Industrial Strategy: First Review Contents

2A new vision for our economy

6.The vote to leave the European Union has created both a challenge and an opportunity for our society and our economy. Striking new trade deals and directly resuming responsibility for policies that were previously developed as part of our membership of the European Union means making choices that will shape and reflect the kind of nation we aspire to be in the future. As the Prime Minister has said, this is a time “to step back and ask ourselves what kind of country we want to be.”5

7.In looking to set a vision for our future, the Prime Minister has explained that the Government’s “modern industrial strategy [ … ] will help to deliver a stronger economy and a fairer society—where wealth and opportunity are spread across every community in our United Kingdom.”6 The tone of her rhetoric, including to some extent the strong embrace of the term “industrial strategy”, strikes a significant departure from that of recent years, even decades. While the Cameron Government’s Productivity Plan focussed predominantly on improving our overall prosperity and growth as a nation, the Prime Minister has set an implicitly more redistributive mission, focussed not just on the size of the economy but on changing “the way our country works—and the people for whom it works—forever.”7

The rationale for a new vision for our economy

Our economy does not currently work for everyone

8.It would be wrong and misleading to suggest that the UK does not have great economic successes. Our country is the fifth-biggest economy in the world.8 The UK is the world’s biggest net exporter of financial services.9 We are host to top international firms in professional and business services, including in advertising, accountancy, architecture, legal services and management consultancy. The UK’s Higher Education system is seen throughout the world as of exceptionally high quality, with three of the globe’s top ten universities being in this country.10 The UK pharmaceutical industry is the third largest in the world in terms of R&D intensity,11 and two UK companies in this sector are in the top ten globally for market share.12 UK aerospace is the second largest aerospace sector in the world, with 17 per cent of global market share.13 The UK automotive industry continues to go from strength to strength: 1.7 million cars were built in the UK last year, the highest output for almost two decades, with 80 per cent of production exported.14 The UK video games industry is the sixth largest market in the world;15 Grand Theft Auto V by Rockstar Games in the UK is the fastest selling entertainment product of all time, grossing $1bn worldwide in just 3 days.16 Five of the top ten selling musical artists in the world are British and one in six albums sold worldwide is by a British artist.17 This country should rightly be proud of these economic and industrial achievements, and be determined that our comparative advantage in these areas is maintained and enhanced in the face of severe international challenges and competition.

9.However, as the Prime Minister has recognised, the benefits of our economic success have not been felt by all. Analysis by the Equality Trust suggests that the UK became a much more equal nation during the post-war years but, from 1979, the process of narrowing inequality reversed sharply with inequality reaching a peak in 1990. Since then, and during a period of increased globalisation, inequality has stabilised but remained high.18

10.Measured against the Gini coefficient, a commonly-used measure of income inequality, the UK has the second highest level of inequality in the G7, after the United States, and a Gini coefficient over 20 per cent higher than that for both Germany and France.19

Figure 1: UK Gini-coefficient 1961 to 2014–15

Source: Institute for Fiscal Studies

11.The Industrial Strategy Green Paper recognises that 61 per cent of our population live in areas with incomes 10 per cent below the national average.20 Over the past fifteen years, gross disposable income per head outside of London has essentially flat-lined. The Equality Trust have found that while in 2014–15, households in the bottom 10 per cent of the population had on average a net income of £9,277, the top 10 per cent had net incomes over nine times that (£83,897). Inequality was much higher amongst original income than net income with the poorest 10 per cent having on average an original income of £4,467 whilst the top 10 per cent had an original income, 24 times larger (£107,597). Over time, rising inequality has seen a dramatic increase in the share of income going to the top, a decline in the share of those at the bottom and, more recently, a stagnation of incomes among those in the middle.21

Figure 2: Changes in income for highest earners in the UK 1990–2012

Source: The Equality Trust

12.While headline economic growth rebounded following the 2007 financial crisis, that growth has by no means been felt evenly. As the Chief Economist of the Bank of England, Andrew Haldane, has explained, “Half of all UK households have seen no material recovery in their real disposable incomes since around 2005. Or, put more provocatively, the majority of UK households have faced a ‘lost decade’ of income.”22 Haldane’s commentary highlights a range of further inequalities too, including:

