It’s time to break the innovation policy omertà. It’s traditional for scientists and science policy experts to respond to any spending review with a loud demand for more public funding. (Here are recent examples from Universities UK, the Campaign for Science and Engineering, Science is Vital, Sir Paul Nurse, and Sheffield University’s Richard Jones.) Considerable effort is made to present a united front.

This is no bad thing. There’s a strong case that spending on research and innovation is an investment that increases economic growth and is worth doing even for a country trying to reduce its deficit (see for example, Jonathan Haskel’s comments in this FT piece).

But with the Department of Business, Innovation and Skills facing cuts of 25 to 40 per cent, the idea that science and innovation spending will increase or even stay the same looks like wishful thinking. BIS spends about £25bn a year, of which six billion or so goes on science and innovation. It will be very hard for a Government elected with a mandate to make sharp public spending cuts to protect this whole six billion.

So let’s ask the unaskable: if cuts are going to be made, what is the best, or the least bad, way to make them? How can we get the maximum practical benefits for the country from 25 to 40 per cent less spending?

The path of least political resistance is to try to protect the current research funding system. You’d do this by cutting as much as possible from the management costs of BIS itself and its arm’s-length bodies, saving money at Innovate UK by turning grants into loans, and trying where possible to minimise cuts to research council funding. The holy grail for this strategy would be if BIS can claim to be maintaining the Coalition’s “flat-cash” settlement for science (perhaps helped by sleight of hand, such as “tucking in” Innovate UK spending into the science budget). The show must go on! – or at least it must look like it is.

But this would be a mistake. If austerity has any benefit, it is that it forces people to prioritise and gives politicians cover to set aside vested interests. Austerity that seeks to preserve the status quo is the worst of both worlds: financial pain without strategic gain. Or, to put it another way, if there’s going to be less public support for innovation, we should be more thoughtful about where it goes.

With that in mind, here’s a proposal for what a 25-40% smaller funding package for science and innovation would look like.

First of all, the government can use austerity as an excuse to cut ineffective spending that serves the needs of vested interests. Exhibit A is the lavish Patent Box tax credit, which costs the Treasury somewhere upwards of £350m a year (p184 here), for vanishingly small benefit. (The Treasury will worry that without a patent box, Astra Zeneca and GSK will decamp to Belgium. But far cheaper to discourage that through diplomacy – persuading other countries to scrap patent-box-like schemes, perhaps with the help of the OECD, than paying the patent-box Danegeld.) This will not be popular with the pharmaceutical industry, but if you can’t push back against vested interests in times of austerity, when can you do it?

This leaves us somewhere between a billion and two billion pounds of further cuts to make, assuming 25% to 40% cuts.

The path of least resistance would be to start making cuts from the innovation budget – in particular the £600m or so that is spent via Innovate UK – to preserve the politically totemic science budget. But let’s resist this temptation for the moment. After all, plenty of other countries seem to spend far more on public innovation than the UK (Finland’s equivalent of Innovate UK, TEKES, spends not much less than Innovate UK each year in an economy a tenth the size).

Rather than starting on Innovate UK, let’s look at the far larger (£4.7 billion) science budget. We can take as a starting point a comment SPRU’s Paul Nightingale made recently on Twitter:

"Total amount of science funding isn't as important as how well research system is aligned with societal need."

Aligning, focusing… whatever you call it, a diminished public research budget will achieve more in the way of economic impact if we can make sure it is joined up with the wider needs of the country, and works coherently with the rest of our innovation system.

The current research funding system is based for the most part of the principle of “excellence”. Research Councils fund the best academic work, wherever it may be and in whatever field. There is some consideration of “impact” in the wider world, but not much. This leads to some odd features, not least a concentration of research funding in the south east of the country (as Tom Forth points out, the location of public R&D funding doesn’t reflect where businesses do R&D). Partly as a result, the UK is very efficient at producing highly-cited academic papers, but ends up with a system in which businesses do relatively little R&D.

One way to address this would be for the government to apply the cuts it is making to both research and innovation, but to change the way the remaining research funding is allocated to increase the chances it delivers economic benefit. This would primarily mean considering other factors alongside academic excellence.

For a start, we could introduce a spatial dimension to research-funding formulas, so that funding is less concentrated in the Golden Triangle. (After all, HEFCE’s data on the interaction between businesses and universities suggest that businesses get far more benefits from informal interactions with universities and by hiring university-trained staff than from reading research papers or commercialising specific bits of intellectual property.)

