techUK's submission to the Autumn Statement points to a cautiously optimistic outlook amongst techUK members, but to turn this into growth for the tech sector and the wider economy the Chancellor must focus on competitiveness, investment, productivity and public services.
The Treasury has set out a commitment to foster long term economic growth for the UK economy through strategic investments in sectors of the economy, including digital technologies.
Ahead of the Autumn Statement techUK, is calling on the Government to support the growth of the tech sector and the wider economy by focusing on four key themes, competitiveness, investment, productivity and public services.
The UK has established itself as a leading tech economy, with a strong digital sector and globally leading research and start-up ecosystem. The tech sector is one of the UK's modern economic success stories, with its contribution to the economy rising over 25% between 2010 and 2019, and now adding £150 billion to the economy every year. Digital services and the growing use of AI are helping to increase growth beyond the tech sector and meaning the UK tech sector is not just a valuable economic asset in and of itself but also an engine of growth for the wider economy. Digital products and services generated £392.9 billion for the economy in 2020 while early research has shown new generative AI products could boost firm level productivity by as much as 14%.
However, the success of our tech sector must not breed complacency. There is now a fierce global race over the key technologies that will shape the future: from AI and Quantum to green technologies and semiconductors, competition between governments to attract talent, bring in investment and grow tech clusters is greater than ever. Further, while the UK has developed a strong tech sector the take up of productivity boosting digital technologies across the wider economy has been slower than in our key competitors.
2022 presented significant challenges for the UK tech sector, as soaring energy prices and a talent shortage resulted in a major drop in confidence. However, 2023 has the potential to end on a brighter note with techUK members showing a cautious optimism about their growth and investment plans in our latest Digital Economy Monitor Survey.
techUK members are ambitious for the future with techUK members telling us they are focusing on growth, efficiency, and sustainability but need Government support to meet their aims.
To capitalise on this renewed optimism and drive growth in both the tech sector and the wider economy the Autumn Statement must seek to boost the confidence of the tech sector with a focus on four key themes - competitiveness, investment, productivity, and public services.
We have set out some of our key recommendations to the Treasury below and you can read techUK's full representation to Autumn Statement here.
Competitiveness
Competition for investment in key technologies has become a fierce global race and the UK needs to ensure that we have a competitive offer to support the growth of domestic firms as well as attracting inward investment.
While fundamentals of the UK economy are strong for tech our sector faces an array of competitive challenges, including a digital divide across the regions and nations, skills shortages, high energy costs and of significant subsidies for key technologies such as green technology and semiconductor development in the USA and the EU.
To address these challenges and ensure the UK continues to put forward a competitive offer the Autumn Statement needs to ensure that our business and regulatory environment remain globally competitive.
Ensure that the regulatory framework supports UK's global competitiveness: regulation plays a significant role in maintaining the UK's global competitiveness and supporting technological change and innovation. Creating a pro-innovation regulatory system is a major potential competitive opportunity post-Brexit, to secure this we urge the government to take a number of actions. These include enhancing regulator capabilities, providing clear regulatory directions, designating a dedicated hub for better regulatory practices, instating a Growth Duty for regulators such as Ofcom, and fostering collaboration and resource pooling between regulators on key emerging technologies such as AI. These measures are essential to ensure that our regulatory framework aligns with global competitiveness and supports technological advancements in the UK, ensuring it remains at the forefront of innovation.
Address the digital divide to unlock the global competitiveness of UK's innovation economy: the UK's innovation economy is facing a digital divide, which is characterised by unequal access to digital infrastructure, varying levels of digital skills, and disparities in online public services across different regions. This divide is undermining the UK's global competitiveness.
The 2023 Gross Value Added (GVA) data for the tech sector underscores these disparities. For instance, London's high GVA per person is remarkably high at £9,083, contrasting sharply with the West Midlands at £2,055, and even lower in Scotland at £1,979 and Wales at £1,348.
The government should prioritise reducing these discrepancies, ensuring that digital infrastructure, skills, and online public services are accessible and equitable across all regions. This would promote economic growth, reduce regional imbalances, and enhance the overall competitiveness of the tech sector. By effectively supporting regional digital ecosystems, the tech sector's annual economic contribution could increase by £41.5 billion by 2025, creating 678,000 more jobs.