Figure 3: English regions gross disposable household income per head index comparison with UK average, 1997–2014

Source: Office for National statistics

Headline economic success masks significant weaknesses

13.While recognising the UK’s economic strengths, the Industrial Strategy Green Paper also provides a detailed—and refreshingly honest—analysis of our economic weaknesses. We will not rehearse these at length but, to summarise they include:

Figure 4: Constant price GDP per hour worked, actuals and projections 1997 to 2015

Source: OECD, Office for National Statistics

Figure 5: UK gross expenditure on R&D as a percentage of GDP, 1990 to 2014

Source: Office for National Statistics

14.We commend the Government for its honesty in its analysis of the UK economy’s structural weaknesses. However, it is also fair to say that the Industrial Strategy Green Paper is the latest in a long line of Government-commissioned documents, stretching back many decades, which has identified shortcomings in the UK’s economic performance on matters like low productivity, insufficient investment in infrastructure and R&D, skills deficiencies and poor export performance. As Prime Minister in the early 1960s, Harold Macmillan wrote a paper to his Cabinet, stating:

“We have now reached a stage in our post-war history where some more radical attack must be made upon the weaknesses of our economy, both productive and structural. We face a situation in which the conditions of trade are becoming increasingly competitive and our commercial rivals increasingly better equipped to compete with us, while our own economy remains sluggish and ‘patchy’ … .in order to enhance our competitive power … we have to increase our productivity by bringing our productive capacity into full use, by eliminating restrictive practices and by developing to the utmost the new methods which technology is bringing within our reach. Whatever the result of the Brussels negotiations, this need is urgent. In or out of Europe, Britain needs to be brought up to date in almost every sphere of life. Second, we have to re-organise the structure of the island in such a way as to rectify the imbalance between south and north—between the ‘rich’ areas and the ‘poor’ regions, the over-employed regions and the under-employed regions—and redress the grave social anomalies which are created by this imbalance”.39

Such sentiment was the rationale behind the creation of the National Economic Development Committee (‘Neddy’), indicative planning between government, employers and trade unions which set an overall growth rate target of 4 per cent per annum, as well as growth and investment targets for specific industrial sectors.

Global economic change

15.While the Industrial Strategy Green Paper primarily focuses on the domestic economic challenges, it is important to recognise that the global economy is currently facing a wholesale period of transformation, for instance:

As the Secretary of State for Business, Energy and Industrial Strategy put it: “The times that we are living in—not just post Brexit when we do need to set out how we are going to compete in the future, but with the development of technology around the world—are posing big challenges.”40

Setting a new direction

16.In recognising the extent to which economic growth has failed to trickle down to many households and describing the causes of our poor productivity, the Government has provided a compelling argument for change. The Green Paper outlines deeply embedded weaknesses within the UK’s economy that have remained unresolved by successive governments. The UK’s headline economic success in recent decades has been felt by too few and its foundations are shallow. As a country, we have not invested enough in infrastructure or innovation, and our skills-levels remain poor despite significant spending. Too many people in too many parts of the country have not felt the benefits of growth.

17.We strongly welcome and endorse the Prime Minister’s aspiration of “an economy that works for everyone”. The ultimate test of Government’s success in delivering this will be whether we see increased living standards across society and a reversal in the trend of widening gaps in the distribution of income and wealth.

18.We agree with the Government’s vision that we should aspire towards an economy which is more productive and where the benefits of growth are felt more evenly throughout the UK. To this we would add that a further objective should be to ensure that the UK economy is fit to face the global challenges and opportunities of our age such as: the technological changes brought about through the fourth industrial revolution, and the challenges these will present for the labour market; changing demographics and an ageing population; and, the pressing need for decarbonisation.

19.Successive governments over many decades have correctly identified long-term challenges and weaknesses within the UK’s economy on matters like poor productivity, skills deficiencies, inadequate investment on infrastructure and low spending on research and development. However, few administrations have had unqualified successes and many have spent huge amounts of taxpayers money in failing to address these weaknesses. While the Prime Minister’s rhetoric suggests an intention to approach this with a welcome and renewed vigour, the incremental proposals outlined in the Green Paper leave us sceptical about whether the fresh thinking or political will is present across Government to deliver the Prime Minister’s objectives.

