Innovation is essential to economic growth. Until 2008, the consensus in the world’s capitals was that a combination of low taxes, free markets and minimal intervention was the best way to spur innovation.

But since the financial crisis, governments and economists are increasingly becoming aware of the subtle but important role of government in fostering innovation, from public investment in technology to the government’s role in shaping markets and clusters through regulation, procurement and moral suasion.

The phrase “industrial policy” still sticks in many politicians’ throats: the first rule of Industrial Policy Club is you don’t talk about Industrial Policy Club. But this is precisely what they are trying to do, with policies like Catapult Centres and the Small Business Research Initiative, or for that matter international equivalents like DARPA or the Fraunhofer Institutes.

If we are going to do this kind of policy, it makes sense to do it consciously and do it well.

Our recommendations

1. Rebalance government funding away from blue-sky research and towards development.

• Reallocate £0.5 billion from research councils to Innovate UK.
• Government investment in research and development should be more prioritised towards downstream investment. Innovate UK should have a strengthened role in setting the priorities for applied research.

2. Make public tech funding better value and more intelligent

• Emulate Finland’s TEKES and Israel’s OCS by seeking capped repayment from successful technology grants.
• Allocate 1 per cent of Innovate UK’s budget to market intelligence and technology futures.

3. Fix the wiring of government to make better industrial policy possible.

• Split up the Treasury, moving budgetary responsibility to a Prime Minister’s Department and economic and industrial policy to a new Ministry for Growth.
• Expand the use of randomisation and testbeds in economic policy – they should be the default.

4. Fight the old British disease of short-termism

• Work with the London Stock Exchange and banks to encourage companies to provide better information about intangible investments and to facilitate lending against them.
• Make a clearer distinction in the Budget between government investment and current spending – and increase the former.