How much does the UK spend supporting its businesses?
UPDATE 22/09/2016: following some further research on this topic, we have updated the numbers presented below. We will also publish updated figures for the year 2014-2015. To receive the new figures, sign up to our newsletter here.
For many in the policy community, much of the past year was consumed thinking about the Spending Review, and how cuts would affect different areas of government. In the field of business support, despite being a lot less severe than expected, cuts did come - with the Department for Business, Innovation and Skills (BIS) seeing a 17% reduction in spending.
How will this affect businesses and innovation in the UK? How should government target the cuts? In order to answer these questions, it is critical to understand how the British government supports its businesses and entrepreneurs, not just through BIS, but across departments. That is why at the IGL we have conducted research to map how much public money goes to businesses and, crucially, through what type of programmes.
What we did
We soon realised this was a bigger task than one might expect. What counts as business support? Grants to SMEs surely do; but what about transport subsidies, or procurement? We settled on the relatively broad definition of any programme mainly aimed at fostering the growth, performance or productivity of businesses or entrepreneurs. Under this definition, money that went to businesses to provide public goods (think transport subsidies) were not included, but loans to help startups were, even when they had a complementary outcome such as creating jobs.
Another important question regarded the definition of spending, and whether to include more than simple cash allocations. We decided to include tax expenditures – estimates of tax revenue forgone by HMRC for the benefit of businesses – but only up and above the tax relief widely considered embedded in the tax system. Therefore, we excluded capital allowances, which recognise the need for businesses to invest and replace capital in order to make profits, and are a common component of most tax systems around the world, but included R&D tax credits.
In the end, we divided programmes into four types: grants (such as Innovate UK’s Innovation Vouchers); loans (e.g. by the British Business Bank); tax-expenditures; and in-kind support (providing advice, mentoring, and other non-financial support). Non-disbursed financial schemes, such as loans guarantees by UK Export Finance, were excluded.
We based our results on annual reports for the financial year 2013-2014 (the most recent available when we began researching). You can navigate the data in our visualisation at the bottom of this page (or full screen here), and find out more about our methodology here.
The 4 things we discovered
Our research was in many ways surprising. The most interesting findings were:
- The UK spent roughly £12.5 billion supporting business in 2013-2014.
- Surprisingly, the largest bit of spending was in tax relief, which amounted to two thirds of the total, at $8.3 billion.
- The smallest sums went to in-kind support programmes. This is hardly surprising, given that most spending in these programmes goes to administration and staff, but it demonstrates the relatively hands-off approach of the British state to supporting businesses. Moreover, it appears that much of the cuts will fall on this type of programme (for example, the Business Growth Service), further entrenching this difference in spending.
- Business support takes place across government departments: beside tax relief and BIS, we identified 6 other public bodies with business support programmes, including the Department for Environment, Food and Rural Affairs, and the Department for Communities and Local Government.
So what does this mean?
Although £12.5 billion might sound like a lot of money, it is worth putting it into perspective: it represents around 1.6% of the government budget; in the same period, the UK spent £10.1 billion in International Development. The budget for the Ministry of Defence was more than four times that.
What’s most striking is that tax expenditures, by far the largest item, are mostly not included in Spending Reviews. The relatively small £4.2 billion in loans and grants has been heavily scrutinised, while a different standard is applied to the Treasury’s decisions. This fact should receive more attention: as far as the tax payer is concerned, a pound spent in forgone taxes costs the same as one spent in providing advice to businesses.
In addition, it is difficult to establish the impact this money has had. Spending on evaluation is hard to single out, as it is often embedded in departmental budget, but the available evidence suggests it represents a fraction of the overall budget. The most recent figure (from 2010-2011), from the National Audit Office, indicates that across all government departments £44 million went into finding the impact of programmes. That was 0.35% of the total. For reference, a non-profit organisation such as the Big Lottery Fund recommends devoting “up to 10%” of total spending to determine whether a programme works. In the context of budget cuts, it is not a luxury to evaluate a programme, but rather the best way to ensure maximum impact.
Some departments, such as BIS, have recently done a lot to better understand the impact of their programmes. Given the size of business support through tax expenditures, we would expect HMRC to be doing much more on this count. Beyond better evaluations, departments should become more experimental, and embrace piloting and trialling new ideas. BIS and Innovate UK have already moved in this direction, becoming part of the ten global organisations that have joined the IGL to pilot and trial programmes to ensure efficacy.
In the next few months, departments will have to make difficult decisions, including on spending to support businesses. The path of least resistance could lead them to cut useful programmes to save politically sensitive ones. A much more sensitive approach would be to look at business support as a whole, and decide on the basis of evidence.
 In fact, even less, as our £12.5 billion includes tax expenditures – a total account of which is not published by HRMC. The actual percentage is likely less than half of that.
Image credit: Pexels.
The authors are grateful to Hugo Bessis who undertook the early stage research work on this project.
To explore spending in each department, click through the blocks. To go back, right click on a block.