The government is once again rediscovering industrial strategy, just 18 months after it was junked by Boris Johnson’s then business secretary, Kwasi Kwarteng. The Chancellor plans to set out a detailed vision for supporting growth areas and enact an industrial strategy council to advise on delivery. But is this latest refresh genuine or cosmetic, and is the new effort doomed to suffer the fate of previous industrial strategies?
The motivation is obvious. The government desperately needs the economy to step up a gear to reduce the budget deficit and pay for the pre-election tax cuts it has promised. But growth has been sluggish for years and the OBR expects this to continue even once the forecast recession is over. So something dramatic needs to happen to lift the underlying rate of GDP and productivity growth from their current torpor.
Yet, the Conservatives’ track record on managing and growing the economy over the last decade is desperately uninspiring. On their watch, business investment has slumped, productivity has stagnated and the trade balance deteriorated.
External shocks, such as Covid-19 and the self-inflicted damage of Brexit, take a lot of the blame. But good policy can help to ameliorate this, and the government’s efforts to restore growth to anything like its trend rate have been ineffectual. This is because they largely rest on a cautious and unambitious slate of supply-side interventions, like tax and regulatory changes, as well as the largely pointless Investment Zones.
These are rooted in the ideological view that intervention should be confined to correcting market failures, rather than actively promoting emerging growth sectors.
Yet, where government has intervened, for instance through the Life Sciences Sector Deal responsible for the speedy development of the Astra-Zeneca vaccine for Covid-19, the results can be spectacular.
Even worse than bad policy has been the constant chopping and changing of policies and institutions and absence of a clear, consistent strategy. Firms, particularly in manufacturing, invest over long-term horizons and require economic and regulatory stability to be encouraged to do so.
But as our paper on industrial strategy argued, policy has changed constantly under successive governments and even individual Ministers, sapping business confidence and inhibiting investment.
Possibly to counter this tendency, the Chancellor also plans to set up an external advisory panel similar to the Industrial Strategy Council (ISC), which was junked by Kwarteng, in a welcome sign of possible openness to independent advice that may counter the short-termist market failure orthodoxy.
But reinstating the ISC, while clearly intended to demonstrate the government’s long-term thinking, merely underlines its consistent inability to do this. Bodies like the ISC function as commitment devices to signal to industry the government’s seriousness of intent. But if the government itself is unable to commit to them, why should firms pay any attention?
Hunt’s move is likely to further raise the hackles of the free market Right, which is already uneasy about the government’s economic direction and detests the whole idea of industrial strategy. Internal Party opposition adds a whole new dimension of political risk that will cast further doubt over its plans unless it can build internal and cross-party consensus over the terms of any intervention.
Labour’s proposals to set up an independent industrial strategy council to advise on policy is a better idea as it would put this on a statutory footing, similar to the Climate Change Committee which has been effective in overseeing net zero policy. Raising the political costs of cancellation would insulate Labour’s industrial strategy from the political cycle and help build long-term credibility in pursuit of its missions on things like delivering clean power.
It’s good that the government is moving on from the laissez faire dogma of Truss and Kwarteng. A clear strategic focus on current and emerging competitive strengths, such as biotechnology and renewables, could allow development of bespoke policies to help these grow. But whether the latest turn back to industrial strategy will have any impact depends on whether the government’s new regime can credibly claim to be built on an enduring political consensus. Only time will tell.