Industrial Strategy: First Review: Government Response to the Committee’s Second Report of Session 2016–17

First Special Report

The Business, Energy and Industrial Strategy Committee published its Second Report of Session 2016–17 Industrial Strategy: First Review, HC 616 on 3 March 2017. The Government’s response was received on 11 September 2017 and is appended to this report.

Appendix: Government Response

Introduction

The Government would like to thank the Committee for its report into Industrial Strategy. This has been timely; the Government launched a wide-reaching consultation on the proposals contained in the Green Paper ‘Building our Industrial Strategy’, published in January 2017. The recommendations made by the Committee have been considered alongside the responses to that consultation from a wide range of organisations and private individuals.

This is informing our developing thinking on the Industrial Strategy. This needs to create the economic conditions that boost earning power for everyone throughout the UK—its people, places and companies. We have an opportunity to deliver an Industrial Strategy that builds on our strengths, provides certainty and stands the test of time so we have a resilient economy for the future.

These are emerging themes, which will be set out in greater detail in a White Paper later this year.

Recommendations

Recommendation 1

In its response to this Report, the Government should outline a set of clear, outcomes-focussed metrics that can be used to frame its goals and to measure progress in meeting these. We recommend that the Government should consider including metrics relating to the following:

Response

As part of the development of the White Paper and a long-term industrial strategy, we are considering the role of metrics in measuring the progress of the Industrial Strategy in meeting its goals. This work is part of ensuring that the Industrial Strategy endures for the long-term.

As we develop the White Paper we will consider further how best to measure the success and progress of the Industrial Strategy.

Recommendation 2

We recommend that the Government publishes annual updates to its action plan outlining progress in delivering policies and setting out any new policies and how they align with the overall strategy. The Government should also create a single dashboard of metrics relating to Industrial Strategy on GOV.UK which should be updated as new statistics are published.

Response

Further to the response on success metrics, we will be considering the most appropriate mechanisms to update on progress made by the Industrial Strategy and what analysis and data should accompany these updates.

Recommendation 3

We recommend that Government reconsider giving sectoral strategies priority and instead focus on horizontal policies and specific ‘missions’ to meet UK-wide and local public policy challenges.

Response

We agree with the importance placed by the Committee on horizontal policies—indeed many of the policies outlined in the Industrial Strategy Green Paper are cross-cutting: they apply economy-wide and benefit all businesses.

However, there is also advantage in addressing the opportunities and challenges in particular industries and sectors—such as by helping create conditions for a thriving supply chain, and developing institutions in which companies can share in research and development and training. That is why, as part of the industrial strategy, we have proposed to set an ‘open door’ challenge to industry to come to the Government with proposals to transform and upgrade their sector through ‘Sector Deals’. This will allow us to consider and address sector-specific issues which would not otherwise be addressed through horizontal policies.

Recommendation 4

We recommend that specific support for industry be guided by a targeted ‘mission-based’ approach, channelling the Government’s support towards addressing the big challenges of the future. It is for Government to set those missions, in discussion with stakeholders.

Response

We agree that one of the strengths of an Industrial Strategy is to be able to bring together concerted effort on areas of opportunity that have previously been in different sectors, or which require joining forces between entrepreneurs, scientists and researchers, industries, and local and national government.

The Government has announced a new Industrial Strategy Challenge Fund (ISCF) which will target Government support for Research and Development to address the big challenges of the future and accelerate commercial exploitation of the most exciting technologies the UK has to offer the world.

Working with the UK’s leading scientific and business experts, we have identified challenges in areas where we have a world-leading science base and where there is a large and growing global market that innovative UK businesses could capture with the right support. The Government has announced the first wave of challenges under the ISCF:

Details of competitions under the challenges have been announced in spring/ summer and further details and competitions will be forthcoming this year.

Recommendation 5

We recommend that the Government consider establishing a joint unit bringing together civil servants from BEIS, the Treasury, the Department for Communities and Local Government, and the Department for Education to provide an inter-departmental team to develop and implement the industrial strategy.

Response

The Industrial Strategy is a Government-wide initiative. If it is to stand the test of time, we need to make sure it drives action across the whole of Government.

The importance of this is demonstrated by the creation of the Economy and Industrial Strategy Cabinet Committee, chaired by the Prime Minister and comprising the Secretaries of State of a large number of Government Departments.

At an official level, we have put in place cross-Departmental governance arrangements to bring together senior officials from across Whitehall to ensure that all Departments are kept closely informed and involved in the development of the policy content and delivery processes of the Industrial Strategy.

