An end to the policy ‘merry-go-round’? Labour’s new industrial strategy and the pathologies of British policymaking
DR DARCY LUKE AND DR NATHAN CRITCH
On the 14th October, the government held its International Investment Summit in London, inviting business leaders from around the world to the UK to meet with the PM, the Chancellor and other high-level Ministers and policymakers representing the new Labour regime. The key theme for the summit – the UK is back in business – and this government pledges to be the most business-friendly, growth-focused government in decades.
Ahead of the summit, the Chancellor and the Secretary of State of Business and Trade launched their Green Paper ‘Invest 2035: The UK’s Modern Industrial Strategy’ which sets out the aspirations of this Labour administration in terms of economic growth. As Rachel Reeves and Jonathan Reynolds boldly proclaim at the outset of the paper “[g]rowth is the number one mission of this government. Our new Industrial Strategy is central to that Growth Mission.”
This statement indicates one of the key strengths of this new approach to industrial strategy: A clearer sense of what industrial strategy is for and where it sits within broader economic policymaking. In this sense, we can contrast the new industrial strategy with the 2017 Industrial Strategy launched by Theresa May’s government. May’s Strategy was a dizzying array of initiatives packaged as a comprehensive agenda for economic growth, but one which sat firmly within the remit of the Department for Business Energy and Industrial Strategy. This outsized scale and ambition, combined with a lack of cross-departmental coordination and engagement led to a lack of Treasury buy-in and conflict at the centre of government, which left the Strategy on shaky ground. In contrast, the new government’s Industrial Strategy is clear that it is but one aspect of a broader growth strategy, headed by the Treasury. This appears to have generated greater buy in, with both the Chancellor and the Business and Trade Secretary signing off on the Strategy.
Budgeting for success?
Despite significant strengths, speculation around the October Budget loomed large over the launch of Invest 2035, somewhat eclipsing the intended optimism of the Investment Summit. Many commentators raised caution in response to the industrial strategy considering what was expected to be a fiscally active Budget but tight in terms of investment. The ‘fiscal rules’ inherited from the previous government would leave little headroom for borrowing to invest, effectively hamstringing any substantive industrial strategy. When the budget came, Reeves significantly altered the fiscal rules by changing the government definition of debt, allowing her to secure substantial borrowing for investment in the coming years.
That said, the scrutiny of the markets will continue to be intense. A credible industrial strategy is therefore vital not only in terms of addressing the vexatious productivity puzzle facing the UK, but also for maintaining credibility and confidence in the UK economy and its borrowing in the years to come.
Invest 2035: an industrial strategy fit for the 21st century?
What then, does Invest 2035 offer in this regard? The Green Paper establishes that Labour’s industrial strategy will focus predominantly on eight growth sectors within the economy where the UK is competitive. These are advanced manufacturing, clean energy industries, creative industries, defence, digital and technologies, financial services, life sciences, and professional and business services.
However, the government have an uphill struggle ahead of them. As commentators have pointed out, the sheer volume of previous abandoned industrial strategies casts doubts on the enterprise and tends to breed caution on the part of business and cynicism amongst everyone else. That said, whilst this government have set out their priorities in terms of economic growth, they have also included in their purview for industrial strategy issues such as decarbonisation and net zero, the international resilience of the UK economy, and the need for regional rebalancing. Furthermore, the Chancellor makes clear that the creation of high-quality, well-paid jobs will be “at the heart” of this modern industrial strategy, synergising with Labour’s programme to overhaul employment rights.
This is a key point that shouldn’t be understated. As the economic historian Jim Tomlinson wrote in 2016, the scale of unemployment caused by rapid deindustrialisation in the UK throughout the 1970s and 1980s should form the basis for a new “meta-narrative” of Britain’s economic performance in the late 20th and early 21st century. The spatial consequences of this process mean that this meta-narrative is also a story of substantial regional inequality in growth, productivity and employment. This has resulted in a ‘geography of discontent’ separating the fortunes of the Midlands and the North of England from London and the South East.
In this context, the focus on jobs and regional rebalancing – alongside the traditional goals of driving economic growth in general – are welcome additions to a modern and credible industrial strategy. However, ambition alone cannot drive growth. Furthermore, and somewhat counter-intuitively, neither can investment. A focus only on the economic drivers of growth tend to underestimate the political and institutional barriers to growth that have long marked Britain’s struggle to adapt to an ever-changing global economic context.
The pathologies of the ‘incoherent’ British state
In a recent paper by Marsh, Richards and Smith, the UK political system is characterised by stark inequalities of power and uneven capacities, both across central government, and between the centre and regional and local actors. In short, the core executive prefers to hoard decision-making power, whilst the capacity to deliver on policy is increasingly fragmented and incoherent. The core executive is also almost pathological in its inability to work in a joined-up way with other institutions of the state. The consequences of this uneven, top-heavy and often cobbled-together institutional ensemble is an increasingly “chaotic and arbitrary distribution of responsibilities and powers”. As such, the British state is increasingly incoherent in its attempts to solve the pressing issues of the day.
