Good morning from New Economy Brief.
Last week the Department for Business and Trade published The UK’s Modern Industrial Strategy (hereafter referred to as IS), “a 10-year plan to make the UK the best country to invest in anywhere in the world”, in the words of PM Keir Starmer.
This week’s New Economy Brief evaluates key parts of the strategy, with a deep dive on clean energy and advanced manufacturing, the risks of de-risking and a review of what we can learn from international experience.
Industrial strategies provide an overarching plan for the economy (or priority parts of it) aimed at helping the government achieve its policy goals, like economic growth, protecting supply chains or developing the Covid-19 vaccine. In the UK, they largely fell out of fashion in the 1980s as governments favoured a more ‘free market’ approach to the role of the state, with economic policy increasingly limited to deregulation and correcting market failures.
Since the Global Financial Crisis dramatically highlighted the laissez-faire approach’s shortcomings, Western countries have been experimenting with new forms of state intervention to actively shape, protect and grow markets seen as strategically important. For example, Bidenomics spurred many countries to join the ‘green arms race’ to develop new technologies and capture market share in fast-growing low-carbon industries, such as EVs or photovoltaics. Rising competition from China’s much more state-led economy has also influenced the creation and design of industrial strategies.
Securonomics is back. Geopolitical instability and fragmenting global trade is threatening the security of supply chains and the resilience of UK industries. After the Russian invasion of Ukraine, the UK in particular has suffered from spiralling energy costs, with domestic industries paying double what EU competitors pay or four times the US average. This is the context for the UK’s new IS, as PM Keir Starmer explains: “economic competitors have been more assertive and disruptive in promoting their national industries…it is our role to back British businesses, invest in our comparative advantage and make bets in pursuit of growth and productivity.” (For an explainer on ‘securonomics’, read our previous briefing.)
So what’s in it? The IS outlines how the government will grow eight key sectors (dubbed the ‘IS-8’) and 37 ‘frontier industries’ within them, comprising around a third of the UK economy. The following sectors have been chosen for their strategic importance, relatively high pay and strong growth prospects: life sciences, advanced manufacturing, digital technology, defence, clean energy, finance, professional and business services and the creative industries. The IfG’s Giles Wilkes explains that the volume of industries targeted is “far more than anything covered by the combined efforts of both predecessor strategies.”
The IS seeks to attract much more private investment in the IS-8, encourage R&D, improve skills, expand access to finance, and reduce trade barriers and energy costs. We will focus first on clean energy and advanced manufacturing, drawing on a briefing from Green Alliance which explains the government’s desire to develop green supply chains as “both an export opportunity and a draw to encourage inward investment in domestic energy capacity”.
Supporting green manufacturing and exports. The IS aims to double business investment in clean energy and advanced manufacturing to over £30 billion and £39 billion a year by 2035, respectively. For example, the government sees an opportunity for UK businesses to make more heat pumps to decarbonise heat and buildings, whilst creating jobs at home and exporting to other countries. (Recent research from the LSE Grantham Institute suggests the UK has comparative advantage in producing certain types of heat pumps – as IPPR also found last year). However, the UK currently has major green skill shortages, particularly in areas like heat pump installation. The IS also increases funding for FE colleges to address this and “create a strong pipeline into the IS-8, with opportunities for good jobs across the country”. Any IS-8 sector that struggles to recruit, train or retain workers will get a dedicated workforce strategy, starting with clean power.
Lowering input costs for UK businesses. As explained above, UK industries pay a lot more for electricity than those in most other countries. These higher input costs means they have a harder time competing, especially in energy-intensive ‘foundational sectors’ like ceramics, automotive, glass and chemicals. To remedy this, the IS includes a new British Industrial Competitiveness Scheme (BICS) to reduce costs for businesses by exempting them from some levies. A new Supply Chain Centre will analyse where the government can take action to grow or diversify domestic supply chains among these foundation sectors. This will then guide investments by public finance institutions like the National Wealth Fund, which the TUC calls a “crucial opportunity to not only reshore manufacturing but future-proof existing sites.”
Bringing in the international perspective. We must also remember that climate change is a global problem, which the UK cannot solve alone. So while the UK needs to reap the economic benefits of the transition in order to make the domestic political economy add up, it would be self-defeating to do so at the expense of others – especially in the Global South. There is a risk that developing countries are locked into an economic model reliant on commodity exports – for instance the cobalt needed for EVs – while developed countries like the UK import these, monopolise production of green technology with intellectual property rights and then profit from selling it back to the Global South. This highlights the need for the UK to pair its industrial strategy with a new approach to issues like technology transfer, investor-state dispute settlement and climate finance.