A unit based within the Department for Business, Energy and Industrial Strategy coordinates the development of the strategy, working extremely closely with policy leads from other Departments across Government and with officials from HM Treasury. This has been boosted by including secondments from other Departments in a number of areas. We do not believe that establishing a more formal joint unit will provide sufficient added value to justify the disruption to the policy development that this would cause.

Recommendation 6

We recommend that the Government improve the transparency of its engagement with business by publishing details of external meetings in a single, searchable database and extending publication to include all meetings that take place at Senior Civil Service level.

Response

Enhancing transparency and accountability is at the heart of our approach to government – we have been open about government spending, provided access to taxpayer-funded research, pursued open data and helped establish the Open Government Partnership. We have a manifesto commitment to continue to be the most transparent government in the world. We have published an unprecedented amount of data – more than 35,000 datasets, including data about the workings of Government.

We are publishing more and new information in open data formats to improve and transform public services. And we are ensuring that Whitehall’s elected representatives and senior officials uphold the highest standards in public life through transparency and democratic scrutiny. The Government is committed to publishing details of ministers’ meetings on a quarterly basis.

We publish details of Ministers’ and Permanent Secretary meetings with external organisations, including senior media figures, routinely on GOV.UK. Information about meetings between officials, businesses and charities are not currently held centrally and could only be obtained at disproportionate cost. Expanding this approach to include all Senior Civil Servants would be a lengthy and costly process due to the number of senior officials across all departments.

Recommendation 7

We recommend that the Government work with industry and local government to conduct a holistic review of the business services and support it offers with a view to simplifying access to advice on these in order to improve the ‘customer journey’.

Response

Government plays an important role in signposting businesses to the support and advice that they need to improve, grow and scale-up their business. Through GOV.UK, supported by a Business Support Helpline and Local Enterprise Partnership (LEP) led Growth Hubs, businesses are able to receive free, impartial support, which aims to simplify their journey to finding the right advice at the right time.

In the Industrial Strategy Green Paper we outlined the importance of support currently available to entrepreneurs and highlighted that we would look to identify any potential gaps in current policy, informed by international best practice. We also announced a Scale-Up Taskforce, overseen by the Minister for Small Business, to support high growth scale-up businesses across the UK.

As we develop and deliver our Industrial Strategy, we will continue to work closely with key partners and stakeholders and look at what more Government can do improve how businesses interface with the services Government offer.

Recommendation 8

We repeat our previous recommendation that the Government should set a target to increase R&D investment to 3 per cent of GDP and implement policies to achieve it.

Response

This Government has set out its vision to meet R&D investment of 2.4% of GDP within ten years and 3% in the longer-term. Going forward, this ambition will be an important part of our Industrial Strategy and will require a concerted cross-government approach.

We have already increased research and development investment by £4.7 billion over the period 2017–18 to 2020–21. This equates to an extra £2 billion per year by 2020–21 and is an increase of around 20% to total government R&D spending, more than any increase in any parliament since 1979. This came in addition to previous decisions to protect science funding with a total investment of £26 billion over the period between the financial years of 2016–17 to 2020–21.

This Government’s sustained and consistent investment in research and innovation is sending a clear message that the UK is committed to protecting the UK’s strength in science, and our Industrial Strategy will place science and innovation at its core.

Recommendation 9

In line with the Secretary of State’s stated aim to support disruptors and economic innovation, we recommend that the Government review with industry whether additional steps are needed to provide regulatory certainty for emerging business models.

Response

The Green Paper recognised that new entrants, not just incumbents, play an important role within established sectors of the economy, and that innovative businesses are driving growth in important new sectors. It committed to more deep dives into transforming and emerging sectors and asks industry about new areas the programme could look to explore.

The Government recognises that, to do this, we must understand key technology trends, foster growth in the new sectors (such as AI and Robotics) that will become increasingly economically significant, and work with established sectors (such as Education and Insurance) as new entrants deploying new technologies and business models emerge and change sector dynamics.

In line with the Green Paper commitment the Challenger Business Programme that engages new entrants in existing sectors is being expanded into a Future Sectors team. This will lead business-focused policy development for new technology sectors such as AI and Robotics, as well as more deep-dives to remove barriers to growth for innovative businesses within existing sectors.

Recommendation 10

We recommend that the Government consider the potential for greater devolution of responsibility and funding for skills to local authorities and Local Enterprise Partnerships, who are well placed to work to identify regional needs and design appropriate solutions.