Reform the visa system to reduce costs: the UK faces domestic skills shortages in critical tech roles, with competition for skilled talent increasing. This is exacerbated by the high cost and complexity of the UKs visa system, which puts UK firms at a disadvantage to their competitors. For example, techUK members reported in early 2023, that obtaining a visa for a UK-based staff can be up to six times more expensive than for EU-based staff. For a five-year sponsored visa, small UK firms bear a burden of £6,910, while larger firms - £11,030. Despite the already high costs, UK immigration fees are set to rise further. Additionally, firms also view the system as too complex and slow.
To address these issues, the government should work with the industry to identify ways to streamline the visa application process, and to keep the visa fee levels competitive with those of the UK's closest competitors.
Respond to the US Inflation Reduction Act (IRA) and EU Green Deal Industrial Plan by supporting the widespread adoption of green technologies: for the UK to remain competitive in technological innovation and implementation towards net zero, the government should focus on digitising the national grid (which could reduce the cost of net zero by up to £16.7bn per year), prioritising connections for strategically important projects, and by including telecoms and data centres in the Energy Intensive Industry Scheme.
Investment
While the UK boasts several strengths as a hub for business investment, such as flexible labour market and generally good business conditions, it also grapples with barriers to investment. This includes a less strategic and hands-on approach to securing inward investment, which is often not as effective as our nearest rivals, and a lack of consistency and certainty in our investment incentives. To bolster the UK's attractiveness for inward investment, we propose that the government should:
Review the findings of the Lord Harrington Review of Foreign Direct Investment: the Review is set to make recommendations backed by UK and international businesses for improving the UK's inward investment offer, creating new ministerial responsibilities for attracting investment, and tackling barriers that can undermine investment cases. The government should carefully review the suggestions of the report and consider accepting its findings.
Create a stable environment for investment in R&D and capital projects: Businesses take investment decisions seeking long term certainty about the shape of the investment incentives available to them. The UK has hurt its attractiveness as a destination to invest through constant chopping and changing of its business incentives.
This can be rectified by setting out a Five-Year Plan for the UK's R&D Tax Credit at the autumn statement. The Plan should focus on how to improve the operation of the Tax Credit for businesses as well as establishing a roadmap to when further qualifying expenditures might be considered for inclusion, building on the recent welcome expansion to cover cloud computing and data costs.
The Government should also move to make full expensing permanent in the Autumn Statement. Full expensing has significantly improved the competitiveness of the UK's capital investment reliefs. To ensure this welcome scheme can deliver its true benefits the Government needs to at least extend the relief beyond March 2026, ideally making it permeant, in order to give confidence to long term investors and unlock the true potential of this welcome incentive.
Fix the UK's scale up economy: while the UK is an excellent place for tech startups, there are challenges as these businesses grow. To support scale-up companies, we recommend providing certainty by making the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) schemes permanent. The Government should also launch a British ‘Scale-up Sprint' to identify, within six months, new investment vehicles and regulatory changes that could create investment opportunities into critical technologies such as green tech, AI, quantum and semiconductors. The Sprint should continue work being done following the Edinburgh reforms and Mansion House Statement and bring in founders, early-stage companies and larger corporates to identify new investment vehicles and opportunities.
Productivity
The UK faces several productivity challenges related to the adoption of digital and AI technologies, as well as skills gaps and digital exclusion. SMEs are lagging behind larger businesses in their adoption of digital and AI tools, with only 15% of small companies and 34% of medium-sized companies having adopted at least one AI technology, compared to 68% of large companies.1 Furthermore, an increasingly complex AI regulatory environment means that many companies, especially SMEs, feel overwhelmed by the number of existing and upcoming AI policies, guidance, standards, and regulation, with potentially high compliance costs. This is further exacerbated by a digital skills gap and digital exclusion. Addressing these issues could reap significant societal and economic benefits.We propose that the government should:
Take full advantage of the AI revolution: AI promises substantial economic growth for the UK, but a gap in adoption persists among SMEs, which have to navigate issues such as access to talent, data, and compute, as well as an increasingly complex AI compliance landscape. To ensure the fundamentals of the UK's AI ecosystem are strong the UK needs to increase access to talent, unleash scale-up funding into the sector, ensure that UK AI companies have access to the infrastructure the sector needs (such as new and advanced semiconductors, computing capability both via the cloud and from an exascale supercomputer) and secure access to cheap energy, lab space and high speed digital connectivity to ensure AI services can be accessed across the UK. Furthermore, we need to ensure we get the right incentives for both small and large businesses to adopt AI technologies as set out in techUK's report AI Adoption in the UK: Putting AI into Actionand that we develop a competitive regulatory environment that is flexible, responsive and adaptive.