John Gapper notes in the FT that beyond the clean energy sector, the “economic prescription for the rest is distinctly liberal: less regulation, fewer planning delays, more competition and higher private sector investment to boost productivity.” For example, free ports and investment zones (which Tax Justice UK has referred to as ‘glorified business parks’ with lower tax and less regulation) have been renamed as Industrial Strategy Zones, and having the financial sector as a priority growth industry risks undermining efforts to redirect finance towards national investment priorities, in the words of Finance Innovation Lab’s Jesse Griffiths.
A key goal of the IS is to reverse the UK’s woeful record on private investment. With fiscal space limited by both a challenging economic environment and the government’s self-imposed constraints, The Economist calculates that the extra spending in the IS (beyond plans made by the previous government) is “modest, around £15bn over five years”. Consequently, the IS will try to “capture a greater share of internationally mobile capital”. Industrial strategies aimed at crowding in private capital have been critiqued as ‘de-risking’ by Daniela Gabor and Benjamin Braun, and bring their own risks.
What kind of private investment do we want in UK industry? The US Inflation Reduction Act embodied a ‘de-risking approach’, which Brett Christophers argues enabled predatory asset management firms to gain control over and profiteer from crucial elements of America's infrastructure such as the road network, electricity grid, and housing stock. (Read our previous New Economy Brief for more on this.) However, the US CHIPS and Science Act tied clear conditions to government financing by limiting share buybacks, making supply chains more energy-efficient and improving working conditions and other community benefits. In short, the US experience with green industrial strategy shows us that regulation, conditionality and disciplining private capital is important. It is not yet fully clear whether the UK will learn this lesson.
Avoiding extractive behaviours with conditionality. A new briefing from Positive Money and others explains how to strengthen the National Wealth Fund, for instance by prioritising equity stakes and imposing conditions on companies that receive financing to distribute risk and reward more daily between the public and private sector. (See this paper by Mariana Mazzucato and Dani Rodrik for more examples of conditionalities.)
The UK IS was praised by Heather Boushey, former member of President Joe Biden's Council of Economic Advisers and the Chief Economist for the Invest in America Cabinet at the White House, who thinks “Labour’s industrial policy can succeed where Biden failed.” Likewise, IPPR’s Sam Alvis warns that “to give long-term policies the space to succeed, governments need a short-term economic improvement to people’s lives”, pointing to the way in which Trump defeated Biden and is now rolling back much of his industrial strategy. As he notes, the government should look beyond the US to other progressives who have retained power, like Spain’s Pedro Sanchez and Australia’s Anthony Albanese. Whether they succeeded by taxing wealth or reducing the cost of essentials like energy, transport, medicine and housing, these examples point to the need for bold policies that directly improve people’s lives to complement the macro, long-term benefits of industrial strategy.
Disability benefit reforms found in breach of international human rights law. The trade union Equity commissioned an expert legal opinion on the government’s reforms to disability benefits. It found they “result in very serious breaches” of international human rights law, and constitute “human rights violations for disabled people” and describes the proposals as “aggressive measures”, “regressive” and “prohibited”.
Short-term bookkeeping over long-term planning. Andrew Bailey, governor of the Bank of England, waded into controversy over the Chancellor’s fiscal rules at a meeting of the House of Lords Economic Affairs Committee. He said “there is a danger in over-interpreting a five-year-ahead forecast”, where investors are constantly assessing government policy on the basis of short-term changes to the economic outlook, stressing the need for a public debate around longer-term challenges to fiscal policy.
New NATO military spending target. Following news that NATO is considering raising defence spending targets for member nations to 5% of GDP – 3.5% for “hard defence” such as tanks, bombs and other military hardware and another 1.5% for broader security needs – the New Economics Foundation has calculated that EU NATO members would have to raise annual defence budgets by €613 billion.
Rosebank oil field is a bad deal for the UK. Analysis from Uplift has found the UK government risks a net tax loss of £250 million if it approves the Rosebank oil field while Equinor, the Norwegian public oil company behind Rosebank, stands to make bumper profits.
Global inequality and wealth taxes. Oxfam finds that the world’s richest 1% grew their wealth by $33.9 trillion in real terms in the past decade, “enough to end annual global poverty 22 times over”, but billionaires pay an effective tax rate of 0.3% on their wealth. Simon Wren-Lewis explains the case for fellow-economist Gabriel Zucman’s proposal for a minimum global wealth tax of 2%.
CCC latest progress report. Carbon Brief reports the Climate Change Committee are now “more optimistic” that the UK can hit its net zero targets than they were before Labour’s election last year. Their latest report points to progress in wind farm planning rules, the 2030 clean power plan and accelerating adoption of clean-energy technologies for heat and transport, but notes that significant policy gaps remain.
The Jubilee Report on tackling the global debt crisis. The Catholic Church and 30 leading economists including Joseph Stiglitz have called for immediate action on the global debt crisis in a report commissioned by the late Pope Francis. The authors call for debt restructuring along the lines of the Heavily Indebted Poor Countries Initiative and a “no bailout clause” to stop IMF rescue packages forcing indebted governments to pay off private sector lenders.
