correlation.

Sadly, we are heading in the wrong direction. The Office for Budget Responsibility predicts that the Government’s plans will leave us with a 17-year period of wage stagnation. The Institute for Fiscal Studies agrees, arguing that we face two decades of lost pay growth. Will the Government’s proposals do anything significant to deal with that? We do not know, but we do not think so.

Time and again, the Chancellor has watered down the Government’s promise of increases in the wage floor. That will not help, either. We know that the most sustainable way to ensure a return to wage growth is to boost productivity, as well as ensuring that there is a strong framework of other worker representation to make sure that gains are shared evenly across any enterprise. That is also important. Research and development not only helps companies to grow, helps profits and helps income tax and tax generation, but helps workers and wage growth. Are the Government doing anything in the proposals to assist with that? No.

The Prime Minister recognised the importance of economic democracy and worker representation all the way back when she became Prime Minister. It is also important that workers can see what research and development investment there is, and what the Government’s proposals on it will do to help. It is difficult to establish what gains there will be under the proposals, and that is why we need to check and challenge the Government time after time on this one.

Of course, while research and development investment is not going into businesses, companies can rely on large pools of pretty cheap and expendable labour. That is important. In the past, the Minister has referred to us having quite high levels of employment, but we come back to the issue that the levels of employment per se—

[The Chair]

Order. We are straying a little bit and having a general discussion on the economy rather than on research and development expenditure credit under new clause 9.

[Peter Dowd]

I appreciate that, Mr Owen. The point I am trying to make is this: in relation to the increase from 11% to 12%, what will the Government’s proposals do that will help any of these elements of the economy? We must set it in this context. What is the purpose of the increase from 11% to 12% if not to increase economic growth? We are trying to establish what the link is, and we cannot find it at this stage, hence the need for a review of the proposals. We fear that, unless we have significant increases in research and development, we will not get out of the difficult economic circumstances we face.

There is the further issue of regional research and development, which my hon. Friends have alluded to. A recent report from Sheffield Hallam University shows vast regional disparities in research and development funding. Today, we are asking the Government to produce a review that would also cover those regional disparities, because that is crucial. None of the Bill’s proposals come in isolation. We acknowledge that the report from Sheffield Hallam included universities and charity sector organisations, which, of course, are exempt from the research and development expenditure credit. It is nevertheless pertinent to highlight that in relation to regional disparity and overall Government research and development expenditure. The university also demonstrated that the Government expenditure on research and development is spent in the south-east, which employs 36,500 people in research and development, compared with the west midlands, which employs only 3,100. We propose including that in any review of the impact of the increase from 11% to 12%.

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[Peter Dowd]

Again, I do not think there is anything in the Government’s proposals that helps to address that disparity. We do not know. That is part of our reason for making our proposal, and I suspect it is also the reason behind the proposal made by the hon. Member for Aberdeen North: to try to tease out those particular issues and get information from a review that would help us to determine that. It is important to make the point that we are restricted by the amendment to law proposals and can only ask for reviews. It is a concern that we are not able to push this more. That is why, to some extent—with your consent, Mr Owen—we are slightly widening the debate. We need to widen it out to be able to focus, in a bizarre sort of way, on the specifics of the Government’s proposals and how they might enable research and development, and the 11% to 12% increase, to help.

In talking about regions and trying to make those important comparisons, the question is what the 11% to 12% increase will do for those regions. The Cambridge area has twice the research and development jobs of the entire north-west, for example, where my Bootle constituency is. Even when we exclude Cambridge University, as this credit does, the Cambridge area has twice as many such jobs as the midlands, more than Scotland and Wales combined, and only 2,000 fewer than the north of England. One has to ask the question, “What do the Government’s proposals do to help that?” We cannot see what they are doing to help it, hence the need for a review. I persist with the issue of the review, hence the new clause. We can push on and increase the 11% to 12%, but what is the evidence that it will be not only evenly spread across the country, but rebalanced? I do not see that at all in the proposals, which is why we must look at them in more detail.

