Why this white paper on industrial strategy is good news (mostly)

Praise be. A Conservative government has published a comprehensive industrial strategy which explicitly acknowledges that the state has a key role to play in steering and coordinating economic activity. So let’s give credit to Theresa May and Greg Clark for facing down their own backbench (and several frontbench) free marketeers who deny this fundamental principle of successful economic policy. And then let’s hope this white paper finally lays to rest the political and media orthodoxy that the economy grows best when “free enterprise” is left to itself; and that government helps the economy most when it intervenes least.

This orthodoxy was never justified by economic theory, which acknowledges that the private sector can systematically underinvest in key fields and regions, and government has a crucial role to underpin and guide it. And over the past decade it has rammed right up against the mounting evidence against it. The UK’s economy has been systematically underperforming on almost every key measure. We have lower investment than nearly all our major competitors. We spend less on research and development (R&D). We have much worse productivity. We have a worse trade balance. We have the most geographically unbalanced economy in Europe. And we are in the middle of the longest period of earnings stagnation for 150 years.

If anyone wondered why we need an industrial strategy – and why nearly every other developed country already has one – these are the reasons. And to its credit, the white paper acknowledges this. Its admission that the UK economy has fundamental weaknesses stands in notable contrast to the bullish Brexit boasting of the chancellor in his budget speech last week.

So does the white paper adequately respond to these weaknesses? Yes and no.

Let’s start with the good things. The white paper provides a simple five-part structure setting out how the government will henceforth seek to coordinate policies in pursuit of higher investment and productivity. These are ideas (R&D and innovation); people (education and skills); infrastructure; business environment (finance, business support, inward investment); and places (regional growth). In each of these areas there are new policies and some new money.

At the same time it has accepted that industrial strategy needs a focus on what the economist Mariana Mazzucato calls “missions” and the white paper calls “grand challenges”: major social needs which can give direction to private sector investment and help strengthen UK supply chains. The government has chosen four, mirroring our own proposals at the IPPR Commission on Economic Justice: artificial intelligence and data; clean (ie green and low carbon) growth; mobility (electric and driverless vehicles, etc); and our ageing society (health and social care).

So far so good; but there remain some major problems at the heart of the government’s approach.

The first is that it doesn’t actually address the key problem on which it is meant to be focused. As the Office for Budget Responsibility pointed out last week, the UK’s single biggest economic problem is our low and stalling productivity. Yet the white paper’s overwhelming focus on supporting our leading innovation sectors will not help.

This is because it is not these sectors where productivity is low. On the contrary, these are our success stories; it is in the rest of the economy, the ordinary firms in “everyday sectors” (such as retail, light manufacturing, tourism and hospitality), where productivity is so much lower than in the rest of Europe and where wages, therefore, have stagnated. So it is on these sectors that industrial strategy needs to focus. Here innovation creation (what our leading-edge companies do) does not help; what is needed is the faster adoption of innovation by average businesses. The evidence shows that UK businesses lag behind their competitors even in things as simple as trading online and utilising the skills of their workforces. Yet on this the white paper is mostly silent. It is good that there will be a “sector deal” with the construction sector; and that there is to be a new “sector council” for food and drink. But much more than this is needed if productivity right across the economy is to be raised.

Second, while it proposes terrific new spending on advanced technologies, these are still largely in the same sectors (pharmaceuticals and life sciences, automotive, aerospace, AI) which have already been the focus of most support. This is based on the old economic orthodoxy that countries need to focus where they have “comparative advantage”. Unfortunately this is another bit of orthodoxy that’s wrong. In fact, the leading export economies in the world – Germany, Japan, South Korea – are much more diverse in their innovation and exporting bases. Over the coming years, as the industrial strategy is developed, we need to see a concerted effort to diversify the UK’s global-leading “frontier” sectors rather than simply deepen our comparative advantage in existing ones.

Third, there’s an elephant in the innovation room which the white paper completely ignores. Most public spending on R&D does not take the form of the grants which the government has announced. It comes through R&D tax credits and “patent box” tax breaks, which together cost around £3.6bn a year. These go largely to big companies, particularly in the pharmaceuticals sector. Yet analysis suggests between 57% and 80% of these are likely to be deadweight, funding activities which would have happened anyway. There is a strong case for shifting the focus of spending away from these tax credits to more direct spending.

Last, the white paper makes a valiant effort to claim that it is focused on supporting investment outside London and the south-east, in a bid to strengthen the economy in the rest of the country. Yet it fails to acknowledge the overwhelming evidence from other countries that this needs much stronger regional institutions. You can’t rebalance the economy from London: you have to devolve power and resources. Yet in England (outside London) we have weak local authorities and local enterprise partnerships and a continuing bias in infrastructure spending towards London and the south-east. It is ironic that in the chapter on geographic rebalancing the case study on infrastructure is … the Milton Keynes-Cambridge-Oxford corridor, another priority south-eastern project.

But let’s not carp. This is just the start of the process. There will be more to come – hopefully, under any future government. The key is the welcome recognition that our economy will not succeed unless we are willing to abandon the economic orthodoxy of the past 30 years and give government its proper role. If that can now be accepted, we should all be grateful.

Michael Jacobs is director of the Institute for Public Policy Research’s Commission on Economic Justice.

This originally appeared in the Guardian Opinion section.