The government’s newly published green paper on industrial strategy aims to revive Britian’s sclerotic rate of productivity growth. Thomas Aubrey asks to what extent this industrial strategy is likely to succeed in raising the UK’s rate of growth in the light of previous government strategies.
Industrial strategy in the UK has undergone various permutations since the financial crisis. This policy instability is one reason for the UK’s poor growth performance. This tends to be driven by political cycles as discussed in a Bennett Institute report by Coyle and Muhtar on UK’s Industrial Policy: Learning from the Past? Hence policy change for change’s sake is unlikely to succeed.
One aspect of policy that has remained more stable is the ambition to get the UK’s high-value sectors growing faster. During the Cameron government, the regional growth fund targeted key industrial sectors including aerospace, life sciences, automotive, construction, information and energy. Theresa May’s Industrial Strategy included sector deals focusing on aerospace, life sciences, automotive, construction, energy, replaced Information with AI, and added the creative industries. Under Rishi Sunak, the government’s key sectors targeted were Digital Technology, Green Industries, Life Sciences, Advanced Manufacturing, Creative Industries and Financial Services.
Not only were the identified sectors therefore fairly consistent throughout this period, but the policy approach remained largely unchanged, with central government typically allocating some funding to each sector to drive innovation and expansion.
The latest official labour productivity data, however, indicates that this approach has not been effective. From Q2 2019 to Q2 2024, the private sector experienced productivity growth of just 0.4% or just under 0.1% per annum. Furthermore, only two fifths of the private sector contributed positively to labour productivity growth while just over half of the private sector contributed negatively. While the economy has been buffeted by external macroeconomic shocks such as the COVID-19 pandemic and the Russian invasion of Ukraine, these outcomes are still poor – particularly when compared to the United States.
Table 1: Sectoral productivity disaggregation Q2 2019 – Q2 2024[1]
Furthermore, the Q2 2023 to Q2 2024 data as shown in Table 2 indicates that the private sector experienced a 1.1% decline in labour productivity, with only a third of the private sector contributing positively and just over half contributing negatively. Most of this decline is explained by the between effect indicating a shift in labour from higher to lower value-added activities, while the labour productivity within each sector, or the within effect, was stagnant. The ONS’ Q3 2024 productivity flash estimate and overview estimates a fall in overall output per hour by 1.8%. In short, labour productivity is getting worse not better.
Table 2: Sectoral productivity disaggregation Q2 2023 – Q2 2024
The new government’s green paper is targeting the same high-value sectors for growth including advanced manufacturing, clean energy industries, creative industries, defence, digital and technologies, life sciences, financial services and professional & business services. However, there is still little detail on how this approach will be any different to prior governments who offered limited pots of money to each sector.
One major challenge for the UK economy is that it lacks scale across high value sectors, with the exception of financial services. Achieving scale requires each sector to collaborate across their entire supply chain, requiring strategies for long-term innovation and growth, rather than just a few firms competing for funding to support their existing plans. Indeed it is hard to see how bidding for relatively small pots of money is going to make any difference to scaling up. Hence, the government should instead ask each sector to produce their own long-term plan. These plans should highlight what industry is going to do to increase jobs and value-added, and what they need from government over ten years.
The HealthTech Sector has already drawn up its ten year growth plan detailing how it can scale up the sector to add 50,000 high-skilled jobs, and double the GVA of the sector over the period, thereby positively contributing towards productivity growth.
The strategy outlines how the sector itself will focus on export growth, improve coordination across the entire supply chain including support for new firms, and assess how new materials can help the industry move towards net zero. But these plans will have limited impact unless the government provides a more open regulatory environment, fosters a stronger partnership between the sector and the NHS for the adoption of new products and clinical trials, and improves financial incentives.
A successful industrial strategy is likely to require a bottom-up collaborative approach. The extent to which the government is interested in this approach, however, remains to be seen. One critical aspect for bottom-up sector plans is that they also take account of the imperative to achieve growth across the UK’s regions. This can be done by identifying where a sector’s clusters are located, and working with firms, local officials and politicians in those regions to ensure they fully support the national sectoral strategy to drive jobs and GVA. As the sector grows, the areas that already have clusters of HealthTech firms will benefit most.
Figure 1 shows that the HealthTech sector is largely clustered around six main areas including Cardiff/Bristol, Oxford/Reading/West London, Liverpool/Manchester/Leeds/Sheffield, Edinburgh/Newcastle, Cambridge and Northern Ireland (the latter mainly comprising subsidiaries of multi-nationals). Over the next few months, the HealthTech sector’s ten-year plan will be discussed with local officials and politicians so they understand the potential of this sector for their area. This approach will be far more effective in driving growth locally than designating any “HealthTech” centre that ignores existing capabilities.
Figure 1: Clusters of HealthTech firms across the UK
Source: The UK Med Tech Centre, Centre for Sectoral Economic Performance, Imperial College
Although the government’s response to the Green Paper consultation is due to be published in Spring 2025, it would be wise for them to focus their attention on how they plan to execute the strategy now.
The drivers and plans for growth for each subsector will be very different as well as the locations where the sector is largely located. The government also needs to recognise that the traditional UK tendency to centralise policy and focus on cross-cutting themes is unlikely to meet with any more success than previous initiatives. Central government instead should play the role of assessing the quality of the sector plans, and collaborate closely with industry where these plans demonstrate they can drive up GVA and highly skilled jobs across the entire sector and its supply chain. Only then might we start to see productivity growth beginning to revive.
[1] The sectoral disaggregation uses GEAD (Generalized Exactly Additive Decomposition) based on Tang & Wang (2004). The ‘within’ effect is productivity growth in activities within the sector whereas the ‘between’ effect measures the change in relative size of sectors taking into account the reallocation of labour between sectors and changes in real output prices. e = estimated as ONS does not publish these values.
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.
