Business, Innovation and Skills Committee 

Oral evidence: Industrial Strategy, HC 616

Tuesday 11 October 2016

Ordered by the House of Commons to be published on 13 October 2016.

Watch the meeting 

Members present: Mr Iain Wright (Chair); Richard Fuller; Peter Kyle; Amanda Solloway; Michelle Thomson; Craig Tracey; Chris White

Questions 100

Witnesses

I: Rt Hon Sir Vince Cable

II: Rt Hon George Osborne MP; Rt Hon Lord Heseltine 

Examination of witness

Rt Hon Sir Vince Cable

Q1                Chair: Vince, welcome to the Committee.  Thank you for coming.  It is good to see you again.  We are looking at industrial strategy and what Government need to do in order to produce a productive and competitive economy for the long term.  Seventeen months after the Conservative Government comes in after the coalition, and after three months with the new Prime Minister, what is wrong with the present industrial strategic approach?

Sir Vince Cable: There has been quite a big hiatus since I left Government.  When we were in Government there was an industrial strategy.  It had strengths and weaknesses, which we can come back to in due course, but there was a coherent approach with some measures that were across the board—the catapults, a long‑term approach to higher apprenticeships and issues of that kind—together with some very strong sectoral work on the car industry, aerospace, the pharmaceutical sector, construction, the railway industry, creative industries and so on.  We had some good work and then there was a gap when we left office.  Now I know the Prime Minister is trying to re-establish some structure and that is very welcome.

Q2                Chair: Can I push you on that?  Following on from May 2015, you think there was a loss of energy, momentum or whatever in respect of an industrial strategy?

Sir Vince Cable: I thought so, yes.

Q3                Chair: Can you give us examples of what you were doing—you saw a coherent package—that stopped after May 2015?

Sir Vince Cable: We had created a structure, which was not just in BIS, as it was, but in many parts of Government, where we had a long‑term approach to industrial issues—I mean industry in a wider sense, not just manufacturing—and in which there was effective collaboration between the public and private sectors.  Those were the two key themes. 

Out of that process we had some very effective work going on in particular strategies.  We will come back to the detail of the sectors.  I would cite the aerospace industry.                There was a major programme in the Aerospace Growth Partnership building up British competence in wing development.  There was the work that had been going on in the motor car industry for the new generation of engines.  There was Government money and private money—very good collaboration. 

In sectors that had not normally been very coherent, like construction, you were getting people in the sector talking to each other who had never talked to each other before about how we accelerate introducing new industrial practices in the industry.  Creative industries are very scattered and fragmented, but they were working together in a coherent way in areas where there was a market failure and Government had a role.

Q4                Chair: I will come back to the sectoral approach, if I may, in a moment, Vince.  In general, in summary, what were the best characteristics of the coalition’s industrial policy?

Sir Vince Cable: The best characteristics were that there was a genuine recognition of the need to think long term about substantial issues in British industry that went beyond the political cycle.  Both sectoral and national level bodies, like the EEF for example, saw great value in having this.  We genuinely had Government and private sector working together collaboratively rather than shouting at each other.  There was real substance.  You could say that some of these sectoral groups had elements of being a talking shop, but they were much more than that.  They did things.  There was real substantive work on building up supply chains, for example.  That was a really positive element.

This was generally understood.  There was a speech that surprised me at the time. The current Prime Minister made a speech on industrial strategy in 2013.  She was not engaged with the process, but she clearly understood the reasoning behind it and was very supportive of it.

Q5                Chair: I will push you on that.  She was not engaged with the process when she was Home Secretary.  How can you have a cross‑Government approach to industrial strategy when things like foreign workers and visa requirements did not have the engagement of the Home Secretary?

Sir Vince Cable: Before personalising it around the Home Office, one of the weaknesses in our approach was that some bits of Government were very well engaged and very positive.  Maybe just picking out a few examples, the Department for Transport really did think deeply about long‑term procurement and how to approach the railway industry in a strategic way.  Their whole approach became very positive during the industrial strategy.  In a quiet way Jeremy Hunt was very helpful about thinking of health as a British export industry, not just in terms of the NHS.  These were good things.

There were, however, bits of Government that did not engage.  The Ministry of Defence was one.  Off-the-shelf procurement was built into their system.  To be fair to him, Michael Fallon was more understanding of the issues.  He had been responsible for the Aerospace Growth Partnership.  In general they were not very engaged.  The Home Office were not.  There were not many issues that affected the Home Office, but certainly on visa issues and overseas students there was a big division of opinion.  That mattered, because we saw higher education as a major successful British export.  Clearly there was a clash with the way the Home Office saw it.

Q6                Chair: Where was the Treasury in all this?

Sir Vince Cable: The Treasury was not enormously enthusiastic, but they were co-operative and helpful when it came to it.  You will no doubt go into this when the Chancellor appears.

Chair: Former Chancellor.

Sir Vince Cable: When the industrial strategy was first launched, which was at the end of my first year in office, I needed some help in getting support from the Ministers.  Michael Heseltine was a very helpful conduit to No. 10 and No. 11.  When it came to it and we needed money for the aerospace projects and the auto industry projects, the Treasury was helpful in making it available.  They were supportive of some of the cross‑cutting policies, not sectoral, like the catapults for innovation, which were one of the very good legacies of this period, and, as I understand it, have remained so.

Q7                Chair: How did the Treasury stop you doing things other than possibly not giving you any money?

