The power of Government spending must be harnessed to create demand for new innovative products and services, concludes a Government white paper published today.

Innovation Nation sets out the Government's aim to make the UK the best place in the world to run an innovative business or public service. It argues that innovation is essential to the UK's future prosperity and the ability to tackle major challenges like climate change.

The announcement comes after chancellor Alistair Darling's first budget budget, in which he said he would look into the practicality of setting a goal for small and medium enterprises (SMEs) to win 30 percent of all public sector business in the next five years.

The paper spells out how the Government creates demand and new markets through £150 billion in public spending on goods and services each year alongside its regulatory responses to global challenges such as global warming.

It sets out a number of practical measures to ensure that businesses and people in the UK are best placed to benefit from the new opportunities and prosperity created by the demand for innovation. Immediate steps include a commitment for each Government department to publish an Innovation Procurement Plan as part of its commercial strategy. This will set out how departments will embed innovation at the heart of procurement practices encouraging them to engage with businesses at an early stage.

The white paper also initiates work to review the role regulation can play in promoting innovation by the Department for Innovation, Universities and Skills (DIUS), the Department for Business Enterprise and Regulatory Reform (BERR) and the Business Council for Britain.

The paper considers how Government and society respond to changes in innovation across the public, private and third sectors. Other key themes are further supporting innovative businesses and research; increasing exchanges of knowledge; boosting the supply of skilled people; supporting innovative towns and regions and promoting innovation in the public sector.

Headline commitments include:

• Supporting businesses in tapping into the demands of new markets in the UK by bringing forward five new 'innovation platforms' to co-ordinate Government support and funding to firms and organisations involved in developing new products and solutions to global challenges - this builds on the innovative approach developed by the Technology Strategy Board (TSB) to successfully co-ordinate Government support for the development of low carbon cars, for example.

• A new initiative to provide at least 1,000 'innovation vouchers' every year by 2011, helping support and fund small and medium-sized businesses to work with a university, further education college or research organisation of their choice to develop a new product or service.

• Doubling the number of Knowledge Transfer Partnerships between businesses, universities and colleges to boost competitiveness and productivity alongside a greater exchange of innovation expertise between the private sector and Government led by DIUS and the TSB.

•Piloting of a new Specialisation and Innovation Fund to boost the capacity of further education colleges to unlock workforce talent and to support businesses in raising innovation potential.

• Expanding the network of National Skills Academies with one academy for every major sector of the economy.

• Piloting a new Innovation Index in 2009 to measure UK innovation managed by the National Endowment for Science, Technology and the Arts (NESTA) in partnership with the Office for National Statistics (ONS), the Design Council, the CBI and others. A fuller system will be in place by 2010.

•Sponsoring new Partnerships for Innovation bringing together venture capital with universities, business and other local partners to jointly develop innovative solutions to local and regional challenges. DIUS will publish a prospectus in the autumn.

• Establishing an Innovation Research Centre in partnership with the Economic and Social Research Council (ESRC), NESTA and the TSB. •

Boosting the ability of small firms to exploit their intellectual property by training Business Link advisors in IP management by the summer of 2009.

• A new Annual Innovation Review to provide a comprehensive annual assessment of promoting innovation in the public and private sectors. The first of these will be published this autumn.

Launching the white paper, John Denham, Secretary of State for Innovation, Universities and Skills, said: "We must make the UK the best place in the world to run an innovative business or public service, where innovation can flourish across every area of the economy.

"It is the British people who will create a world-beating innovation nation and that is why we must unlock talent at all levels by investing in skills, research and the exploitation of knowledge. But we can achieve much more if we harness the power of Government as the UK economy's biggest customer to create new markets and demand to benefit innovative businesses and people in Britain.

"Innovation will be the key to some of the biggest challenges facing our society, like global warming and sustainable development. We need to ensure that Britain contributes to the innovative solutions and that British business and the British people benefit from the new opportunities and prosperity they create."

The paper outlines how the nature of innovation, defined as the successful exploitation of new ideas, is changing. Traditionally, the UK's innovation policy has been concentrated on high-tech manufacturing. While this will remain vitally important, it is argued that increasingly innovation applies to a wider range of products, services, business processes, models, marketing and enabling technologies used by companies, organisations, industries and sectors.

Innovation Nation makes an assessment of the UK innovation system highlighting the UK's many strengths such as its research base, open economy, excellent universities and good levels of business innovation. However, it also outlines areas in which improvement is needed, for example in increasing business demand for skills, boosting skills to successfully innovate and increasing business investment in research and development and in non-technological innovation.

Iain Gray, CEO of the Technology Strategy Board, said: "This white paper presents a huge opportunity to address challenges through innovation, and for Government to be an exemplar of innovation across all Departments, in turn stimulating innovation and R&D investment throughout business.

"The Technology Strategy Board has a key role to play in addressing these opportunities and accelerating innovation. Working closely with partners, our initiatives and investments will make new connections and act as a catalyst for new areas of business innovation, making a real difference to the prosperity and global competitiveness of the UK."

Anne Glover, chief executive of Amadeus Capital Partners Ltd, who has been asked by the Chancellor to look into what barriers can be removed to allow SMEs to win more public sector business, said: "I'm excited to take on responsibility for advising Government on the greater involvement of SMEs in Government procurement. Many small businesses are highly innovative and by taking account of innovation in the public procurement process the Government can achieve both value for money and greater engagement with SMEs."

The strategy builds on themes around innovation raised in Lord Sainsbury's Review of Government's Science and Innovation Policies, published in October 2007. The Government has just published a progress report highlighting that the Government has or is in the process of implementing the review's recommendations.