The role of industrial strategy

20.Having an industrial strategy does not suggest that a country is moving away from a belief in the power of markets. On the contrary, in the modern global economy, strategic state support for business growth and economic goals is the norm, not the exception. While, anecdotally, current European Union rules around State Aid are often cited by officials as a reason for a lack of public sector intervention and support in the UK, EU data makes clear that many other economies in Europe—including Germany and France (the fourth and sixth biggest economies in the world, respectively)41—spend a considerably higher proportion of their GDP on State Aid than the UK does. In fact, out of other European Union member States, only Italy, Spain and Denmark spend a lower proportion of GDP on State Aid than the UK does.

Figure 6: State Aid Expenditure as per cent of GDP (2014)

Source: Eurostat

21.That said, the term “industrial strategy” has a chequered history in the UK that can provoke strong reactions. The perceived failure of industrial strategy in the 1960s and 1970s led to the phrase being associated with the assumption “that government could act as a backstop for the decline of ever more uncompetitive industries in an increasingly globalised commercial landscape.”42 There then followed thirty years in which, while industrial policies and business initiatives continued, the terminology of “industrial strategy” was avoided and associated with attempts to ‘pick winners.’

22.The concept of an explicit industrial strategy was resurrected by the Labour Government following the 2008 financial crisis, under the term “industrial activism” and evolved further under the Coalition Government, before experiencing a brief “hiatus” after the May 2015 election.43 This approach sought to differentiate itself from that of the 1960s and 1970s by espousing a philosophy of working with the grain of markets and competition. For the Institute of Directors, modern industrial strategy “is a strategy not centred on ‘picking winners’ in the traditional sense, but rather on the government championing new, innovative industries through vocal support, tax incentives for investors, research funding, and a hands off regulatory approach.”44 Or, as the Coalition Government described it, industrial strategy is “the whole of government working in partnership with industry to set the long term direction needed to give business the confidence to invest [and] to create more opportunities, skilled jobs and to make the UK more competitive so British businesses can thrive and compete with rising economies.”45 This sentiment has been echoed in the Industrial Strategy Green Paper.46

23.The Prime Minister’s rhetoric on industrial strategy marks a significant step change from that in recent years, as signified by the creation of a new department with the term in its title. However, to some extent application of the term “industrial strategy” to existing policies is arbitrary and, while the rhetoric is apparently radical, the Government’s approach appears to be evolutionary. For instance, while the former Business Secretary, the Rt Hon Sajid Javid MP, said he preferred the term “industrial approach”,47 in practice what he described doing is little different to the sectoral approach that his successor is proposing:

Rt Hon Sajid Javid MP, March 2016—”I’ve taken the old strategy’s closed shop and replaced it with an open door. A willingness to deal with representatives of all sectors and to respond positively to industry-led solutions.”48

Industrial Strategy Green Paper, January 2017—”We propose to set an ‘open door’ challenge to industry to come to Government with proposals to transform their sectors through ‘Sector Deals’.”49

Likewise, the Green Paper’s focus on regional growth and horizontal policies expands on themes set out in the Government’s previous productivity plan.50 Where the May Government’s approach to “industrial strategy” differs is that it suggests a more explicit and conscious approach to coordinating Government policies at both a national and local level and, coupled with recent funding announcements, suggests that Government intends to pursue its objectives with greater vigour than was previously the case.

What does having an industrial strategy mean in practice?

24.Evidence to our inquiry was wide ranging and included many different suggestions as to what approach Government’s industrial strategy should take. Much of the evidence we received included suggestions from particular sectors about ways in which Government could reduce or amend regulation and taxation or provide particular incentives and support to help them grow.

25.During our inquiry we heard that industrial strategy should be seen as “a framework within which a country can think about how it supports those aspects of industry for which either it has great opportunity or great need”,51 and that:

“Industrial strategy is [ … ] not about goals, objectives or picking winners. Nor is it rebranded industrial policy. Instead it involves diagnosing problems, a process of analysing and choosing an appropriate set of policies that reinforce each other (within a given context), to deliver desired objectives.”52

26.Fundamentally, the vast majority of respondents to our inquiry welcomed the Government’s revived interest in industrial strategy explicitly, or more frequently implicitly, on the grounds that:

a)There are barriers to growth and market failures that Government intervention is considered necessary to overcome;53 and,

b)Government policy choices inherently have an economic impact and these should be coordinated and driven by a consideration of longer-term objectives and priorities (though views on what those should be inevitably differ).54

27.Finally, and particularly in the context of the UK’s decision to leave the EU, industrial strategy can, in the words of the CBI, become a “calling card” for the UK’s economy in the world,55 mitigating uncertainty by setting out clearly our ambitions and plans for the world-class infrastructure, innovation and skills that will ensure that the UK remains at the heart of the global economy.

