Hands on

Understanding Labour’s industrial strategy

The industrial strategy published last week did not get the attention it deserved. It is a major, novel and long-awaited plank of the government’s economic plans and yet it will have barely registered with most voters. Partly this was a consequence of events elsewhere, the brewing welfare revolt at Westminster and Trump’s bombing of Iran. However, it also results I think from a conceptual bewilderment that includes journalists, politicians and economists.

We have lived through more than 40 years of almost unbroken neoliberal supremacy in the UK. An entire generation of policy analysts has left university, had their career and picked up their pension in a world founded on principles established by Margaret Thatcher. Their successors are today preoccupied by the rise of populism. So when something genuinely new comes along that is neither neoliberal nor populist, the reaction that emerges is a collective “Hmmmmmm”. To get past that we need to understand what is being left behind, what is being created, and how that shift fits into the wider currents of British politics.

The supremacy

In line with neoliberal faith in the market and hostility to the state, Thatcher cut off many of the hands with which previous governments had sought to shape the economy. This involved abandoning the idea that the government should try to shape the country’s industrial base via direct investment, vetoing takeovers or even simply persuasion. She privatised entire industries. She eviscerated support for what she called near-market research, work that allowed, for example, the Central Electricity Generating Board to develop a successful line of generators and control software for its power stations or helped GEC to develop new avionics.

She had an ally in the European Commission, which took François Mitterand’s idea of state-backed Grands Projets that would allow Europe to compete with the US in advanced technologies, and corralled it into the pre-competitive (far-from market) zone found today in the Horizon programme.

As Defence Secretary, Michael Heseltine had different ideas but was comprehensively defeated when Sikorsky, the US maker of helicopters, sought to take over Westland, the UK maker of helicopters. The key point resonates today: the US firm intended to close down Westland’s UK manufacturing operations while the European alternative he wanted would have retained them as part of a larger group, rather like Airbus.

Later governments softened Thatcher’s approach without effectively contesting the basic hands-off idea. Under John Major, Heseltine tried to develop an alternative approach but had no money. Poignantly, he published an annual R&D Scoreboard listing the UK firms spending the most on research, but after he went it was quietly shelved as foreign companies were allowed to buy up firm after firm on the list.

Under Gordon Brown, tax credits for R&D were introduced and the near-market injunction was blurred at the edge with the creation of Innovate UK, but Peter Mandelson had too little time to make a difference once a department with the right overall remit was created. A ratchet, under which Brown promised the government would spend more on R&D if companies did, had no discernible impact.

Under the Coalition, Vince Cable wrung the British Business Bank out of George Osborne in a high stakes backroom deal. Thereafter, Conservative governments see-sawed between two factions depending on who had the critical Cabinet seat. One, fronted by David Willetts and Greg Clark, articulated a technology-level focus for the research councils and Innovate UK. This was far from market again but they called it “industrial strategy” anyway. The other, fronted Kwasi Kwarteng and Sajid Javid, abandoned even that element of direction over public funds and reverted to a more purely Thatcherite position.

The policies the UK has ended up with can be quite expensive. Tax breaks for R&D cost some £10 billion a year in lost revenue. However, they have remained resolutely hands off – and ineffective. Where are the world-beating companies the neoliberals promised us half a century ago?

Meanwhile, while endlessly promising an end to white elephants like Concorde and red tape, the neoliberal supremacy has in fact spawned its own white elephants and presided over an ever-more sprawling regulatory regime. This is how we come to have HS2, and how HS2 comes to spend £100 million on a tunnel to avoid annoying some bats.

Even the high-tech innovation ecosystem in which we have great strengths has ended up with a poisonous geography. The start-ups and scale-ups are concentrated in the south-east and, instead of maturing into production at locations around the country, routinely sell out to the US. A few founders in the south-east get very rich and buy a yacht; the rest of the country falls further behind.

As Keir Starmer wrote last week, “The result is a state that is both overbearing and feeble, poorly serving an economy that has become too reliant on a small number of places, too exposed to global volatility, and too sluggish to take advantage of opportunities.”

The industrial strategy published last week is a break with all that. The goal is growth and, if necessary, the government will put its hands on the economy to make that happen. In policy terms, the leitmotif of this commitment is a promise to bring down energy prices for industrial firms, but at a symbolic and psychological level the crossing of the Rubicon came a couple of months ago with the nationalisation of British Steel.

The British Steel decision came up against very little opposition and significance of this break with the past should not be missed. I recall a hustings at the Royal Institution during the general election campaign where Willetts made the argument that the British state, unlike its French counterpart, was temperamentally incapable of hands on management of the economy. Even then, he and his neoliberal allies still hoped to dissuade the incoming government from the assertive path it has now taken.