Incentivise digital adoption through the tax system: boosting digital adoption, especially among SMEs, is crucial to address the UK's productivity challenge, as these businesses are pivotal for innovation and employment. Despite this, the UK is underperforming in the adoption and use of digital technologies compared to our international competitors. For example, research from Be the Business shows that while UK companies put significant importance on management and technology adoption, we invest less than our G7 counterparts2. 92% of SMEs say technology is vital to their survival, yet these businesses only plan to increase technology investment by 13%, below the European average of 18%.3
To help support SMEs in digitising, the government should introduce a "Small Business Digital Growth Allowance" scheme, which would provide a support of 140% on the first £50,000 of expenditure on qualifying productivity enhancing digital services This will empower SMEs to embrace digitalisation and harness emerging technology, such as AI, to become more productive and grow sustainably. It is a net win for the UK, with economic modelling estimating that if SMEs unlock the full benefits of technology, an extra £232bn per annum could be added to the economy.4
Additionally, it will be important to better signpost the tech support and grants being offered by existing UK tech firms to SMEs, to help SMEs navigate to programmes and grants that support their needs much quicker. Finally, it will also be important to accelerate the implementation of Making Tax Digital and mandating e-invoicing to help boost productivity and economic insights.
Address the skills gap and promoting digital inclusion: this will be crucial to ensure a digitally skilled and inclusive society and could bring significant economic benefits. For example, research from the Centre for Economics and Business Research, and the Good Things Foundation estimates that every £1 invested in digital inclusion generates a society wide return of £15.
In light of this, the government should review the National Curriculum and focus on enhancing digital literacy and skills across education levels. Additionally, measures to improve digital education, support flexible work options, and establish a ten-year National Inclusion target focused on providing universal access and skills for interned use, led by a dedicated Cabinet Office Minister for Digital Inclusion and a Digital Inclusion Unit in the Department for Science, Innovation and Technology, can help ensure equitable access and opportunities throughout the UK.
Enable digital IDs to grow the economy and boost productivity: digital identity technology offers a promising way for people to safely participate in the digital world and boost productivity. The UK should prioritise the development of this nascent market to seize a stake in a global market predicted to value $40.44 billion by 2027. To do this, the government should accelerate the delivery of the Data Protection and Digital Information Bill and work with the sector to clarify the operation of the trust framework. The government should also allow full interoperability between public and private sector digital IDs.
Public services
UK's public services face a variety of challenges, spanning from the lack of common standards and interoperability issues to grappling with legacy systems, limited secure-ID verification, and skills shortages. Embedding digital technology across our public services has huge potential to increase the efficiency and resilience of public services as well as offter more tailored services. However, to achieve this we need to overcome the barriers that often stand in the way of public sector digitization. To address these issues, techUK recommends the following steps:
Digitise public services across the country and address the procurement challenge:digital technology can improve service quality for the users and reduce costs for the government. To fully embrace digital potential in public services, a cross-government taskforce must tackle legacy IT issues, ensure interoperability between public and private sector digital IDs, and invest in training and infrastructure across the UK. It will be equally important to improve the procurement regime and upskill government buyers while fostering industry collaboration.
Digitise health our health and social care system: to improve outcomes for patients and the health of the nation the government should ensure the £2.1 billion allocated for NHS digital transformation is delivered. Delivering these funds will be paramount for comprehensive digital transformation, fostering seamless integration of technology to reduce wait times and bolster staff efficiency.
Modernise the criminal justice system through the greater use of digital technology: the development of a digitally enabled Criminal Justice System is critical, enhancing the digital experience for various stakeholders. To empower law enforcement to tackle increasingly complex and transnational crimes, the government should focus on upgrading technology, improving interoperability, and addressing barriers, such as funding and procurement processes. It will also be crucial to allocate sufficient funding for training and professional development across the criminal justice sector to further enhance its capabilities.