The government needs to clarify the position of industrial strategy within its growth plan

After a bruising few weeks, relations between the government and corporate Britain are delicate. Business representatives and individual entrepreneurs, told that growth is the overriding objective, have reacted angrily to a budget that raised taxes, increased borrowing and caused interest rates to go up. Rupert Soames, the chair of the Confederation of British Industry, has taken to accusing the government of seeing business as a cow to be milked, rather than “the strong horse that pulls the whole cart”. ⁶ Soames R, Chancellor’s ambitions depend on what businesses are inspired to do, The Times, 30 October 2024, www.thetimes.com/business-money/economics/article/chancellors-ambitions-depend-on-what-businesses-are-inspired-to-do-dgvjjwxmv  The chancellor Rachel Reeves has responded with obdurate reminders of how the public finances needed to be put on a firm footing, to restore the stability essential for prosperity. 

Where both sides agree is that strong economic growth is needed if such battles are not to become a regular soap opera. But this merely shifts the argument on by one stage, to the question of whether there is anything resembling a growth strategy to sugar the bitter pill of higher tax.

The government is right to say it has been consistent in how it discusses growth

The government has a reasonable rebuttal. It has been consistent in how it discusses growth. Apart from the sine qua non of fiscal stability, it has been clear that weak investment is the most serious longstanding problem. Reeves prioritised this in the budget. Flagging labour supply has emerged as another issue, and the Department for Work and Pensions has published a 'Get Britain Working' plan. A detailed consultation on industrial strategy has just closed, aiming to narrow down the growth sectors and a range of policy tools for helping them. For the rest of its growth mission, the budget referenced a wide range of policy levers within no less than seven pillars. ⁸ Economic and Fiscal Stability, Investment, Infrastructure and Planning, Place, People, Industrial Strategy and Trade, Innovation and finally Net Zero.  These range from the diffusion of technology and improved transport infrastructure to net zero and the place agenda. 

If the government were a business, the test for whether this constituted a coherent strategy would be easier to define. It would examine if there were well-defined priorities; proven methods for achieving them; resources allocated for the task; a set of milestones to measure progress; a communication strategy; and a system of governance to coordinate different policy levers, respond to setbacks and provide the cover needed to take risks. 

But the government might respond that this is not a reasonable test. Unlike a business, governments cannot exit product lines, deploy just a few tools or focus on only the most promising markets. A business might target only shareholder value or market share; a government must balance multiple objectives as well as growth, with innumerable tools. If you were to brainstorm growth policy, the whiteboard would be filled with dozens of policy areas: investment, technology, skills, place, access to finance, trade links, priority sectors, the transition to net zero, planning rules, transport links, tax, regional equality, poverty, health, management skills, economic institutions, business dynamism, labour market rules, regulation, efficient government and a stable macro economy. Not all will matter equally, but none can be entirely disregarded. 

But there are some early worrying signs about the government’s growth strategy

Nevertheless, on the question of whether the government has the makings of a growth strategy, “not yet” would be the kindest verdict. Some early signs are worrying. It is possible to acknowledge that there was no choice in the budget but to impose tax rises, but still criticise it for having little discernible bias towards growth – and even some discernible bias against it. The decision to raise employers' national insurance contributions reinforced the distortive tax wedge between different kinds of work and will increase the incentive towards inefficient organisational forms. Fuel duty was once again frozen, at a large cost, and missing an opportunity at a crucial time to tilt the field towards electric vehicles. The tax system continues – through ideas like the Employment Allowance – to favour smaller companies rather than the ones most likely to grow fast. Once again, the challenge of updating the UK’s property tax system was ducked. 

The government needs to ensure its industrial strategy is at the heart of its growth mission

The other worry is a confusion about the status of industrial strategy within the overall plan. In many ways, it is the most developed aspect of the government’s economic policy. The green paper Invest 2035 is being pored over by corporate Britain, and thousands of detailed responses are expected. But it has led to some confusion about priorities. Industrial strategy boasts eight growth sectors, but is meant to be just one of seven pillars in the budget’s schema for growth policy. Confusingly, each sector section includes   questions about policy levers that are themselves often pillars. The flow-chart this conjures up is quite a headache to imagine. The suspicion is that this reflects differences of emphasis between different parts of the government that are yet to be resolved.  

