A series of key government announcements over the coming weeks will set the direction of travel for research and innovation for years to come. Next week’s spending review will set the financial parameters for the remainder of this Parliament – and we shouldn’t expect this outcome to maintain the status quo, given this is the first zero-based review under a Labour government for 17 years.
Accompanying this will be the industrial strategy white paper, which is likely to have a focus on driving innovation and increasing the diffusion and adoption of technologies across the economy – in which the UK’s universities will need to be key delivery partners. We can also expect more detail on the proposals in the immigration white paper, with implications for international student and staff flows to the UK.
The outcome for higher education and research remains hard to call, but the government has sent early signals that it recognises the value of investment in R&D as crucial to transforming the UK’s economy. In a volatile fiscal environment, DSIT’s R&D budget saw a real-terms increase of 8.5 per cent for 2025–26 with protection for “core research” activity within this.
Looking ahead to the spending review, the Institute for Fiscal Studies has pointed out that the fiscal envelope set by the Chancellor for capital spending – which is how R&D is classified – at the spring statement is significantly frontloaded. There is scope for increases in the early years of the spending review period and then real-terms declines from 2027–28. With such significant constraints on the public finances, it’s more essential than ever that the UK’s R&D funding system maximises efficiency and impact, making the best possible use of available resources.
International comparisons
Last month, the Russell Group published a report commissioned from PwC and funded by Wellcome which considered the experiences of countries with very different R&D funding systems, to understand what the UK might learn from our competitors.
Alongside the UK, the report examined four countries: Canada, Germany, the Netherlands and South Korea, scoring them across five assessment criteria associated with a strong R&D system: strategic alignment to government priorities; autonomy, stability and sustainability; efficiency; and leveraging external investment. It also scored the countries on two measures of output: research excellence and innovation excellence.
The analysis can help to inform government decisions about how to strike a balance between these criteria. For example, on the face of it there’s a trade-off between prioritising institutional autonomy and ensuring strategic alignment to government priorities. But PwC found that providing universities with more freedom in how they allocate their research funding – for example, through flexible funding streams like Quality-Related (QR) funding – means they can also take strategic long-term decisions, which create advantage for the UK in key research fields for the future.
Over the years, QR funding and its equivalents in the devolved nations have enabled universities to make investments which have led to innovations and discoveries such as graphene, genomics, opto-electronics, cosmology research, and new tests and treatments for everything from bowel disease to diabetes, dementia and cancer.
Conversely, aligning too closely to changing political priorities can stifle impact and leave the system vulnerable. PwC found that, at its extreme, a disproportionate reliance on mission-led or priority-driven project grant funding inhibits the ability of institutions to invest outside of government’s immediate priority areas, resulting in less long-term strategic investment.
With a stretching economic growth mission to deliver, policymakers will be reaching for interventions which encourage private investment into the economy. The PwC report found long-term, stable government incentives are crucial in leveraging industry investment in R&D, alongside supporting a culture of industry-university collaboration. This has worked well in Germany and South Korea with a mix of incentives including tax credits, grants and loans to strengthen innovation capabilities.
Getting the balance right
The UK currently lags behind global competitors on the proportion of R&D funded by the business sector, at just over 58 per cent compared to the OECD average of 65 per cent. However, when considering R&D financed by business but performed by higher education institutions, the UK performs fifth highest in the OECD – well above the average.
This demonstrates the current system is successfully leveraging private sector collaboration and investment into higher education R&D. We should now be pursuing opportunities to bolster this even further. Schemes such as the Higher Education Innovation Fund (HEIF) deliver a proven return on investment: every £1 invested in HEIF yields £14.8 in economic return at the sector-level. PwC’s report noted that HEIF has helped develop “core knowledge exchange capabilities” within UK HEIs which are crucial to building successful partnerships with industry and spinning out new companies and technologies.
In a time of global uncertainty, economic instability and rapid technological change, investments in R&D still play a key role in tackling our most complex challenges. In its forthcoming spending review – the Russell Group submission is available here – as well as in the industrial strategy white paper and in developing reforms to the visa system, the government will need to balance a number of competing but interrelated objectives. Coordination across government departments will be crucial to ensure all the incentives are pointing in the right direction and to enable sectors such as higher education to maximise the contribution they can make to delivering the government’s missions.
