The UK must get serious about industrial strategy to end economic stagnation – Inside track

This is the  first blog in our short series of expert perspectives on UK industrial strategy.

UK business leaders and commentators have long bemoaned the lack of an industrial strategy to drag the country out of its economic torpor and into a new era of AI-enabled, green prosperity.

Last month’s Autumn Statement was a good opportunity to launch one, not least because the government had earlier promised a detailed response to the US Inflation Reduction Act (IRA). IRA is a vast $369 billion programme of industrial subsidies that mirrors similar moves by China and the EU. It is set to reshape global supply chains. UK inaction in the face of it risks leaving us behind in the race for green investment.

We didn’t get that, but what did we get instead? A £4.5 billion programme for advanced manufacturing was unveiled, which includes subsidies for emerging green sectors. The chancellor also announced a slate of sensible supply side reforms that will, for example, speed up planning decisions for investment in the electricity grid. But this is pocket change compared with IRA, and the extra private sector investment expected will mostly be cancelled out by equivalent cuts to public investment. Overall, there was no real vision, let alone a concrete plan, to set the UK economy on a new path after the chronic stagnation of the past 15 years.

The UK has become a divided economy

Underlying all this is a much deeper disquiet over how the UK can continue to pay its way in a vastly more competitive world, increasingly riven by geopolitical tensions and uncertainty. Since the end of the long post war economic boom of the 1970s, the UK has toyed with various economic models to compensate for the sharp decline in heavy industry as a share of GDP.

Under Margaret Thatcher, and then New Labour, the UK evolved into a dualised economy. Its export champions shifted from traditional manufacturing to high tech, high skill service sectors, while low skilled, low wage services came to dominate its domestic sector.

This economic model generated well remunerated employment and comparative advantage in business and financial services, biotechnology and a few sectors of advanced manufacturing. But, on the downside, it rested on an occupational structure bifurcated between well paid graduates on the one hand, and a much larger and more precarious ‘everyday economy’ of low wages and productivity on the other.

The resulting stark regional and social imbalances have sapped prosperity and eventually spilled over into politics through the vote for Brexit. As well as a political revolt against Westminster, Brexit represented an attempt at a new economic vision based on deregulation and open trade with the fast growing economies of Asia. But the failure so far to capitalise on these opportunities has meant no let up from continued low growth and stagnating productivity which policy makers have struggled to get to grips with.

Green markets are good opportunities for UK growth

Hence the appeal, not just to the UK, of Green New Deal style economic strategies to seize market share in rapidly expanding net zero sectors. Decarbonisation and development of renewable industries and technologies is not just critical for meeting the UK’s net zero targets, it could also play to many of our economic strengths while producing more extensive growth that will benefit those ‘left behind’ regions. But green industrial growth is not only about developing the industries of the future, for example switching car making to electric vehicles. It is also about decarbonising existing heavy industries, and ensuring they have access to affordable and reliable power supplies. As the following blogs in this short series will argue, this requires funding and a plan.

Unfortunately, previous political consensus over the net zero transition and the means of achieving it has collapsed. As a general election nears, a rift has opened between the two main parties over whether the private sector, incentivised by tax cuts, should take the lead in developing renewables industries, or whether government should show the way through more investment and an activist industrial strategy.

There are merits to each approach. Given that the private sector will ultimately deliver most of the investment needed for the green transition, correcting market failures by removing regulatory barriers is important to free this up.

On the other hand, there is a general tendency for firms to under-invest when making the transition into new markets, such as renewables, due to uncertainty over the payoffs. In many green sectors, hydrogen and CCS, for example, substantial upfront investment is needed, and the government is often best placed to resolve the co-ordination failures among firms.

The more expansive view of industrial strategy held sway under previous Conservative governments as well as within Labour. Theresa May’s Industrial Strategy White Paper in 2017 was probably the most interventionist in recent times. Boris Johnson’s government weakened a lot of its precepts but it also launched a 10 point plan for a green industrial revolution which proposed widespread intervention to foster new green industries. But Rishi Sunak’s government appears to have questioned whether net zero investment is affordable at all, scrapped key targets and, in the Autumn Statement, following unexpected fall in borrowing, has chosen to use the dividend for tax cuts over maintaining investment.

The fact that net zero is now a political football risks discouraging the billions of pounds of private investment in the green economy that we need. This would be disastrous, as both public and private investment have lagged behind that of other G7 countries over the last 40 years and the UK has been slow off the mark to develop important low carbon industries, such as electric vehicles.

Treasury suspicion of industrial strategy is a barrier

A coherent, long term industrial strategy could help by providing businesses with some reassurance about policy continuity on which they can base their decisions. But there are other, deeper problems that have led to short term policy making. One is that the Treasury, which dominates Whitehall, cleaves to a narrow, cautious approach to industrial strategy, based on correcting market failures. It is profoundly suspicious of more ambitious, market-shaping innovations. Another is the executive centralisation of Whitehall, which hoards power and resources, in contrast to more decentralised economies like Germany.

Put all this together, and it is perhaps no surprise that at least 11 industrial or growth strategies have been launched over the past 70 years, few of which have made any lasting difference.

Overall, the UK’s approach to industrial strategy is piecemeal, inconsistent and vulnerable to swings in ideology. We need to do better than this if we are to develop the green industries of the future, use them as a springboard to level up the country and compete as a leading economy on the world stage.