Paul Teasdale argues that a deal with the EU will be critical for the success of Labour’s industrial strategy
In 1997, the incoming Labour government inherited an economy that was growing fairly healthily but with a pool of unemployment. In contrast, coming into office next year, a Labour government would inherit an economy that is struggling. For a decade, economic growth and productivity growth have been low by historical and international standards. Yet there will be little scope for a fiscal stimulus (i.e. borrowing) with the economy already near full employment.
Voters hoping for an increase in spending on health or local services will be disappointed. That would require raising taxes to European levels, and Starmer and Reeves are not going to do that. Instead, Labour (like Truss) is counting on “growth” to bring in the necessary revenues. Starmer has stated that one of his missions is to achieve the highest economic growth of the G7 countries. That is bluster. It would be a more realistic recognition of our predicament if he were to have a target of climbing to somewhere near the average.
So, what will be different with Labour? The answer, listening to shadow ministers, is industrial strategy. That means a set of microeconomic or supply-side policies aimed to increase investment and productivity and to boost particular sectors. This language harks back to the days of Wilson rather than Blair. From 1990, the UK relied on a broad set of policies to stimulate innovation and investment rather than interventions – the single market provided expanding markets, and this was backed by rigorous competition policy. There were targeted initiatives, e.g., to boost renewables or life sciences. This worked in achieving growth, but the imbalances within the UK economy widened and the policies that indulged the financial sector contributed to the 2008 financial crash.
Much of the rhetoric from UKIP was rejection of open markets and competition, wanting to be free of EU rules on state aid so that Government could subsidise British jobs. (Also in the Leave camp, the Tory European Research Group wanted the opposite – smaller government – but kept quiet during the referendum campaign.) May was the first prime minster in years to talk of industrial strategy. She set up a Department for Business, Energy and Industrial Strategy (BEIS), a Cabinet committee on industrial strategy, and the expert Industrial Strategy Council (ISC). This last was quickly closed down by Johnson, who had an enthusiasm for spending but not for strategy. Dominic Cummings was behind interventions to support a UK presence in industries of the future (micro-conductors, space) and legislation to allow ministers to stop foreign takeovers. But when Cummings left, so did any sense of strategy. Government intervention rapidly became a vehicle for corruption (to reward friends and donors and bribe voters).
In 2022, Sunak broke up Theresa May’s BEIS and the Government rhetoric returned to a more Thatcherite tone. This was at a time when other countries were turning to interventionist strategies prompted by global warming, the pandemic and the Russian invasion of Ukraine. Biden’s USA, the EU and China have all boosted the green economy using, among other things, subsidies. The UK Government has said there is no need here, repeating, “The Government is making the most of our Brexit freedoms to grow the economy.” It was totally unprepared for the collapse of the plans for Britishvolt to build a plant to make electric car batteries in Blyth; after intense lobbying by car manufacturers, it appears to have done more to attract a battery plant to locate in Somerset.
As the UK looks to be lagging behind the rest of the world, there has been a general welcome from people in business and science for proposals from Labour. Labour’s statement on industrial strategy, ‘Prosperity Through Partnership’, was launched at the 2022 Conference. The project was led by Jonathan Reynolds, the shadow secretary of state for business and industrial strategy. It draws on academic commentary and on the lessons of the ISC. If the reader skips past the Johnsonesque boosterism – “the UK leading the world” – there is some good content. This far from an election, it is inevitably light on specifics (especially spending), but it is clear enough to give some confidence of the direction to be taken; “picking challenges rather than picking winners”. This provides a skeleton, and flesh will be put on in government when Labour can draw in partners and resources.
Like most statements in opposition, the industrial strategy has promise rather than promises. There is deliberate ambiguity. There are gaps; for instance, little on industrial democracy or co-operatives (admittedly a small element, but one might expect more from Labour). There is talk of funds but lack of clarity on the mix of public and private funding, and there is a prospect that it will be thwarted by Rachel Reeves’s obsession with fiscal rules.
The highlight is the commitment to develop clean power. This provides a good example; because there is a consensus over direction, Government can support in a variety of ways (subsidy, purchasing, planning regulations, promoting research and the spread of innovation). Elsewhere, Labour has announced a green property plan, committing £28 billion per year for measures to reduce carbon emissions. But questions remain on how much of this is to be public spending and whether the plans match the scale of those in the EU or the US.
Other sectors identified as requiring specific support include: the care sector; industries of strategic importance (defence, food, medical equipment, payment systems, steel); and potential future successes that will require support for R&D, innovation and growth finance. This will be monitored by a new statutory Industrial Strategy Council which will also set goals.
However, economic growth requires investment across the economy, not just in a few sectors. That requires a foundation of what they call “horizontal” policies: a stable environment, access to university research, digital infrastructure, help disseminating innovation, fair labour market regulation, skills, cutting business rates. The Tories have obsessed about cutting business taxes to increase investment, but history has shown that business investment depends largely on expectations of opportunities – growing markets, a stable macroeconomic environment.
This package is part of Labour’s “commitment” to make Brexit work. It sees a less open economy, where we “buy, make and sell more in Britain”. The statement does acknowledge that restricting access to the largest export market has been a big setback. There has been a loss of trade and investment. Making Brexit work cannot be done with the deal that Johnson rushed to sign, so the document refers to Labour’s plan, announced earlier in 2022, to “sort out” Johnson’s terrible deal.
But does Starmer grasp this? In his speech to the CBI in November on the subject of industrial strategy, he made no mention of the EU. Starmer needs to be clear that renegotiating the deal is central to boosting growth; it is not an optional bit of tidying up. Labour’s plan appears to be for piecemeal modification (e.g. mutual recognition of qualifications) rather than closer alignment of standards with the single market.
In 2016, it was expected that negotiations to leave the EU would take several years (five was suggested), but sensible negotiation became a casualty of Johnson’s desperation to be prime minister and his simplistic slogan “Get Brexit Done”. He never understood, cared even less, what was in the deal he pushed through Parliament. The deal has had nothing to show on the positive side. On the other hand, we have a devalued pound, extra ‘red tape’ for importers and exporters, higher prices for imports, a lower standard of living, lost trade, lost business investment, lost university research projects, delays for goods and people at borders, and sporadic shortages of goods on shelves. Attacking “Johnson’s deal” should be an easy starting point. Then, with a with a new trade deal and alignment with the single market, the industrial strategy will have a prospect of success in achieving growth and raising living standards.