Business may have been told that industrial strategy is just one part of the growth mission but – presented with no other equally developed statement of the government’s approach to growth – appears to believe it essential to be “in” the strategy. Hence the thousands of consultation responses for the Department for Business and Trade and the Treasury to wade through. Without a clear sense of how the growth mission will work, much of business is treating the industrial strategy as if it is the whole thing. 

It is the essence of industrial strategy that it is selective, however, and a great many will have to be disappointed. To resolve this confusion is going to take some skilful handling.  There are five steps the government should take to give itself the best chance of success.

Be focused and selective

First, the government must not buckle in the face of so much eagerness to be “in” the industrial strategy. The scale and multi-faceted nature of growth policy – the busy-ness of that whiteboard –  is precisely why the industrial strategy bit has to be focused, goal-oriented, closely monitored – and just a part of the whole. As we have written repeatedly at the Institute for Government, it needs tight edges. Industrial strategy must be a hard core in the middle of the growth mission, containing only those industries where the case has been made with overwhelming conviction. It is where one should expect to find plans for defence, for energy and highly advanced technology sectors: those where government interests and capabilities are unavoidable and the effect on the rest of the economy undeniable. 

If a strong case is not made, then no matter how large, well-connected or esteemed the sector may be, the government should not be reluctant to generate a minimal response. 

Consider every possible policy lever

Second, this highly selective approach should be applied to target sectors – but not tools. Invest 2035 has been clear that a wide variety of policy levers must be considered, and the right ones will depend entirely on the situation. Nothing from that crowded whiteboard – including tax policy – should be off the table.

Keep listening to companies outside the industrial strategy

Third, the government needs to be clearer that not being included in the industrial strategy does not mean that the “spurned” industry or company is unimportant, nor that its concerns will go unheeded. True, most of growth policy has to concern the wider economic environment; most companies say that all they really want are predictable taxes, decent infrastructure, a supply of skilled labour and accessible finance and so on. But recognising this does not mean ignoring all signals from an individual company or sector. The government needs information from all corners of the economy in calibrating its policies; regardless of whether the respondents make the cut, it should take seriously all the responses in the current consultation, and use them in developing wider growth policy. This just doesn’t have to lead to some kind of intentional government strategy for the sector, with all the associated goals, milestones and targeted interventions. 

Create a system of business engagement

Fourth, as a key part of this, the government needs to follow through on its commitment to create an effective system of business engagement. In Invest 2035 this is presented as a key part of the industrial strategy, but the value would be felt far beyond those carefully selected sub-sectors. There needs to be a large increase in business investment. Much of it may lie outside of the chosen sectors but nevertheless require a responsive government to secure. Multinational companies and investors in particular rely on extensive engagement with the state to deploy capital with confidence. It is a good sign that the Office for Investment (OFI) has been strengthened, and the government is known to be impressed by the Harrington Review into how to encourage more foreign direct investment. But doing this can run against the instincts of parts of Whitehall, the Treasury in particular. 

The fanfare around the industrial strategy has been such that businesses may be dissuaded from putting in the effort to engage with the government if they do not think they are part of a favoured sector. This impression must be quashed. The beefed-up OFI must be clear that the door is open to all investment and market-opening proposals. It can’t be like a bouncer at a club, barring a guest with “sorry, you’re not on the list”. 

Speak to individual companies 

Fifth, the government must resist the temptation to try – maybe in the name of diary-management – to do as much engagement as possible through business representatives rather than with companies. It is no substitute to hearing from directly from whoever is wielding the chequebook. Britain has excellent business organisations, but they have to reflect the position of a wide membership, and this is not always the best way to get to the heart of specific problems holding up an investment. 

The question of how the rest of the growth mission needs to be organised awaits a longer piece. Resolving the part of the industrial strategy within it is just one early priority. Doing this will help to reassure business that the discord of the past few weeks is not a harbinger of the next four years.