How bold will the government be on industrial strategy? – Inside track

It has been a good few weeks for industrial strategy nerds. The government has an ambitious agenda for economic renewal, with impressive sounding new institutions and programmes like Great British Energy (GBE) and the National Wealth Fund (NWF), albeit with truncated budgets.

Later in the year we should get details of the sectors the government wants to promote. Given Labour’s focus on decarbonisation and renewable power, the hope is that many will be green.

All this is beginning to look like Britain’s answer to the US Inflation Reduction Act and the EU’s Green Deal Industrial Plan, massively ambitious strategies accelerating a green industrial revolution abroad which have put us in the shade.

But are the new government’s plans coherent? As strategy shifts from correcting market failures to spotting new opportunities in fast emerging global markets, questions will be asked about whether ministers have the tools, knowledge and institutions to succeed.

Industrial strategy should be central to stronger partnership with businesses
Central to Labour’s project is using the power of the state to work with, and in many cases lead, the private sector in restructuring industries to prosper in a greener, more high tech, but less globalised economy.

Key to this partnership is industrial strategy. The last government gave tax breaks for R&D and targeted help for strategic industries like cars and steel. But what we lack is an strategy to tie them together coherently, assuring companies and investors there is a plan to grow the industries we are good at, while developing cutting edge sectors where we are weaker.

Such a strategy could also pay more attention to managing the decline of ‘sunset’ industries in a way that is fair and avoids the permanent economic scars that can blight entire areas.

The new government approach comes with challenges
This entails a shift from the previous approach based on correcting ‘market failures’ – ie removing obstacles to investment, tackling market distortions and improving the business environment – to something more strategic and interventionist. There are three key facets of this.

First, the government has multiple objectives that go well beyond the usual goals of raising productivity and boosting exports. As well as nurturing the green industries of the future, ministers are concerned about regional inequality and want to spread wealth and jobs across the country. Industrial decarbonisation and offshore wind will be central, but there are also more speculative opportunities in emerging sectors like AI, sustainable aviation and hydrogen. Industrial strategy also needs to mesh with trade strategy and adapt to an increasingly dangerous and uncertain world by focusing on security of supply. Not all of these objectives are complementary.

Second, the new government has five overarching ‘missions’, of which at least four – ‘kickstart economic growth’, ‘make Britain a clean energy superpower’, ‘break down barriers to opportunity’ and ‘build an NHS fit for the future’ – relate to industrial strategy. Making these coherent and keeping them on track will be a major political and bureaucratic challenge.

Third, and most profoundly, by going well beyond correcting market failure, the government is attempting a very different kind of industrial strategy. For a start, it . New bodies, like GBE, the NWF and the UK Investment Bank, will be tasked with kickstarting investment and development in, for example, domestic renewables, as well as funnelling additional investment into strategic sectors like automotive and steel to help them decarbonise.

Driving a green economy solves multiple economic problems
If the strategy works, the pivot to a greener global economy will create opportunities for new industries where there is both domestic demand and export potential.

In this, the government will be vulnerable to jibes about ‘picking winners’. This criticism is mostly wrong. The thrust of modern industrial strategy is to make upstream interventions with downstream impacts, rather than risking ‘capture’ by backing individual firms.

But with ambition comes risks, and hard questions.  One issue, known as the ‘principal-agent problem’, is whether policy makers can ensure that ideas cooked up in Whitehall get implemented effectively on the ground.

Another is around links between trade and industrial strategy, and supply chain ‘security’. Should we try to move industrial production and energy generation back to the UK to enhance security and resilience? Or pursue a more growth focused strategy, either by leaning into a small number of strategic sectors or pursuing more extensive growth and levelling up across the regions?

Which sectors should be targeted?This leads to the question of which sectors the government should promote, and through which mechanisms and policies? Our analysis suggests it should exploit existing regional capabilities by building on local skills, infrastructure and knowledge. This will help to move regional economies away from declining industries towards growing green businesses. Developing them will also boost the national economy, improve energy security and supply chain resilience.

The tools to do this include ‘vertical’ sector specific measures, such as investing in  for EVs, and ‘horizontal’ measures such as pooling access to green power across energy intensive industries, cutting bills in return for decarbonisation.

Responsibility for industrial strategy should lie firmly with the business department, not the Treasury. It’s important that the planned Industrial Strategy Council (ISC) is well resourced and can liaise effectively with mayoral and combined authorities, business representatives, trade unions and Local Enterprise Partnerships.

The ISC should include green economy experts, overseeing a Net Zero Investment Plan to identify funding gaps and policies to crowd in private finance, updated against carbon budgets. To ensure the workforce has the skills necessary, industrial strategy should feed into Skills England’s strategy. And the government should work with the Office for Budget Responsibility on credible fiscal rules which permit growth enhancing capital investment.

In opposition, Labour signalled that it took the challenge seriously and wanted to be bold. Soon, we will know whether this is true.