Response

We are committed to ensuring we have a strong skills system that can drive increases in productivity, improvements in social mobility and help make a success of Brexit. This will be essential to the success of our industrial strategy. We recognise we need to bring forward a new offer on skills and technical education that builds on the Skills Plan published in July 2016, which is why we’ve set out our ambitions for wide-ranging reforms to technical education in both the Industrial Strategy Green Paper and, more recently, in the Budget set out by the Chancellor in March.

These reforms will improve basic skills for those who have fallen behind, develop a proper system of Technical Education for young people not going to university, help us address regional skills imbalances, address shortages in STEM skills and at higher levels, and make it easier for adults to retrain and upskill later in their working lives.

Alongside this we are devolving the adult education budget to the mayoral combined authorities, starting with a transition towards devolution in 2018/19. Full transfer of statutory adult education functions to the combined authorities, and delegation to the Mayor of London, will take place in 2019/20, subject to readiness conditions. This will give local areas the tools to commission outcome-focused skills requirements, enabling adult education to more closely match local labour market needs and employment opportunities. We are continuing to work towards devolution deals with England’s largest cities where they don’t have them at present.

We will also be setting up Skills Advisory Panels in England that will bring together local employers, providers and LEPs to identify local skills needs and inform delivery to support local growth.

Recommendation 11

We recommend that the Government exclude university students from immigration totals and promote high skilled migration to the UK on an equal “who contributes most” basis to people wishing to invest and innovate in the UK.

Response

The Government strongly welcomes genuine international students who come to the United Kingdom to study. There is no limit on the number of genuine international students who can come to study in the UK and there is no intention to impose a limit on the number of international students that any institution can recruit.

Migration statistics are produced by the Office for National Statistics (ONS), the UK’s independent statistical authority. It is for the ONS to determine how statistics are compiled. By including international students in its net migration calculations, the ONS is using the internationally accepted definition of migration, which includes all of those who move for more than 12 months, including students. Other major countries such Australia, Canada and the United States include students in their migration statistics.

Those planning the provision of services need to know who is in this country and, like other migrants, international students have an impact on communities, infrastructure and services while they are here. So long as students are complying with the terms of their visas and returning home at the completion of their studies, the overall contribution of students to net migration should be very small and incremental growth in student numbers, along the lines of that seen in recent years, can be accommodated within the net migration target. The target does not require us to impose restrictions on student numbers and we have no intention of doing so.

We recognise the value of international students and this is why we are commissioning the independent Migration Advisory Committee (MAC) to provide an objective assessment of the impact of international students.

We are considering the options for our future immigration system very carefully. As part of that, it is important that we understand the impacts of different options on different sectors of the economy and the labour market. We will build a comprehensive picture of the needs and interests of all parts of the UK and look to develop a system which works for all. As part of our evidence gathering, we have commissioned the Migration Advisory Committee to consider patterns of EU migration and the role of migration in the wider economy, including how we align our immigration system with the Industrial Strategy. Parliament will have an important role to play in this, and we will ensure that businesses and communities have the opportunity to contribute their views.

Recommendation 12

Fiscal levers can play a key role in shaping business behaviour. We recommend that Government commission an independent review bringing together broad representation to consider whether taxation levers can better be used to boost investment in physical and human capital, research and innovation.

Response

The government recognises the role of fiscal levers in shaping business behaviour and is committed to ensuring that Britain has a competitive tax system that encourages businesses to invest. It has cut the rate of corporation tax to 19%, the lowest rate in the G20. It has also increased the rate of R&D tax credits to further incentivise innovation. A recent review into the UK’s R&D tax credits found them to be effective and internationally competitive. To further support business investment, the government has set the Annual Investment Allowance to £200,000 – its highest permanent level. The government keeps all tax policy under review but we do not see the case for an independent review at this time.

Recommendation 13

We recommend that the Government conduct a fundamental review of the outdated structure of the business rates system, given that it acts as a disincentive to investment regardless of who is responsible for setting the overall rate.

Response

The government conducted a review of business rates in 2015. This review concluded at Budget 2016 where the government announced business rates reductions, costing nearly £9bn over the next five years, benefitting all ratepayers. This package includes permanently doubling and increasing the thresholds of Small Business Rate Relief (SBRR) from April 2017 and increasing the rateable value threshold for the standard multiplier to £51,000 from April 2017. All ratepayers will benefit from the switch in indexation from RPI to the main measure of inflation (currently CPI) from April 2020. This is a business rates cut every year for all businesses costing £1.1bn by 2022. This benefit will increase significantly each year. In addition, the government has cut the main rate of corporation tax from 28% to 19% from April 2017 and it will fall further to 17% in 2020.

