Invest 2035: a promising launch for the industrial strategy

That which is quickly broken is not speedily fixed. Ever since the Global Financial Crisis broke the UK’s financial-services-driven model, its politicians have been fumbling towards a new one. Along the way, laissez faire as a governing principle has been buried, and industrial strategy risen, shakily, to take its place. Monday saw the publication of the latest attempt, the Labour government’s Invest 2035: The UK’s Modern Industrial Strategy.

Industrial strategy means governments actively directing the structure of the economy, in an effort to achieve consciously chosen goals. In the case of the UK, the overriding goal is higher growth, but with due regard paid to the key objectives of decarbonisation, economic resilience and regional rebalancing.

There have been so many of these over the years that a little jaundice ⁶ https://x.com/rcolvile/status/1845810987036799113  is forgivable. Their standard characteristics have become familiar: our strengths (universities, science, being a services superpower); the emphasis on new industries; disdain for “picking winners”; acknowledgement of the importance of infrastructure, skills, and R&D; a reminder that we do in fact still make a lot; and the weakness of our regional economies.

But this world-weariness isn’t helpful. A really good industrial strategy should contain a fair amount of what appears obvious, but without being so uncontroversial as to look bereft of any choices whatsoever. It must provide enough direction for industry to know where to put its efforts, without being too specific and excluding the role for information, consultation and partnership. There should be enough ambition to generate excitement, without grandiose promises that generate justifiable scepticism. 

Judged in this way, Invest 2035 is a success, particularly given the short period of time the Department for Business and Trade (DBT) has been given to produce it. Here is why.

The chancellor is behind Invest 2035

Rachel Reeves’ signature on the foreword is no guarantee against Treasury neglect or hostility, but it cannot hurt. Past efforts have generally been produced under Treasury sufferance, the funding handed out as part of a tactical bargain rather than a long-term strategic choice.

Organising the strategy by sectors is a good, pragmatic decision

There are plenty of ways of organising a strategy. So long as the worst analytical errors are avoided, the sector-method is a reasonable way to start.

The worst error is to prioritise an industry simply because it has high gross value-added per head (GVA, the total output of each worker in that industry), without considering all the perversities of that measure. An industry can score well simply by being capital-intensive or using an outsourced labour model. For certain sectors, a high score is not an unalloyed good: it is no success for the energy sector or drugs industry to score highly in terms of GVA per head simply through high domestic prices, for example.

The methods for choosing the sectors are suitably flexible and eclectic

DBT economists clearly understand the distortions risked by using a sector-lens, and GVA per head is only the starting point for their analysis. International competitiveness is considered, and the potential effect of emerging technologies. Since “Standard Industrial Classification” codes can be somewhat arbitrary, the approach is to look to lower-level divisions, too. The green paper promises to dive into the “foundational” sectors of critical importance to the others. A potential example is the role of a strong transport network in sustaining a technological hub, or the energy sector for manufacturing.

The eight sectors chosen hold few surprises

Most micro-economists would have chosen in a roughly similar way to the government: advanced manufacturing; clean energy industries; creative industries; defence; digital and technologies; financial services; life sciences; and professional and business services. 

Among these, only defence was much of a surprise, but its importance in the wake of the war in Ukraine is hard to deny. Compared to earlier attempts, there is a much greater emphasis on services, which is sensible. Most of the UK economy is found there, and services also dominate exports. The inclusion of financial services marks its long journey from systemic risk to an opportunity and enabler to the rest of the economy.

The government’s strategy acknowledges itself as just a part of the growth mission

The Labour government has a mission to become the fastest growing economy in the G7. Industrial strategy is “a central pillar” of this mission, but not the whole edifice. I imagine this reflects a pragmatic compromise with more free-market-oriented thinkers in the Treasury. Most of the economy’s problems and potential lie in areas beyond the conscious control of the government and will emerge from the ceaseless experimentation of the free market. Making that machine work better through better ‘horizontal’ policies (i.e. those without any particular sectoral emphasis) is key. 

Attempting to make industrial strategy about the entire growth agenda risks a loss of coherence – making a meal too large to digest. It is good that the government has avoided this mistake.

The green paper includes a host of relevant policy areas

It is normal for documents like this to include skills, infrastructure and innovation, but Invest 2035 goes further with the regulatory environment, international trade and something called “crowding in investment” (which is about attracting global finance). The promise is to consider the particular issues of each relevant sub-sector and direct efforts accordingly. This spawns a great many consultation questions asking respondents to identify the barriers to growth and the best approaches to emulate: from questions about industrial electrification and planning to technology adoption, regulatory reform, availability of finance, the export markets to prioritise and more.

The analytical challenge of the paper risks being overwhelming

The sheer variety of the policies mentioned in Invest 2035 constitutes its greatest strength but a potential weakness. The paper deserves praise for recognising how broad are the influences guiding the productivity of the sectors of a modern economy; it is far from the subsidy-allocating caricature portrayed by critics of industrial strategy. But a commitment to shape the government’s multi-faceted influences on a sector in accordance with its strategic needs risks creating an almost impossible analytical task. 

In the next phase of the industrial strategy, when consultation responses are in, there will need to be another phase of prioritisation. Eight sectors, even more subsectors, and at least a dozen ways of intervening or affecting the industry will present the secretary of state and the Industrial Strategy Council with a serious challenge about where to put their efforts. Given how this will happen against the backdrop of a challenging Spending Review, that prioritisation may come naturally.

More acknowledgement of trade-offs would help

The driving theme of Invest 2035 is growth, but with net zero, economic resilience and regional rebalancing as ancillary objectives. It is important to acknowledge that sometimes these objectives are in conflict. Industrial policy involves questions of whether to make something or trade it; any decision will please one group (consumers or producers) and annoy another. Net zero can involve investments the cost of which outweigh the benefits in the short run. Resilience may mean stopping UK companies choosing the cheapest option on the global market. In its first 100 days, the Labour government has been keen on pointing towards the difficult choices – its industrial strategy will have a share of this, too.

The document is remarkably lacking in case studies

Given how much ⁸ https://x.com/Gilesyb/status/1764704318865777066  (albeit faltering) effort has gone into industrial strategy in the past 15 years, it is surprising that Invest 2035 has not made more effort to include case studies of what has worked and how. It has not all been a failure: the Aerospace Technology Institute, the Catapult Centres, the CFD system for offshore wind and the creation of the Office for Life Sciences are all regarded as useful. For businesses now struggling to work out how to engage with this strategy, case studies might also have helped as a guide to what sorts of response might be helpful to the government.

All in all, Invest 2035 marks a theoretically sound start to the government’s industrial strategy, one that balances the need to provide direction with an open-minded attitude towards how exactly it means to intervene. It has set out the best high-level arguments for industrial strategy of all the attempts made in 15 years. But in the next phase, there needs to be a further sharpening of its focus.