My Lords, it is an honour to speak in the debate on the Queen's Speech. I wish to speak on an issue of major importance to the economy. I spent the bulk of my professional career, about 30 years, working in industrial research and development, and this is the only subject that I wish to address today. Research and development is the seed corn for manufacturing and is essential if we are to rebalance our economy and restore our manufacturing output, which has fallen catastrophically from 20% of GDP in 1988 to 11% now, leaving us in ninth place in the world. We were fourth in 1988. Recovery will depend on the excellence of our R&D. R&D expenditure is the best indicator of the likelihood of recovery.
Thankfully, there are signs that the coalition is aware of this and it has supported several initiatives that will help. I will discuss just two of these, though I noted that the noble Lord, Lord Haskel, mentioned the 130 initiatives for manufacturing. I want to talk about the Catapults that are being organised and partly funded by the Technology Strategy Board and the Queen Elizabeth Prize for Engineering, which is privately funded but strongly supported by our leaders. The Catapults came about as a result of Dr Hermann Hauser and his report that recommended the setting up of institutes similar to the German Fraunhofer Gesellshaft Institutes. Industry and academia will work together in the Catapults under the leadership of industry to harness the output of our strong science base for commercial advantage. There are to be seven of these centres, organised by the TSB and funded roughly in thirds by the TSB, by industry and through publicly funded research programmes. I hope that these will include the Framework Programmes, funded by the European Commission. The aim is to have each of these centres receive about £30 million a year total. The seven centres will therefore represent about a £200 million increase in R&D.
These Catapults should make an important contribution provided they are allowed to be independent and driven by the needs of industry and not strangled by the imposition of government-driven regulation and assessment. It will be a mammoth task, however, to scale them up to match the contribution of the Fraunhofers to German industry. There are 60 Fraunhofer Institutes, funded with €1.8 billion annually. Of this, 70% comes from contracts with industry and from publicly financed research contracts and 30% comes from the German federal and länder Governments. We made a good start but there is a long way to go. I urge the Government to set these institutes free and not harness them with unnecessary bureaucracy.
Overall, we need to increase our annual R&D spend by about 0.8% of GDP to match Germany and the USA, or about 1.4% to equal Japan. To compete with Germany and the USA, therefore, we would need to spend roughly an additional £10 billion annually on R&D over and above what we spend today. This places in context the £200 million for the Catapults. Sir Alan Rudge, who has been working with the Electrical Research Association Foundation on these crucial matters, has pointed out that our shortfall is in part due to the reduction in the size of our industrial sector. Many of our companies have excellent R&D, but there are not enough of them; there are others that are failing to invest in the development of the new products that will be essential to their survival.
The only way we are going to meet this challenge is for the Government to take on board the magnitude of the problem and introduce appropriately strong incentives for industrial companies of all sizes-not just SMEs, although they are incredibly important-to increase their R&D spend and find ways of transferring more of their own funds to innovation and development. We have the talent and the research base to compete on the world manufacturing stage, but without increasing our R&D spend we will continue to sink down the performance table.
Finally, to finish on a positive note, I would like to praise all three political parties for the strong support they have given to the Queen Elizabeth Prize for Engineering-an initiative designed to inspire young people to take up the challenge of being creative engineers. This magnificent prize, to which the Queen has given her name, was funded generously by forward-looking industry. It was launched last November by the Prime Minister, accompanied by the leaders of the Liberal Democrats and the Labour Party, in the Science Museum in a unique moment of political consensus. Like the Nobel prizes, it is an international prize and at £1 million, it is 50% larger than the Nobel prizes. It will be awarded for ground-breaking innovation in engineering that has been of global benefit to humanity. The prize is directed by a board of trustees chaired by Lord Browne of Madingley. I declare my interest as chairman of the international panel of judges.
The prize has been greeted with enthusiasm from all around the world. It is especially pleasing that engineers everywhere have thought it appropriate that the UK should take the lead on this new prize because of the high regard in which British engineers are held. Nowhere is the prize of more importance than in the UK, where it should help to inspire a new generation of creative engineers who will go on to reinvigorate our industrial R&D and thereby ensure a better balance in our economy. It is very encouraging that it has received such strong support from our political leaders.