Recommendation 14

The Government should also consider the opportunities to further boost procurement from within the UK as part of its negotiating strategy for withdrawal from the EU.

Response

We welcome the Committee’s endorsement of our work to maximise opportunities for UK firms to compete in public procurement. The issue of how procurements should be governed following our exit from the EU is being considered as part of the wider process of the UK preparing to leave the EU. It would be wrong to set out unilateral positions in advance of the negotiating process, and we cannot provide further details about the possible outcomes at this stage.

Recommendation 15

Given the Prime Minister’s previous comments about foreign takeovers, the Government needs to provide much greater clarity and certainty as to what steps it intends to take to intervene in foreign takeover deals and in what circumstances.

Response

The UK thrives on openness to trade. The UK’s merger regime facilitates foreign direct investment, which plays an important role in creating jobs and helping UK businesses grow on the world stage. Maintaining a clear, stable and open environment for trade and investment is, and will continue to be, core to our approach. As part of this it is appropriate to ensure that there are adequate safeguards in place where national security is concerned.

As was confirmed in the Queen’s Speech, the Government will bring forward proposals to strengthen Government’s powers to protect national security. We will therefore be consulting on the case for strengthening scrutiny of future overseas investment in some key parts of the UK’s critical national infrastructure in order to protect against potential national security risks. The Green Paper will set out proposals for discussion and consideration, and will invite stakeholders to provide feedback before any proposals become legislation.

Recommendation 16

We recommend that the Government takes steps to ensure it has the power to retain IP benefits in the UK in the event of a foreign takeover where a business has been supported in developing new IP through taking advantage of taxpayer funding or tax-incentives. At the very least, it should ensure that any transfer of IP delivers a substantial return for taxpayers. This could be done, for instance, by placing constraints on access to funding and incentives. The Government should also develop mechanisms to clawback any tax relief or funding should tax-payer subsidised IP be transferred abroad.

Response

The backing provided by the Government to industry, for example for research and development, supports innovation and growth of cutting-edge industries and solutions. When companies in receipt of public funds are taken over, Government is able to safeguard public funds by using ‘change of control’ clauses in funding agreements where they exist. This allows the Government to claw back funding in the event that a takeover means the new company does not meet the eligibility criteria to receive the grant or the new company intends a fundamental change to the purpose for which the grant was given.

Recommendation 17

The Government needs to provide clarity on the respective roles and responsibilities between national, local and regional institutions. Failure to do so will lead to unnecessary complexity and confusion for business and reduce accountability to the electorate. In partnership with business representatives, local government and the devolved administrations, the Government should consider whether any further steps are desirable to facilitate businesses in understanding and navigating different tiers of devolution. While many services may best be designed at a local level, the Government needs to ensure that it avoids creating barriers to cooperation between local institutions or inadvertently introducing perverse incentives that lead to needless and inefficient duplication of services.

Response

We are conducting a review into strengthening the role of LEPs. This gives us the opportunity to consider how we can support the business voice by bringing it further into local economic decision making. This work will look to make the most of the diverse strengths of our cities and regions, and be responsive to the changing institutional landscape, particularly within mayoral combined authorities.

Recommendation 18

We recommend that the Government set out a clear plan to close per head spending gap on infrastructure, R&D and education between London and the rest of England.

Response

The Government recognises the importance of spending on infrastructure, R&D and education to support growth across all regions of the UK.

The Industrial Strategy Green Paper committed to ‘using infrastructure to support rebalancing’ while ‘continuing to prioritise the highest value-for-money projects’. The White Paper will be an important vehicle to consider these issues in more depth, and will set out how the government will support regional growth, building on the progress made through the Northern Powerhouse and the Midlands Engine.

The Green Paper recognised that, although we have world-leading centres of excellence and leading R&D clusters, we need to do more to strengthen areas outside the ‘golden triangle’ of institutions and businesses between Oxford, Cambridge and London. Through the Green Paper, we consulted stakeholders to consider what more we can do to support science, research and innovation throughout the UK and help drive local economic growth and productivity. We are now considering how different policy approaches might work in the wider funding landscape for regions and places.

The Government is taking forward a number of initiatives to close the spending gap on education across England. It is currently consulting on the introduction of the National Funding Formula, a new formula for allocation of school funding across the country. The Government also launched the Northern Powerhouse Schools Strategy at Budget 2016, and is taking forward the recommendations set out in Sir Nick Weller’s Northern Powerhouse Schools report. DfE has allocated £72m over the next three years to twelve opportunity areas (OAs) across England to support efforts provide children and young people with the chances and choices to fulfil their potential.



15 September 2017