We could also ensure that some proportion of funding was targeted at particular societal and economic challenges, aligned with the UK’s practical capacities and innovation funding. This is not a million miles away from what the Wellcome Trust’s new strategy proposes. The system could also do more to encourage co-funding of research, either by businesses or by government departments.

The last big attempt to target research funding, the EPSRC’s Shaping Capability strategy, was widely criticised by senior scientists and significantly watered down. If we want to maximise the benefits of research funding, it may be worth another try.

I won’t pretend that this would not be a radical change. It would involve cuts of a billion or more to science funding, and would without a doubt severely degrade Britain’s capability to undertake world-leading science. But if our goal is to make the most of the practical benefits that research brings: applied science, high levels of R&D, and solutions to societal challenges, it is a better option than trying to preserve the status quo for science and scything down everything else.

We should apply the same principle of focus to innovation funding. The most expensive bit of innovation policy does not go through BIS’s books at all – it’s the R&D tax credit, which costs £1.6 billion a year – and funds big and small companies alike, in all sectors. I’ve seen several sensible-sounding proposals for focusing the R&D credit.

These include limiting it to small companies (who are more likely to be capital constrained and therefore more likely to respond to the nudge), relating it to increases in R&D spending, not absolute spending , or to numbers of R&D staff employed (to reduce dead-weight loss). Whichever one we pick, we could aim to save 25%-40% per cent of its cost without reducing its impact by the same amount. Innovate UK funding should also be tightly integrated with the new, more mission-oriented funding streams going into universities.

Government could also look for opportunities to make Innovate UK funding go further. Proposals to turn some Innovate UK grants into loans have been mooted (and criticised by the Financial Times), but are unlikely to be applicable to large parts of Innovate UK spending.

At the same time, government should make a serious push to get other departments to spend some of their procurement budgets on more innovative things. It has long been hoped that the uninspiringly-named SBRI programme would harness hundreds of millions of the Government’s purchasing power to the cause of innovation, but so far the programme has been small. If we want a cut-price but efficient innovation system, this has got to change. Big spending departments, such as the Departments of Health or Education should set up units to turn society’s future needs into research and procurements specifications in fields like digital health or edtech, and spend their money accordingly.

Making the research and innovation system more targeted will not be trivial. In particular, it will not be possible to do it without coordinating capability. This means that slashing central staff, whether in BIS or in arm’s-length bodies, as government may be planning, is a bad idea. There may well be scope to merge funding bodies (Finland’s TEKES and Singapore’s A-STAR are more consolidated than the various BIS organisations), but whatever is left needs more than a skeleton crew.

On the contrary, a targeted research and innovation system needs officials and funders who have good data on where money is going, where research is happening, and where innovative businesses are. Its officials should be taking advantage of new developments in data analytics to understand the system, and should have the experience both in research and in business to make good investment decisions. Concentrating cuts at the centre would have precisely the opposite effect.

So to conclude, if we want a smaller but smarter innovation funding system, there are a few steps we could take: cutting waste, especially in the form of the patent box and the extent of the R&D tax credit; focusing academic research on areas of societal need and economic opportunity; aligning innovation spend with these areas, and relying more on departmental procurement to make innovation happen; and keeping a smart central capability to make the system run effectively.

On the face of it, this is a list of recommendations that is likely to be unpopular with almost everyone. People opposed to austerity will dislike the very fact it entertains the thought of cuts. The pharmaceutical industry will loathe the end of the Patent Box. Research scientists will be appalled at the downgrading of the excellence agenda. Cutting any innovation support programme will attract the wrath of people who benefit from it. And many on the right will dislike the implied dirigisme of a more capable BIS focusing funding on areas of national priority.

And yet, it might not be as far-fetched a proposal as it looks. In some ways, it goes with the grain of several recent developments. The Coalition Government developed the Eight Great technologies and made a number of centrally directed investments into new science and innovation capability, from Crick Centre and the Graphene Engineering Innovation Centre to the Turing Institute. The Nurse Review may be considering how to do more of this sort of investment. BIS is already thinking about how to turn more of its business grants, including SMART awards, into loans. Innovate UK’s new CEO seems to be streamlining its operations. And BIS has gradually been opening up the data on how it funds innovation, and could take a leaf out of the book of the US Department of Defense by using Big Data to understand the innovation system.

And I’ll end with a final thought for those still horrified by the magnitude of the cuts I’ve discussed, or who are still holding out hope that the BIS axe will fall somewhere other than science and innovation. If these proposals would make the innovation system more effective at improving society and the economy and would reduce the impact of cuts, perhaps they are also worth considering even if the cuts don’t happen. Whatever happens in November’s Spending Review, perhaps it is time to take focus and mission more seriously in our innovation policy.