Key to the break is the articulation of an industrial strategy with all the comprehensiveness and complexity that term properly implies. The strategy published last week is massive, and not only in pages. It is dense with evidence, reasoning and plans. This should come as no surprise as this is the half of government economic strategy that has been missing in Britain during the neoliberal supremacy. The state is re-equipping itself with many, if not all, the hands Thatcher ditched.

One document lays out the plan; a technical annex sets out the evidence and reasoning behind it. These establish a conceptual framework with three dimensions: vertical, horizontal and geographic.

Verticals

The vertical dimension consists of a list of industrial sectors expected to generate the bulk of growth in the country over the coming years and which are to be targeted for intervention. These eight broad sectors (“the IS-8”) that potentially provide a home for just about everything and are hence primarily organisational units that in themselves entail little in the way of decisions. The decisions start to come in the detailed strategies for each one, five of which have already been published.

A muscular novelty is that each sector has been given a goal for private investment, which should mean not only growth but higher productivity and better jobs.

The IS-8 and some of their targets for investment

More decisive is what is going on within the sectors, where a total of 37 priority sub-sectors¹, called “frontier industries”, have been identified. In the green paper last year, the sub-sectors were heavily dependent on what economists call their revealed comparative advantage. However, the thinking has matured and the economic assessment now includes a wider range of indicators of growth potential along with concern for strategic alignment with goals such as regional growth and security. In an era of supply chain warfare, industries that are foundational, such as ports, steel and other materials manufacturing, have been prioritised. In addition, account is taken of the scope for the government to intervene in a cost-effective way, what is called “policy opportunity”.

The practical upshot of this maturing is that Wind, in which the UK does not have a revealed comparative advantage, nonetheless is selected as a frontier industry. Although the detail of this reasoning is not provided, it seems likely to be because: i) the UK does not have a significant disadvantage; ii) the global market for wind power is set to triple in size in the coming years; and iii) as a substantial market today, the UK has leverage it can use to nurture manufacturing here.

That sounds reasonable but it won’t be easy. We are up against two countries that have been using industrial strategy for a long time to pursue domination of the industry, China and Denmark. The Danish government, for example, is closely tied to both Ørsted, which owns a huge collection of wind farms around the world (including 12 in the UK), and Vestas Wind Systems, which makes turbines.

The frontier industry approach could be described as meso-level. The consequential prioritisation is an order of magnitude more specific than, say, manufacturing. At the same time, it stops short of identifying national champions and pouring support into them – a reluctance not shared, for example, in either China or Denmark.

At the Institute for Government, Vince Cable’s former advisor, Giles Wilkes, says:

“Essentially, by choosing a sector-focused industrial strategy the government is declaring that it can address the more ‘micro’ causes of uncertainty that impede investment, which often come down to a failure to deliver in narrow areas of policy that are more sector-specific. This is the common approach behind such policies as pensions reform to boost investment in digital companies, or reforms to the Contracts for Difference scheme to increase clean electricity generation.

It is through this constant reference to the IS-8 that this is properly an Industrial Strategy, rather than just a collection of growth interventions. Throughout the document is a repeated commitment to put the needs of the IS-8 first, be that in allocations of R&D spending, skills provision, finance, infrastructure and regulatory focus. It makes the selection of the IS-8 and the 37 frontier industries much more consequential and justifies the government’s repeated insistence that it has deliberate choices in this strategy.”

Horizontals

The horizontal dimension consists of strategies addressing a broad range of generic concerns that impinge on any sector: skills, underpinning research in universities, energy, infrastructure, the regulatory environment, state finance, private investment, trade, UK data assets, critical supply chain technologies and more.

The thing that makes the industrial strategy a step forward into the 2030s rather than a step back into the 1970s – which justifies the word “modern” in the document’s title – is the emphasis on nurturing ecosystems. In the House of Commons, the Cabinet minister responsible for the strategy, Johnny Reynolds, said, “We all recognise the tremendous innovation in this country, but do we always get the long-term benefits of that scale-up happening in the UK rather than going abroad? We do not, and that is what we are seeking to fix. That is the fundamental mission that we are all united behind.”²

On the critical issue of finance, the promise is to develop the UK’s venture capital ecosystem “through strategically targeted public finance to encourage scale-up funds to raise more capital and lead larger investment rounds in UK businesses”.

An important element of this is the earlier change in the Treasury’s fiscal rules that means that the value of the assets acquired by the government is no longer ignored. This will allow additional investment of over £100bn over the spending review period.

