From the TUC

Active industrial strategy: Where should the next government put its money?

10 May 2017, by in Economics

The main parties in this election are committed to an active industrial strategy, a great improvement over years of leaving much of the development of industry to market forces. But we need to see the detail. As they publish their manifestos, we’ll be watching closely to see what their own ideas are for industrial policy. One point we’re looking for is whether they believe government resources should be used to target specific industries, or whether they should support all sectors of the economy?

Until about ten years ago, there was no support for the idea of identifying of specific sectors, an approach that was described as “picking winners”. However, first Lord Mandelson and then Vince Cable, First Secretary and Business Secretary respectively in Labour and Coalition Governments, began to focus on specific industrial sectors. The reason for this was that some sectors are particularly important for exports, for research and development, and for quality jobs. Not all industries deliver the same outputs and neither do they need the same policy response from government.

The TUC supports this approach, while recognising its major weakness: sectoral policy favours incumbents, making it more difficult for new industries to emerge with government support.

In this age of rapid technological change, that could mean other countries reaping the benefits of the “next big thing”, while the UK continues to support “yesterday’s” industries. Clearly some sectors are particularly important, but we cannot be so specific that we deter disruptive technologies.

So what could the government do to support all industries, both those that have allowed us to pay our way in the world up to now and those that might emerge and be important in the future? And what about the so-called ‘foundational’ economy, made up of businesses that do not export but that provide solid, if not particularly sexy, jobs in local communities?

First, we can support infrastructure spending. Just about any business uses infrastructure – roads, the rail network, telecommunications and, in the modern age, broadband. It is widely believed that one of the reasons France enjoys higher productivity than the UK is its superior infrastructure. France has a network of high speed rail lines, for example. The UK has just one high speed line – the one that goes to France!

Infrastructure investment provides much high quality work in its own right, including in construction – and trade unions have reached important framework agreements on work conditions during the construction projects leading, for example, to Heathrow Terminal Five and the stadia for the 2012 Olympic and Paralympic Games. With interest rates at historic lows, such investment is good value for the public sector. However, comparing spending across OECD countries (on a national accounts basis), UK government investment of 2.6% of GDP ranks 20th out of 27 countries for which data are available.

Procurement policy is also important. The public sector spends around £268bn per year, equivalent to 14% of GDP, on goods and services, according to the Government’s Green Paper on Industrial Strategy. As the Government also says, used strategically, this spending can encourage innovation, competition and investment in skills. The TUC made that argument for many years and we are delighted that the government has finally come to accept its importance. We welcome the rolling out of the ‘balanced scorecard’, an approach recently developed by the Cabinet Office, across all major construction, infrastructure and capital investment projects over £10m. Alongside this, we would urge the Government to consider the role that strategic procurement can play in those communities currently described by commentators as “left behind”.

Science, research and innovation are vital to industrial strategy. During the years of the Coalition Government, the science budget was frozen in cash terms, which amounted to a cut of 11 per cent in real terms over the lifetime of a Parliament. In fact, this headline figure also masked significant cuts in science spending within government departments. Moreover, as the Government Green Paper admitted:

“The UK invests 1.7% of GDP in private and public funds on research and development. This is below the OECD average of 2.4% and substantially below the leading backers of innovation – countries like South Korea, Israel, Japan, Sweden, Finland and Denmark…”

The Government has committed to invest an additional £4.7bn in research and development by 2020-21, an investment that the TUC naturally supports. We would argue that there should be a mission-oriented element to this spending; missions (The US Government’s policy objective to put a man on the moon by the end of the 1960s was an obvious example of such a mission) require collaboration across sectors and academic evidence, including from the influential economist Mariana Mazzucato, supports the value of mission-oriented policy. One question is how to identify the best or the most important missions? The TUC believes that one deciding factor should be the quality jobs created or safeguarded by the mission in question.

Finally, the development of skills is vital to horizontal industrial policy. The Government has signalled its intention to put technical education at the heart of its industrial strategy and it is right to do so. We know that the UK excels at university education provision but is at the bottom of international league tables on most other key skills measures. The TUC has welcomed moves to boost apprenticeships, while recognising that there is further to go, with 21% of 16-18 year olds still competing their apprenticeships in less than a year and 30% not completing their training at all.

On the wider issue of technical education, the TUC supports the integration of apprenticeships and technical education systems, as is the case in many other European countries. Flexibility to allow students to switch between academic and technical routes, as well as tailored support for those with special educational needs, is also important. However, as noted in yesterday’s post, the key ingredient is a role for unions as social partners to be given the ability to work alongside government and employers in managing the system. The longevity and high quality standards achieved in other European countries bears testimony to the success of this approach.

It is important not to get too stuck in debates about the relative virtues of sectoral and horizontal industrial policy. We need both, without being beholden to either. World class sectors are vital and in need of government support, but we cannot lose sight of disruptive technologies or the foundational economy either. For this reason, science, infrastructure and skills must be central to government plans for industry in the months and years ahead.