28.The wide range of responses we received to our inquiry reflects the fact that the country faces choices about how it would like to see its economy develop in the future, the kinds of safeguards it would like to put in place, and the extent to which it believes that different types of intervention (or an absence of intervention) will best deliver its economic vision and help different industries to thrive. Contributors to our inquiry have seen it as a framework for coordinating the Government’s economic policies and interventions towards a defined objective or set of objectives.

29.An explicit industrial strategy recognises that many Government policies inherently have an impact on the different sectors, nations and regions that comprise the UK’s economy. We have a choice as to whether these policies are implemented in an incoherent, ad hoc manner or work together toward a clear vision of the kind of economy we want. As the Prime Minister has recognised, an industrial strategy can provide a ‘practical and proactive’ framework for government intervention that can help address our economic weaknesses and ensure that our economy works for everyone.

30.The remainder of this Report looks at the principles that we believe need to underpin a successful industrial strategy, and some of the key issues that will need to be tackled in its delivery.

5 Rt Hon Theresa May MP, Speech of 17 January 2017

6 HM Government, Building our Industrial Strategy: Green Paper, January 2017, p.3

7 As above.

8 World Bank GDP rankings accessed on 21 February 2017

10 Times Higher Education World University Rankings 2017, accessed on 21 February 2017

12Top 25 pharma companies by global sales’. PMLive, accessed on 15 February 2017

13 The aerospace industry: statistics and policy, House of Commons Library SN00928, March 2015

15 UKIE: The game industry in numbers, accessed on 21 February 2017

16Confirmed: Grand Theft Auto 5 breaks 6 sales world records’, Guinness World Records, 8 October 2013

18 ‘How Has Inequality Change’, The Equality Trust, accessed on 21 February 2017

19 BEIS Committee analysis of OECD data

20 HM Government, Building our Industrial Strategy: Green Paper, January 2017, p.13

21 As above.

22 Andrew Haldane, Speech of 30 June 2016, Bank of England

23 As above.

24 As above. Around 15 per cent of those working part-time would prefer to be in full-time employment. And around a third of those on temporary contracts would prefer to be on permanent contracts.

25 As above.

27 HM Government, Building our Industrial Strategy: Green Paper, January 2017, p.38

31 Institute of Directors (ISG0025)

34 Sherry Coutu CBE, The Scale Up Report on UK Economic Growth, November 2014

36 WTO, World Trade Statistical Review 2016 accessed 8 February 2017

37 BEIS Committee analysis of OECD data

38 BEIS Committee analysis of OECD data

39 Quoted in A Horne, ‘Macmillan 1957–1986’ (London: 1988), p. 469.

40 Oral evidence taken on 14 December 2016, HC (2016–17) 566, Q103

41 International Monetary Fund, World Economic Outlook Database, accessed 8 February 2017

42 Institute of Directors (ISG0025)

43 Q351 [Lord Mandelson]

44 Institute of Directors (ISG0025)

47Sajid Javid heralds Thatcherite approach to business policy”, Financial Times, 16 September 2015

48 Rt Hon Sajid Javid MP, Speech of 3 March 2016

50 HM Treasury, Fixing the Foundations, July 2015

51 Q225 [Dr Celia Caulcott]

52 Professor Paul Nightingale (ISG0134)

53 For example: Royal Aeronautical Society (ISG0145); ICAEW (ISG0183); Aerospace Technology Institute (ISG0037)

54 For example: Sheffield Political Economy Research Institute (ISG0057); Q295 [Paul Nowak]; Q423 [Andrew Lewis]; CF Fertilisers (ISG0082)

55 Confederation of British Industry (ISG0133)

1 March 2017