To take another example, we talk about the northern powerhouse, but eight years on the economy is still not rebalanced and there is nothing in the proposals to help with that. In that regard, it is difficult not to comment on Lord O’Neill’s resignation over that particular matter, because he did not see the Government in any way pushing the issue of research and development in some of the regions. Take, for example, the fact that only two of the 20 most expensive infrastructure projects being financed by the Government are in the north-east, the north-west or Yorkshire and the Humber. We could look at all the other cities in the broader sense—I will not go there—but the point is that research and development expenditure does not seem be going to the areas that perhaps need it most to help their economy.

I have asked the Minister, as have other hon. Members, whether the Government plan to redress that imbalance in regional research and development expenditure. If the extended credit being debated today might contribute to rebalancing, will he tell us the percentage change in regional distribution that that might account for, rather than generalisations? We need details. Some regions right across the country are calling out to know what this will do specifically for the regions. We have heard a lot from the Government about rebalancing, but that has not yet been translated into action.

That is why we tabled the new clause: to enable us to review the change and better to understand both the revenue effects of the proposal and its effects on research and development expenditure more generally. Should the new clause succeed—we will press it to a vote—we hope it will encourage the Government to reflect on the scale of the productivity challenge and the action required to address it properly. We hope that, if the Government agree to the review, it will also give us some insight into the revenue forgone in specific parts of the country.

I hope that hon. Members consider supporting the new clause for the reasons I have set out. If they will not support it, I exhort them to push the Government to give us more detail about how this is going to impact on all the regions and nations of the United Kingdom. There will be a consistent and persistent belief that we are not a one-nation country and that not everybody is in it together. An awful lot of people are out there on their own, and the Government must give us information through a review to show in solid terms how this increase from 11% to 12% is going to help those communities.

[The Chair]

I call the Minister to respond within the parameters of the three proposals under discussion.

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[Mel Stride]

The hon. Lady knows that we are reviewing that specific point in the context of the negotiations. Those are decisions, among others, that we will have to take in future. My point is about that critical flagship programme, Horizon 2020. The hon. Member for Bootle suggested that we have not treated universities in the way that we have the agricultural sector, to which guarantees have been provided, but this is a clear example in the universities sector of where we are doing precisely that.

I will not dwell on those matters; I am aware that they are more directly related to R and D tax credits, but the patient capital review is a commitment that we put a lot of money, effort and research and development into. The intellectual property issue was mentioned in the debate. There is the patent box, which provides a lower rate of taxation for those businesses that develop intellectual property, so that we make sure that that is developed and exploited in this country.

The hon. Member for Aberdeen North quite rightly mentioned the North sea, which is absolutely critical to her part of the United Kingdom. There are measures in the Bill that we will come to shortly that further ease tax pressures in that sector, and certainly there were measures in the last Finance Bill, when she and I both served on the Committee.

[Peter Dowd]

I know that the Minister is aware that the Public Accounts Committee reported that the cost of R and D tax relief increased from around £100 million in 2001 to more than £1 billion in 2011 and 2012, while the actual amount of business expenditure on research and development stayed more or less the same. We have seen large increases in the costs as a result, potentially—I am not saying there was, but potentially—as a result of some abuse. The question I want to try to tease out is, how do the Government know that the increase in research and development reliefs will achieve the desired result, without having a proper review?

[Mel Stride]

In my opening remarks—I will not re-rehearse them—I talked about the evidence of the amount of money going into R and D and the return per pound. There is a relationship between the amount that goes into R and D tax credits and the amount of R and D spend that is occurring, but the one does not solely cause the other. Many externalities impinge upon why companies may or may not invest in research and development, the most obvious being the general state of the economy and business confidence. That should not take away from the fact that it is demonstrably the case and will continue to be the case that if we provide attractive taxation reliefs aimed at encouraging companies to invest in research and development, we will see a displacement of activity towards those activities, which is what we so strongly want to see in our country.

I shall leave it there and say that we have had an extremely wide-ranging and interesting debate. I hope that we can move on to put the question.

Question put and agreed to.

Clause 19 accordingly ordered to stand part of the Bill.

Clause 20

Intangible fixed assets: realisation involving non-monetary receipt

Question proposed, That the clause stand part of the Bill.