George Osborne’s anti-industrial strategy

In announcing his Spending Review and Autumn Statement the Chancellor, George Osborne, committed to delivering “an active and sustained industrial strategy. The strategy launched in the last Parliament continues into this one”.

This public reaffirmation of the previous coalition government’s policy was mildly surprising in that the new Business Secretary, Sajid Javid, has refused to use the phrase ‘industrial strategy’ and seemed to be placing clear and very blue water between his department and Vince Cable’s BIS regime.

Yet, for all the rhetoric and the significant funds provided for the development of new aerospace and automotive technologies, the Chancellor fails to convince he means what he says on industrial strategy. Witness the lazy, feet-dragging approach to measures which could’ve helped the steel industry better withstand its current struggles.  Hidden away in Wednesday’s announcements were three other reasons to fear that the goal of coherent and rigorous industrial strategy is as far away as ever.

The demise of UK CCS

The decision to scrap the £1bn funding for a competition to build the UK’s first carbon capture and storage facility – a 2015 Conservative Party manifesto commitment – wasn’t communicated in the Chancellor’s speech or even detailed in the lengthy accompanying documents. Officials called industry players as the nation’s media started to digest the Budget’s detail – a cowardly method of communicating a very bad decision.

Unless significant numbers of the world’s top engineers and geologists, the Intergovernmental Panel on Climate Change, the Scottish Government and the UK Government’s own Committee on Climate Change (the list could go on) are wrong, CCS is both technically feasible and very necessary. The UK has a number of advantages that led many to assume it could and should pioneer this important new technology: accessible storage opportunities, a mature offshore sector, world leading academics and UK (-based if not always -owned – an important distinction) companies with relevant engineering experience.  Yet the Treasury now decrees that, if CCS is eventually deployed here in the UK, it will be with technology owned and developed in other countries. The bulk of the associated economic benefit will accrue to the nations accepting this challenge.

It may be entirely consistent with the Treasury’s longstanding approach to industrial development but, nevertheless, the lack of ambition reflected in pulling the CCS competition is depressing. For over a decade successive administrations have excitedly promoted the potential of CCS while singularly failing to provide the necessary support. Industry has suffered a number of false starts and broken promises. This is anti-industrial policy. Sufficient private funds will never be forthcoming for expensive, nascent technologies which can only promise uncertain returns over indefinite time frames. Public sector support is necessary to de-risk the investment. If the UK system cannot provide such support to an emerging industry with massive employment, industrial and export potential then the UK economy will forever be smaller, less diverse and less resilient.

Privatising the Green Investment Bank

Similarly, confirmation of the Government’s intention to conclude the sell-off of the Green Investment Bank (GIB) next year should worry those concerned by the UK’s capacity to generate sufficient investment in socially useful technologies. Why? Consider the case of the Industrial and Commercial Finance Corporation (ICFC) established in 1945. Let Colin Mayer take up the story:

“For a brief period in the 20th Century, ICFC provided Britain with a financial institution that matched its German counterparts in the funding of industry. Its success reflected its distinctive features…It focused on the financing of early small manufacturing companies in their early development stage and frequently took equity stakes in firms…it developed a degree of industrial expertise that allowed it to bridge the gap between finance and business which had emerged when the British banking system lost its local roots in the 19th century. It was an immense success…ICFC investments were regarded as signals of quality certification.

However,

“true to the British custom of selling off successful institutions, the banks and the Bank of England sold their stakes in the 3i group [it had changed its name in 1983] in 1987…and the repositioning of its activities contributed significantly to the switch in UK venture capital from early stage in the mid-1980s to management buy-outs and buy-ins by the end of the 1990s…Britain  had once again returned to being a country in which there was little serious long-term funding of SMEs and limited venture capital to finance seed-corn, start-ups and early stage ventures”.

ICFC isn’t of course equivalent to the Green Investment Bank; its ownership, structure and remit are different. The Government is also forcing would be investors to agree to a set of principles designed to ensure the GIB maintains its green credentials post privatisation.

But, as with ICFC, the change of ownership could alter management incentives in a way that undermines the GIB’s core purpose. The GIB has already been accused of ignoring the kind of riskier projects it was established to fund. Privatisation could see it compete with, rather than increase, private investment. The core concern is that it will no longer even be conceived of as a potential bulwark against short-termist, myopic finance. Riskier projects will simply not be funded.

The Apprenticeship Levy and Labour Market Institutions

It’s good to see the reintroduction of the Apprenticeship Levy abolished by Mrs Thatcher but it does raise a number of questions. For instance, as the OBR notes, the incidence of this tax is, like all payroll taxes, likely to fall on workers themselves hence contributing to more pessimistic forecasts on wages growth.

The Government’s commitment to establishing “a new employer-led body to set apprenticeship standards and ensure quality” is also intriguing because it looks like a job ready made for the industry-led UK Commission for Employment and Skills (UKCES). Perhaps the future of UKCES is less than certain? It’s worth noting that it’s one of only two UK labour market institutions – the other is the Low Pay Commission – which could broadly be described as ‘social partnership’ bodies: a European term usually denoting employer, trade union and Government involvement and of which Scottish Ministers are particularly fond.

If my fears prove correct and the UKCES is abolished or eviscerated through funding cuts, the UK could be left without any influential institutions of social partnership with the Low Pay Commission having been undermined, perhaps fatally, by the Chancellor’s approach to the National Living Wage. In the context of the Trade Union Bill it is difficult to envisage the Government replacing tripartite institutions with new bodies which include a meaningful role for trade union representatives. In the area of skills development will be severely damaging. Across much of Europe employers and unions constructively agree standards for apprenticeships. Why not in the UK?

 

Industrial strategy (I prefer ‘policy’ but heyho) is by its very nature difficult. Payoffs are long-term and uncertain which renders politicians understandably reticent about its application. But the economy ‘rebalancing’ the Chancellor supposedly craves won’t be achieved with half measures and a paucity of ambition. The development of effective strategy requires input from industry in its widest sense and the foresight to identify and act upon the UK’s advantages. This the Autumn Statement simply failed to do.

Image from CCS: A 2 Degree Solution by Carbon Visuals under CC by 2.0

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