Capital for the British Business Bank (BBB) has been expanded to £26bn, more than it asked for in the Spending Review. This should result in a two-thirds increase in support for innovative UK businesses compared with 2025-26 and it will now be allowed to invest up to £60 million in a single firm (up from £15m). For larger scale-ups, the National Wealth Fund (NWF) will be able to make investments in the hundreds of millions.

The UK’s problems with funding, and the government’s role in solving them

The NWF’s capitalisation is rising to £28bn, an increase of £6bn on what its predecessor, the UK Infrastructure Bank, had. More importantly, it will start to invest at more than the sclerotic pace of the UKIB (a mere £3bn over the four years since it was first announced). By 2028, the NWF should be investing each year 1 per cent of the UK’s GDP – the same as the KfW in Germany and Bpifrance in France.

The additional capital is unlikely to be enough to bring an end to the defection of world-beating scale-ups to the US. The weakness of the London Stock Exchange guarantees that. But we will be developing institutions with expertise in investing larger sums at scale – which will make it easier to commit larger amounts of capital in future.

The promise, notoriously difficult to make work, is that the strategy will be a priority across the wide range of government departments tasked with implementing it. To try and make this stick, the strategy explicitly sets out which departments are responsible for what.

In all of this, Net Zero and energy, Ed Milliband’s department, have the special place that was foreshadowed in Labour’s Green New Deal manifesto commitments. For example, the NWF has twin goals – growth and Net Zero. This reflects not only economic arguments but also the electoral importance of Net Zero in the cities, of energy-intensive manufacturing in the towns, and of energy costs to everyone.

The strategy commits to a degree of consultation that Wilkes understandably describes as dizzying. The digital technology sector plan, for example, mentions seven different councils, panels, boards and partnerships.

The geographical dimension pulls together existing initiatives such as Freeports with support for clusters and liaison with devolved governments. Most striking is the commitment to help cities manage development in their region, a move that should help the regions we call ‘left behind’. Luke Raikes at the Institute for Public Policy Research likes it all:

To sum up, if you are of a dirigiste mind then there is plenty missing from the industrial strategy. The words “national champion” and “takeover” do not appear in it. Yet it is a genuine break with the past half century of economic policy in the UK. It is reminiscent of an old German social democrat dictum, being hands off as far as possible, hands on as far as necessary. We have a long, long way to go in seeing how that attitude plays out and, as the IPPR has pointed out, a critical question is likely to be whether enough fiscal firepower is brought to this front.

Political reaction

The clear lesson from Joe Biden’s version of the Green New Deal is that even when it works economically it may not deliver much in the way of political lift. The benefits for voters take too long to arrive. Still, that does not mean the UK’s version lacks political consequence, as can be seen by examining the reaction to the industrial strategy of other political formations.

In the case of the Conservative Party, one can say, as a tooled-up 80s football fan might, that they got their reaction in first. For more than a decade, Conservative ministers of the technology-focus faction have been using the term “industrial strategy” to describe prioritisation of certain technologies in the funding streams of the research councils and Innovate UK. This is a tactic that attempts to negate the political impact of a genuine industrial strategy by insisting it is no change. It was again on show in the Commons debate on the industrial strategy where Reynolds’ Conservative shadow, Andrew Griffith, described it as “158 pages mostly copied and pasted from previous sector strategies and the science and technology framework”.

On the one hand, this tactic betrays a fundamental weakness. Why not just say the new policy is wrong and campaign against it? On the other hand, it is highly successful. After more than 40 years of the neoliberal supremacy there are few economists, journalists or politicians in the UK who understand what an industrial strategy actually is. And so the Financial Times can publish in all seriousness an opinion piece with the laughable thesis that the industrial strategy is actually a reversion to Thatcherite principles.

Labour’s refrain on growth is stability, investment and reform. The stability bit is why many of the industrial strategy’s targets are set for 2035 and why it is only one of a clutch of major pieces of long-term government strategy coming through. Just in areas adjacent to the industrial strategy, we’ve already had the Spending Review, the Strategic Defence Review, the Trade Strategy and 10-year plans for some R&D.

Stability is essential for higher levels of private investment but has made it hard for Labour to clarify the clear blue water between its position and that of the Conservatives. This is because the emphasis on stability extends even to fostering cross-party commitment, however fanciful that may seem under Kemi Badenoch’s leadership. Reynolds gave his opposite number an advance copy of the strategy before the debate in the House of Commons and the two most notable representatives of the Conservative technology focus faction have been welcomed into the government fold: Greg Clark is on Reynolds’ Industrial Strategy Advisory Council and David Willetts is running the Regulatory Innovation Office for Peter Kyle at the Department for Science, Innovation and Technology.

