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Thursday 30 March 2017, Rob Lyons

Go for Growth

The Economy Forum responds to the UK government's industrial strategy consultation.

Executive summary

We welcome the Green Paper as an opportunity for fresh ideas on the issues of productivity and economic growth. There has been a lack of serious thinking and effective action about these issues for many years. As a result, the UK economy has consistently lagged behind even the relatively weak rates of investment and productivity growth in other advanced economies.

While action on the various problems with the UK economy is long overdue, our departure from the European Union offers a chance for thorough reflection upon this state of affairs. We argue that many elements of current policy need to be changed. Some of these changes will be controversial in the short term and will require considerable resolution on the part of Government to follow them through. We believe, however, that we are long past the time when the UK can afford to muddle through. Our proposals would provide the basis, not merely for riding out any economic problems resulting from Brexit, but also of a new surge in wealth creation in the UK.

The papers in this response look specifically at three areas of the consultation:

1. ‘Extending our strengths’, ‘Closing the gap’ and the ‘ten pillars’ for raising productivity
While ‘catching up’ may be an appropriate outlook for a developing economy, it is not suitable for an economy like the UK that is already advanced. Our strategy must be to facilitate the transformation to a stronger future, not reinforce the present state of affairs. In that case, we must identify the barriers to raising productivity and the creation of new firms and industries.

First, we must get serious about publicly funded research and development (R&D). At present, publicly funded R&D spending equates to about 0.5 per cent of GDP; public and private sector spending together equates to 1.7 per cent of GDP. This is far less than both EU targets and many of our major competitors. We propose that publicly funded R&D spending should rise to two per cent of GDP as soon as possible – enabling the kind of ‘blue skies’ and basic research that is the bedrock of future products and services.

Second, we need to revive a powerful motor for economic transformation: creative destruction. At present, a relatively small number of companies provide all of the UK’s productivity growth. Far too many firms are ‘zombies’: kept on life support thanks to easy credit and supportive regulation. Sustaining these firms is a barrier to new investment and innovation among more dynamic firms. Japan’s ‘lost decades’ are testament to the dangers of weakening business ‘churn’, even where R&D levels are healthy.

We agree with the Green Paper that ‘modern British industrial strategy must make this country a fertile ground for new businesses and new industries which will challenge and, in some cases, displace the companies and industries of today’. This can be achieved, for example, through changing insolvency rules and ending the policy of ultra-low interest rates. Bank of England independence should end so that interest rate policies can be guided by Government policy. A broad review of regulations should be undertaken with a view to kick-starting the process of creative destruction and ending the mollycoddling of incumbent but under-performing firms.

This renewed dynamic of creative destruction will be painful, however. It must be allied to support for employees so that they take up jobs in new firms and sectors as they emerge. In the long run, this support will pay for itself as workers find more appropriate outlets for their abilities and economic growth takes off.

2. Priority areas for science, research and investment
The case for industrial strategy in the broadest sense has been handicapped by accusations about Government attempts to ‘pick winners’ in the past. In reality, policy has been more directed at propping up losers than supporting potential winners. The Green Paper is right to emphasise the need for new industries that are sustainable, competitive, generate substantial new wealth and offer plenty of well-paid jobs. The Green Paper is also right to identify on page 15 a number of sectors worthy of special attention around energy, robotics and artificial intelligence, space technology, healthcare, and more, with particular interest in battery technology.

We offer further suggestions for new sectors that could meet the Green Paper’s exacting requirements: mass-manufactured housing (with the important proviso of releasing Green Belt land for development); clever pipes, utilising ‘internet of things’ technology; combining pharmaceuticals, medical devices and digital health; a new infrastructure to take advantage of recycling carbon; and service robots for older people.

More generally, we need a focus on enabling technologies that facilitate the journey from the lab to market, including lab equipment, digital design modeling and 3D printing, allied to ‘agile’ product development strategies borrowed from software development.
What must be central to Government strategy is demand as well as supply. What new technologies do we know will be needed in the future? This emphasis will avoid the mistakes of the past. But this must also be allied to a major expansion of ‘blue sky’ research, so that we are open to new, unthought-of opportunities.

3. Cutting energy costs
Productivity increases are driven, in substantial measure, by the clever replacement of human labour by other energy sources. Therefore, increasing the potential supply of energy, while cutting its cost, is a crucial element of creating a dynamic UK economy in the future.

Unfortunately, the drive to decarbonise energy has all too often taken precedence over cutting costs and increasing supply. We therefore argue that it is time to scrap the framework created by the Climate Change Act, which has increased bills substantially for both domestic and business users. We think an ambitious target should be set: to halve the cost of energy. This would be a popular move that also provides a stimulus to innovation.

Energy subsidies should be phased out quickly. Low-carbon technologies will flourish where they meet the wider requirements of society. Extraction of shale gas through so-called ‘fracking’ techniques, which are safe, economic and do not require subsidy, should receive more enthusiastic backing from central Government. Local authorities should be allowed to keep more of the benefits of shale gas extraction as an incentive. A single-minded drive to create new energy technologies – a ‘Manhattan Project’ for energy – should be instigated. These new technologies may well be low-carbon, but that should be a happy side effect of innovation, not the primary focus.