A new Industrial Strategy whitepaper explains how the government plans to build a Britain fit for the future. TIGA’s Dr Richard Wilson comments.
We have a minority government, economic growth has slowed and negotiations for the UK to leave the EU are not proving easy. Companies, consumers and the country need a sense of direction; as does government. Without a clear lodestar, government policy could drift and lack consistency.
Hard on the heels of the Budget, the government is set to publish an Industrial White Paper. This could give the government an opportunity to set out a new approach to the economy and to provide a clear sense of purpose.
It is argued here that a modern industrial strategy for the UK should be animated by three principles.
Firstly, it should generally favour competitive markets over detailed central planning as the former typically produces more efficient and effective outcomes.
Secondly, it should involve removing obstructions to business growth, addressing market failures and providing public goods.
Thirdly, 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. 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.
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.
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.
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 announced measures to increase investment in R&D in the November Budget. However, if we are serious about making the UK the most innovative country in the world then we need to increase investment further and act more rapidly.
The government can also work to promote productivity in the public sector, which represents a significant proportion of the economy per cent 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.
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 and productive. 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 and 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.