Given this, it is no surprise therefore that economic policy – in particular, attempts to fix the vexatious productivity puzzle – has often floundered due to a unique set of extra-economic institutional challenges. Pabst & Westwood, in their 2021 Working Paper for The Productivity Institute, helpfully summarise these by way of a series of stylised facts. In seeking to drive productivity, recurrent policy fixes have come apart due to overcentralisation, with the British state being both one of the most centralised in terms of decision-making and fiscal policy of any in the OECD. Britain has weak and ineffective governmental institutions, due primarily to the lack of power of many departments (excepting the Treasury) to make decisions about, and deliver, policy initiatives. Institutional and policy silos result in the lack of a consistent, integrated approach to productivity and economic policy. Finally, there is an inherent short-termism and poor coordination to policymaking, with new governments often scrapping initiatives before they have a chance to pay dividends, resulting in a bewildering churn of institutions, policies and personnel.
Given that these stylised facts seem to have become common sense when discussing the British state, what does the new industrial strategy do differently and how can it hope to overcome the institutional challenges which so often get the better of well-meaning industrial strategies?
Long-term delivery vs. short-term exigency
Perhaps most promising is the key institutional innovation promised by Invest 2035; that is, the establishment of an Industrial Strategy Council (ISC), which has statutory footing. Drawing on the example of George Osborne’s Office for Budget Responsibility, Labour have promised that the new Industrial Strategy Council will be given status in law so that policymakers cannot simply ignore the findings and recommendations of the Council. This is an important step forward relative to the above-mentioned institutional challenges. A statutory footing quite obviously helps combat against the tendency for institutional and policy churn, along with the short-termism which both drives and emerges from this. Given that the new Industrial Strategy is phased across a 10-year period, an institutional framework that can ensure delivery over this time frame is essential if plans are to be brought to fruition and if stability for investors is to be achieved. Furthermore, giving the Council statutory status may allow it to operate as something of a counterweight to the core executive and provide evidence-based advice and recommendations to drive better policy-formation, combatting the centralisation of power inherent to the British state.
The statutory status of the ISC will also be vital in building cross-party support for industrial strategy in order to ensure the endurance of the ISC and its work if there is a change of government in five years’ time. As Sam Freedman notes in his latest book ‘Failed State: Why Nothing Works and How We Fix It’ the British constitution allows an incomparable degree of power for an elected government to do as it pleases given a sufficient majority. It is hoped, therefore, that the statutory footing of the ISC along with a track-record of helping the government develop and monitor policy, will counteract the temptation by any incoming government to wipe the slate clean and start again. This will prove vital for productivity gains, as long-term investment in sectors and places is necessary to see returns, whilst stability in the policy-landscape will be vital for attracting sufficient private investment.
Invest 2035 also reaffirms a commitment to what is a central question in British politics – tackling regional inequality. As mentioned above, the spatial political and economic inequality in the UK is stark both in domestic terms and when compared to similar countries. The previous orthodoxy of industrial strategy – that of ‘picking winners’ – has produced a landscape where public and private investment has been skewed towards London, where the obvious benefits of economic agglomeration can be seen. The rest of the country has lost out to cost-benefit analyses which funnel money to the already-successful capital. It is encouraging, therefore, to see regional Mayors feature so prominently in the Investment Summit and to hear from regional officials that so far, the new government’s approach to regional issues holds promise. It is also positive to see a focus on Sector Plans in the new Industrial Strategy, which is vital to ensuring that growth in not only concentrated in sectors with a strong presence in London (as with finance and knowledge industries). Furthermore, regional leaders will no doubt welcome the focus on rebalancing and the pledge to work alongside the recently constituted Council of the Nations and Regions as well as Mayoral Councils, to develop place-sensitive planning.
Returning again to the ISC, the formation of this body will be key to the success of future industrial strategy. However, its composition must also reflect the diversity of Britain’s economy. Whilst it is welcome that Clare Barclay, CEO of Microsoft UK has agreed to chair the interim Industrial Strategy Advisory Council, the government must follow through with their promise to include a range of voices not only from business, but from academia, trade unions, regional government and – we would add – the public sector to ensure that industrial strategy is meeting the needs of left-behind places and people. This will allow the ISC to combat the issue of policy silos which often afflict attempts to drive fundamental change in our economy, allowing joined-up thinking between the public and private sectors at both the sub-national and national level.
All in all, the ISC and the wider industrial strategy are promising. In attempting to overcome the inherent institutional challenges which have long confronted policymakers seeking to achieve economic growth, the industrial strategy and the institutions developed to support it, might well prove instructive to those formulating policy elsewhere in the UK. However, the announcement is just one step towards a coherent long-term industrial strategy. The government will now engage in a lengthy and wide-ranging consultation process to build the strategy properly. As this happens, whether the good ideas the government have can be properly honed and focused into a set of workable and effective targeted initiatives, and whether they will backed with the finance necessary for them to bear fruit will be the acid test of the new Industrial Strategy’s long-term success. At this point, they remain open questions.