The strength of industrial strategy as a political project is also indicated by recent moves from Nigel Farage. He now says, “Our platform is to re-industrialise Britain.” In pursuit of this pitch, three weeks ago he went to Port Talbot near Swansea and pledged (and then un-pledged) to re-open the blast furnaces at the steel works there. From a political point of view, Farage’s gambit makes the case for nationalising British Steel.

There is no Reform policy to speak of but there is a distinct hostility to Net Zero. For example, Farage is promising/threatening to subject clean energy projects to a new tax if he forms a government in future.

The significance of this step by Farage is all the more because it is not an easy one for him to take. In any discussion, it’s going to be hard for him to get past the de-industrialisation brought on by his signature project, Brexit. In a review of the first five years of that, the National Institute of Economic and Social Research concluded, “Sectors dependent on EU markets, such as manufacturing, food exports, and labour-intensive sectors, have been hit harder. Meanwhile, EU countries have maintained smooth trade operations, giving them a competitive advantage. The UK’s sluggish productivity growth, which has persisted since the 2008 financial crisis, stems partly from these issues. Brexit’s structural effects—trade frictions, reduced labour mobility, and low investment—have worsened this problem, causing the UK to trail the EU in productivity improvements.”

These problems have been exacerbated by uncertainty about the regulatory regime in the UK and the extent to which it may diverge from that in the EU. “Key industries, such as automotive manufacturing and chemicals, continue to exercise caution regarding divergence risks, which limits their willingness to invest.”

Take cars. Before Brexit, the UK was making about 1,500,000 a year. Now it’s down to about 900,000. Tell us again about your brilliant industrial strategy, Nigel.

The Liberal Democrats are supportive of the general thrust of Labour’s policy but have discovered an enthusiasm for science that is likely coloured by the southern tilt of their electoral map. The SNP is obviously scathing but the most likely point of real divergence is the prospect of small modular reactors in Scotland – the SNP has long opposed new-build nuclear power. The Green Party’s response was exclusively focussed on issues related to the green energy transition. Tony Blair, who has spent two years pushing a Big Tech-led approach to economic renewal via the Tony Blair Institute, has made his position crystal clear by saying nothing.

So industrial strategy has shifted from something that was such an extreme form of state intervention that it was all but unthinkable for more than 40 years to something that is now so accepted that there is no one around who is willing to argue against it. This brings to mind Thatcher’s view of Blair as her greatest achievement because, as she put it, “We forced our opponents to change their minds.”

We are not there yet. Neoliberalism is a fundamentally insincere doctrine and at heart this is what Farage, Badenoch, Willetts and Blair remain. Today’s quiescence is likely only tactical. But we are certainly going in the direction of a Thatcher-like transformation of conventional thinking in this corner of British politics.

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I corrected this article on 5 July to remove a reference to the National Economic Development Council, whose closure I had timed to Thatcher rather than Major and on 7 July to reduce the spend on tax breaks for R&D to about £10bn (£4.5bn via SME credits, £3bn for big firms via the RDEC scheme, £1.5bn via the Patent Box plus smaller amounts for the EIS, SEIS and VCT schemes).

Frontier industries

1. Advanced materials
Aerospace, Agricultural technology (Agri-tech), Automotive, Batteries, Space

Clean Energy Industries
Carbon capture, usage, and storage (CCUS), Heat pumps, Hydrogen, Nuclear fission, Fusion energy, Wind

Creative Industries
Advertising and marketing, Film, Video games

Defence (provisional)
Autonomous systems, Combat air, Complex weapons, Directed energy weapons, [Land military vehicles], Maritime capabilities, [Nuclear submarines]

Digital and Technologies
Advanced connectivity technologies, Artificial intelligence, Cyber security, Engineering biology, Quantum technologies, Semiconductors

Financial Services
Asset management and wholesale services, Capital markets (including retail investment), FinTech, Insurance and reinsurance markets, Sustainable finance

Life Sciences
Pharmaceuticals, Medical technologies (MedTech)

Professional and Business Services
Accountancy and tax, Legal services, Management consultancy

2. Reviewing the green paper in December, I wrote: “It is uncontroversial to say that a central goal for the coming industrial strategy should be to make more stuff in the UK. However, push comes to shove when you ask what if anything is going to be done in pursuit of that aim. The burden of the above analysis is that a key goal should be for the UK to retain the fast-growing firms that emerge out of our innovation ecosystem, to retain for British workers the benefits of the dynamism the green paper wants to nourish. This is one overarching objective that could and should distinguish Starmer’s vision for the economy from past failure.”