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Why industrial policy is the growth engine of modern economies

The government is hopelessly stuck in the old world of free market shibboleths. Labour mustn’t fall into the same trap.

By Ben Westerman

Labour is at last succeeding where it has so often failed: in convincing the public it can be trusted with the economy more than the Conservatives. With this parliament overseeing a contraction in living standards, it’s hardly surprising that public trust in Conservative economic competence has run out of road.

Labour is clear that its “defining purpose” is to grow the economy; Keir Starmer has described wealth creation as his number one priority, which is absolutely right. It’s growth that will allow Labour to redistribute wealth, improve opportunity, build, regenerate, and secure private investment. But amid an international race for capital, that wonct be easy.

Any party swept into office on a wave of apathy for its opponents faces the same challenge: showing the public you’re not just “the other guy”, but actually up to the job of arresting national decline. Labour has pitched itself as a safe pair of hands, pledging “ironclad fiscal rules” and that it won’t “turn on the spending taps”. Herein lies danger.

If Labour is to achieve the economic growth from which all else flows, it will have to make some tough choices that break the prevailing orthodoxy around tax and spending. Of course, it is important that Labour is seen as fiscally responsible, but the fiscal status quo simply isn’t working. The Tory psychodrama has deprived investors of predictability and stability. Rishi Sunak’s unbending belief in the small state flies in the face of an increasingly interventionist West turning away from globalisation. The result? UK productivity continues to lag, the economy continues to stutter.

Pinning economic hopes on the free market, or on regulating our way to growth, is simply not enough. What’s needed is investment predictability, clear direction, and an engine for growth. That’s where industrial policy comes in. Across the world, modern economies are demonstrating that muscular industrial policy backed by a state willing to make brave choices is the engine of economic growth. In the EU, it cannot be overstated how seismic the decision to relax the bloc’s state aid rules is – and these were the rules once seen as the very foundation of the European Union’s economic approach. Labour has committed to an industrial strategy; the tough bit is making the similarly bold choices that this would entail for the UK.

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[See also: What are the key questions Labour needs to answer in 2024?]

Stuck in the old ways

Industrial policy has always attracted criticism. Governments intervening to alter market outcomes and align them with political objectives will always make free-market purists bristle. But times change, and as we recalibrate our economic thinking for a net zero world, those purists are finding themselves increasingly detached from reality. The passage of the US Inflation Reduction Act (IRA) has reignited this familiar debate. Critics are marshalling their arguments against “Bidenomics”, the model from which Labour draws its inspiration. They say that it marks the end of globalisation. While it is lazy to blame globalisation for all our economic ills, it’s clear that with inequalities worse than ever and economies faltering, the model needs to change. They call it anti-competition, distortionist, and protectionist, but in the US inflation is easing, and private investment is flowing. Public investment is crowding in, not crowding out, the private sector.

In reality, a government directing market outcomes isn’t especially controversial. Public money invested in education, technologies or infrastructure is usually considered the most effective way to derisk private investment. Similarly, competition policy and regulatory clarity are designed to direct outcomes, but these choices are usually geared towards remedying market failures. However, an effective industrial strategy isn’t about helping specific industries or fixing failures, it’s about choosing how best to improve the productivity of a whole economy: it is not corporate welfare. To grow the economy, Labour will have to make proactive choices on where it wants to create markets. The focus of any industrial strategy must be to set a clear direction of travel and reshape the supply side of the economy.

The question isn’t whether the UK should pursue industrial policy, but how the UK can do it well.

[See also: Growth alone isn’t enough to end poverty in the UK]

The alternative

Central to Labour’s pitch is its £28bn green prosperity plan, including an £8bn national wealth fund. The virtues of public investment have always been apparent, and not just since the IRA. Here at home, the offshore wind manufacturing investment support scheme crowded in £30m of industry funding with £31m of government spending: our offshore wind capabilities are the envy of the world. The Aerospace Technology Institute has attracted £1.5bn of industry capital in response to £1.7bn of public money, resulting in a world-leading aerospace sector. A bit of boldness from government goes a long way for industry.

If Labour were to spend the entirety of the £28bn each year, it would amount to around 1 per cent of GDP – hardly the reckless giveaway some make it out to be in a world in which the average OECD economy spends 1.4 per cent of GDP on industrial policies through grants and expenditures, and 0.7 per cent of GDP through financial instruments (excluding export finance). Given the vast amounts the UK already gives away in corporate tax breaks such as the Employment Allowance, a reframing of the conversation is required. It is not about whether we should invest to kick-start a domestic green industrial base, but about how we can better invest what we’re already spending. That’s vital, because if we are to learn anything from IRA, the EU’s Green Deal industrial Plan, and similar programmes in Canada, Australia and beyond, it’s that you can’t just regulate your way to an industrial strategy. Every stick needs a carrot.

The focus in the first year of a Labour government must be to make decisions that create fiscal space, attract private investment, and give Labour the room to be bolder as each year goes by. That includes addressing the cross-cutting issues holding industry back, from sky-high industrial electricity prices to the looming threat of a carbon price that could cost the Treasury millions if it is not linked to the EU’s. That is how Labour will be able to create the Britain it wants to see, and this is where an industrial strategy is so important. If it can get this right, private investment is there for the taking, and with it all the opportunities that growth brings.

Visible winners will need to be created to offset the criticism that will come when the inevitable losers arise. A spate of short-term, voluntary sector-led deals in recent years have done little to incentivise private investment. Instead, Labour will need to focus on the big picture. Government capacity will need to be addressed, ensuring that it has the right talent, experience, and institutions to act effectively as an investor. We will have to set goals (such as reaching net zero), make it clear where we envisage our industry going, both geographically and technologically, and outline how government intends to enable that goal.

Geopolitical tensions are rising. In France, Marine Le Pen’s National Rally is on the rise, so too the AfD in Germany, and the spectre of a second Trump term looms large. As supply chains fragment and national security concerns shape economic policy, industrial policy is not just vital, but inevitable. Instead of getting lost in fruitless conversations about the merits of interventionism or the recklessness of public spending, Labour will have to be brave. It’s time to pick our winners.

[See also: How offshore workers are being let down by net zero]

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