The Conservatives and Labour are each developing a distinct strategy to grow the British economy. Will Lord discusses their strengths and weaknesses and recommends where they should focus their attentions.
“In developing our industrial strategy for the period ahead, we have the benefit of much experience. Almost everything has been tried at least once.”
Reading Tony Benn’s quote from 1974, one could be forgiven for thinking little changes in politics. Once again, Britain’s economy is in a poor state. Productivity growth and wages stagnated since the late 2000s. Many argue the country lacks an ambitious industrial strategy: a long-term plan to tackle blockers to productivity and invest in the country’s most promising sectors and technological strengths.
Another claim is both parties do have an economic strategy, but it’s just they share the same one. Whether it’s “Ms Heeves” coined by The Economist’s Bagehot columnist or Larry Elliott’s “Reevuntism”, this is a new sort of cross-party consensus based on fiscal probity, Net Zero, not overturning Brexit, and support for some high-value sectors. There are similarities between both parties, but neither view is quite right. In fact, the Conservative and Labour strategies are distinct, and their roots are in two speeches.
The first is Rishi Sunak’s Mais Lecture as Chancellor in 2022. The speech combines a framework of Capital (infrastructure and business investment), People (skills and education) and Ideas (research and innovation) as the foundations of higher productivity with the notion that “what government does is far less important than creating the conditions for private businesses and individuals to thrive”. It is dear to the Prime Minister’s heart, and he has taken its approach into 10 Downing Street: seeking to gradually improve the UK’s economic fundamentals while keeping the national finances on an even keel.
Ideas have been boosted through big increases in public Research & Development (R&D) spending, targeted at cross-cutting technologies like artificial intelligence and quantum. Capital budgets have grown and generous investment allowances introduced. The Prime Minister’s passion for extending maths provision to 18 year-olds should also be seen through the “People” lens of Mais. This is combined with Chancellor Jeremy Hunt’s five priority sectors and occasionally using subsidies to attract inward investment, such as the reported £500m package for Jaguar Land Rover to establish a battery factory in Somerset. A kind of “legacy Johnsonism” can also be found in a continued commitment to Levelling Up, for example increasing R&D investment outside the Greater South East and boosting devolution in major city-regions, as well as major Net Zero projects. But these are not as central as the Mais framework.
The second approach is set out by Shadow Chancellor Rachel Reeves in her speech in Washington DC and accompanying paper. Reeves’ gives a much more muscular and interventionist role for government, heavily inspired by the Biden Administration’s Inflation Reduction Act. £28bn by the second half of the parliament is earmarked for new green investment. An £8bn National Wealth Fund will invest in large industrial projects such as battery factories, green steel and wind energy, with a focus on “underinvested places”. A publicly owned Great British Energy will ramp up clean energy generation. A much greater emphasis is put on reforming the “Everyday Economy” of high-employment industries like retail, care and hospitality. Planning reforms will overcome barriers to much-needed housing and infrastructure. This is much more of an industrial strategy, targeting manufacturing and boosting uptake of existing technologies by businesses, than the government’s “science-push” approach. Like the Levelling Up agenda and Biden’s interest in rejuvenating America’s industrial heartlands, It correctly identifies the poor economic performance of places outside London and the South East as integral to the UK’s productivity problem.
Both have advantages and disadvantages. Sunak’s strategy is less reliant on politicians and civil servants attempting to buck the market, and could go with the grain of the UK’s strengths. The unfortunate story of BritishVolt shows the risk of policymakers being carried away with particular sectors or technologies, and who in Whitehall would have anticipated recent high-profile breakthroughs in Artificial Intelligence technology even a year ago? But it also risks going with the grain of the UK’s weakness, doing little to address the country’s regional inequalities, and supporting the creation of technology-rich start-ups while doing little to incentivise them to stay and grow in the UK. Reeves’ approach is higher-risk and higher-return. A better-resourced and energetic approach to tackling the blockers to productivity could well put Britain on a better growth trajectory. But it also puts a large premium on a manufacturing sector that – while vital to R&D, exports and high-wage jobs – still represents a historically declining share of GDP and employment.
Above all, both risk failing thanks to the fatal inability of the British state to think and act for the long-term. Both Reeves and Sunak are trying to fit their strategies into fiscal rules that, as Andy Haldane and others argue, undermine growth and investment. In particular, by making reducing net debt a disproportionately large goal of economic statecraft, cramming capital programmes into short term Spending Review cycles, and seeing levels of investment swing from “feast to famine”. In Sunak’s case, it can be seen in a capital allowances regime that only lasts three years, the commitment to increase R&D spending to £22bn by 2027 being abandoned, infrastructure projects like HS2 and Northern Powerhouse Rail being trimmed until they are less than the sum of their parts, and trying to increase maths provision in the face of drastic teacher shortages.
Reeves takes the issue of short-termism seriously, for example committing to a statutory Industrial Strategy Council to monitor a Labour government’s plans. But the party will have to carefully balance its investment pledges, commitments to get debt down in five years, and other urgent demands on public spending. Without clear safeguards, one can easily see the Treasury “meeting” the figure through counting existing spending commitments as new investment. As it continues to articulate its industrial strategy, Labour should:
- Develop a bold science and technology policy: A focus on production and manufacturing is welcome, but Labour’s plans still depend on a thriving research and innovation base. The party should consider its own response to the Science Superpower agenda, for example committing to a 10-year funding settlement for R&D accompanied by a pledge it will always increase with inflation.
- Make the case for long-term investment: Labour should explore setting fiscal rules or safeguards that protect their investment plans from being undermined in government. This could include applying the recommendations in the Resolution Foundation’s recent paper, for example by setting a small number of seven year programmes for sectors or technologies where the UK is genuinely competitive.
- Activity target regional disparities: Never assume new investment will automatically gravitate to less-prosperous regions. The National Wealth Fund and other programmes should be proactively “tilted” to projects in areas with low productivity, but high potential. Greater powers over skills, infrastructure and business support should be devolved to Mayors. A UK-wide industrial strategy should be aligned with those in Scotland, Wales, and Northern Ireland.
- Get the foundations right: Bidenism works thanks to the United States’ relatively cheap land and energy, areas where the UK is uniquely dysfunctional. Labour’s industrial strategy will succeed or fail depending on how successfully it ramps-up clean energy supply by 2030 and reforms the planning system.
The UK’s problems are not a matter of destiny. The country still possesses considerable strengths, and an ambitious strategy to back its growing industries and overcome their blockers could make a real difference. But whichever vision wins out, both Labour and the Conservatives need to think and act for the long-term. If they fail to do this, a stodgy and unambitious version of “Ms Heeves” could yet become reality.
Image: Rachel Reeves MP in Washington DC, by Rachel Hitchcock
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.
