Now that the Government has triggered Article 50 and the UK is set to leave the EU, companies, consumers and the country need a sense of direction; as does Government. Without a clear lodestar, Government policy will drift, Ministers will be sidetracked by day to day firefighting and departmental policies risk inconsistency. By leaving the EU we are embarking on a dramatic change in our constitutional, economic and political framework. We need a strategy to steady consumers, stiffen business confidence and strengthen investment.
The Government provided a partial answer earlier this year when it published an Industrial Strategy Green Paper; the second instalment of which will be published on November 27th in the form of a White paper. The decision to launch an industrial strategy is a conscious break with the past. But how do we avoid going back to the future? The last thing anyone wants is a return to the 1970s, picking losers and subsidising failing industries.
A modern industrial strategy for the UK should be animated by three principles. It should generally favour competitive markets over detailed central planning as the former typically produces more efficient and effective outcomes. It should involve removing obstructions to business growth, addressing market failures (for instance, in respect of business access to finance) and providing public goods (for example, investment in blue sky research). It should involve both generic and sectoral approaches to the economy. This means that while the Government should aim to create a general framework for business success characterised by comparatively low tax rates, relatively low business costs and an effective regulatory environment, it should also seek to ameliorate restrictions to business success, market failures and distortions in different sectors.
The UK economy has many different economic sectors, with 5.4 million firms, employing over 31 million people. A uniform approach to economic and industrial policy which ignores the differences of distinct sectors could be ineffective or even harmful. An industrial strategy with generic and sectoral components may not appear tidy, simple, or ‘rational’. Nevertheless, such an approach is realistic, deals with the world as it is in practice and is likely to result in better policy outcomes than a rationalist, ‘sector blind, one-size fits all’ approach.
Like Churchill’s pudding, these principles and the industrial strategy should be linked by an overarching theme: eliminating the productivity gap that exists between the UK and other G7 countries.
Productivity is critical to business competitiveness and to improving living standards. Increases in output per hour enable firms to increase pay without having to raise prices and to stay competitive against other firms. Higher pay results in higher tax receipts. Improving productivity will attract overseas investment. Enhancements in productivity will strengthen the economy.
“A uniform approach to economic and industrial policy which ignores the differences of distinct sectors could be ineffective or even harmful“
Currently, UK workers are less productive than their counterparts in every G7 country apart from Japan and on average, the productivity gap between the UK and the rest of the G7 is approximately 20 per cent. Indeed, according to research by the Conference Board, the only EU countries to have lower output per hour than the UK are Greece, Italy and Portugal. Not only is the UK economy in general relatively less productive than some of our key competitors, but productivity is particularly weak in specific sectors, including banking, telecoms and energy.
Improving productivity is ultimately in the hands of managers, owners and workers. Yet Government also has a part to play because productivity growth is driven by investment, education and innovation and public policy affects these variables.
We invest less than many of our competitors. UK gross investment as a percentage of GDP was just over 14 per cent in 2012 compared to a global average of almost 24 per cent. The Government can encourage greater investment by investing directly in the UK’s infrastructure and it can promote greater private sector investment via measures such as investment allowances, investment incentives like the SEIS, R&D Tax Credits and tax relief in the creative industries.
UK workers are relatively less educated than their compatriots in competitor countries. In 2011-12, the UK’s 16-18 year olds were the worst performing on literacy and second worst for numeracy out of 18 OECD countries. It should be a priority to improve the provision of basic skills, particularly English and mathematics; ensure that the new T-Levels provide high quality vocational qualifications and training; and enable our world class universities to compete effectively in the global market for students. A better educated and skilled workforce will be more productive and have a wider range of life chances.
“A better educated and skilled workforce will be more productive and have a wider range of life chances“
A strong science and engineering base can be a source of new ideas for business and can serve as a magnet for inward investment. Government can encourage innovation by investing in the country’s science and engineering infrastructure and by encouraging knowledge transfer from the science and engineering base to the private sector to help enterprises make use of new discoveries. The UK invests just 1.7 per cent of GDP in private and public R&D funding, compared to an OECD average of 2.4 per cent. The Government is increasing expenditure on science and research, but we need to do more and match the OECD average. Government investment and support for R&D encourages business investment in the same. The Conservative Party Manifesto makes a commitment to match the OECD average spend on R&D of 2.4 per cent – but only within ten years – with a longer term investment ambition of 3 per cent. If we are serious about making the UK the most innovative country in the world then we need to be more ambitious and act more rapidly. Our competitors are not standing still.
The Government can also work to promote productivity in the public sector, which represents a significant proportion of the economy and which employed 5.4 million workers in 2014. The Government can do this through investment, training, innovation and adopting best business practices and techniques.
Our capacity for advancements in productivity will be accentuated by ensuring that a ‘global UK’ is a reality. We must be open to new ideas, new businesses and new highly skilled migrants. We must ensure that the UK is open to competitive pressures: global competition keeps individuals and businesses ship shape. The UK Government should therefore aim to negotiate a trade deal with the EU that avoids tariffs and other non-tariff barriers to trade to the greatest possible extent. After leaving the EU, the UK Government must negotiate trade deals with growing economies, including the USA, China and India.
A modern industrial strategy with a clear objective – eliminating the productivity gap that exists between the UK and other G7 countries – has three key advantages. It addresses our principal economic weakness. It prepares the UK for the challenges of global competition as we leave the EU. It gives businesses, government and the country a sense of purpose.
It is a modern industrial strategy for the UK.