Sir Vince Cable: Quite apart from the specifics of the industrial strategy, in the earlier part of the coalition particularly, the overriding issues were around stabilising public finances and the first big public spending round we had.  There was severe pressure on public spending in general.  BIS was caught up in this.  I did my best to defend key programmes, but there was inevitably a tension.  That limited what we could do.  I do not think that was specifically designed to undermine that industrial strategy.  That was just part of an overall approach to the public finance requirements we had.

Q8                Chair: In terms of the machinery of Whitehall and sitting round the Cabinet table, does a dominant Treasury and a dominant Chancellor prevent the implementation of an effective industrial strategy?

Sir Vince Cable: If the Treasury is too dominant, that will happen, because the Treasury’s perspectives are necessarily fairly short term.  The maximum period of time of the public spending review is three or four years, but usually on an annual cycle.  Indeed, one of the reasons why the industrial strategy we had was fairly successful was that it was understood in Government, including in No. 10 Downing Street, to be a counterbalance to the very short‑term view that the Treasury adopted—and to some extent has to adopt.  Their job is cash management and it is part of their perspective.  But it did need a counterweight in Government, which I think we helped to provide.

Q9                Chair: If you had your time again in Government as Business Secretary, what would you do differently?

Sir Vince Cable: I would like to do an awful lot more of some of the things we did.  I began to see shoots sprouting around innovation policy, apprenticeships and some of the sector work. I would not say we got on to it late, but it took a while to get the machinery going.  If I had had another five years, I would have really wanted to build that up onto a much bigger scale. 

Q10            Chris White: Good morning.  In your remarks so far you have talked about the industrial strategy that we had.  I would suggest to you that this industrial strategy was a bit of a secret, not least in this Committee.  We are trying to work out what an industrial strategy means.  I would suggest an industrial strategy would include a Minister reporting to the House.  I would suggest it would be about targets.  It would be about how the Government would help business meet those targets. 

Your reputation in terms of this particular area is known as picking winners.  You have mentioned aerospace—one sector—four times already in your remarks.  Aerospace is a fantastic industry with a huge export record. I would challenge you in that this may have been going on in your head, but the public, and not least business—business welcomed that it was now the Business, Energy and Industrial Strategy Department.  If there was a strategy beforehand, why did they not know about it?

Sir Vince Cable: They did.  I tried to make a point of getting round the country once a week.

Q11            Chris White: Would it not have been better to have done that in Parliament?

Sir Vince Cable: There was a process of reporting to your predecessor Committee and Parliament.  I took the overall responsibility for it and frequently answered questions on this subject.  The heart of your question is a very important one, which is whether we were engaged in, as you put it, picking winners, which is a phrase that rather discredited the old style industrial policies of the 1970s.  I was quite sure that we should not do that and we should not be prescriptive. 

There was a tendency in Whitehall to say, “Let’s choose some sectors according to some criteria.”  We went through an exercise.  We looked at sectors that had a high export component, which was not just manufacturing but professional services, universities, creative industries and some of what we call foundation industries, which are ICT and construction.  We built the industrial strategy around them. 

I took the view that we have to be flexible about this.  Whitehall should not be dictating to business what is and is not important.  The chemical industry, for example, took the view: “There is no industrial strategy for us, so we will go and organise one.”  They did and we got the Department to come in behind them.  The railway manufacturers organised their own and it was a very effective group.  I said, “This must be seen as part of the industrial strategy.”  We had to allow for self‑selection, if you like—people picking their own winners—and that is the way the system worked.  It was flexible and it allowed for spontaneous growth.

Q12            Chris White: Thank you.  How could you suggest there was a general understanding of a coherent and comprehensive strategy if the chemical industry and the railway industry both said that this strategy was not for them and they had to create their own thing?  The railway industry is a major part of our infrastructure and did not believe there was a strategy that they felt part of.  Is that a strategy by anybody’s terms?

Sir Vince Cable: I may have explained myself badly.  They did understand the importance of thinking in these terms. Let me just go back a little bit.  One of the reasons why we got into the industrial strategy in the first place was a whole series of events that took place in the latter part of 2010 and early 2011, which exposed the fact that we did not have an overall approach in Government.  One of them was the allocation of contracts for Thameslink.  The Department for Transport had allocated the transport to Siemens.  There was a question mark because this had enormous implications for Bombardier and other companies. 

When we went into it, and I had discussions with Philip Hammond about it, we agreed that Siemens was the right answer.  Clearly the process had been right and they had got the right outcome.  But there was a terrible gap in the system that nobody anywhere was doing long‑term public procurement pipeline planning.  None of the British companies involved were in any way involved in the long‑term thinking about future big contracts, and that had to be put right.  That led us to work with the manufacturers, the service companies and new companies that came in, like Hitachi, to try to create a long‑term strategy for that sector.  It was pretty effective.  I attended several meetings myself and got to know the people involved.  That was industrial strategy at its best.

Q13            Chair: Vince, you have been talking as if the implementation or the introduction of industrial policy year zero was 2010.  Would you give any credit to what happened beforehand in terms of new industry, new jobs and what Lord Mandelson was doing as your predecessor?  Were you continuing that thing, which industry wanted, because that provided long‑term policy and stability for business?

Sir Vince Cable: Yes, I do give credit.  I always took the view that this is not something sensibly done on a one-party, triumphalist type basis.  If you are trying to get long‑term achievements, you have to have buy‑in across the board and acknowledge the good things that happened before. 

One of the helpful things I had was Lord Heseltine had an office in my department.  He was in and out of my office.  His experiences from the 1980s were highly germane to what we were doing.  As you say, Peter Mandelson did bring in some measures, particularly around the crisis in 2008 and 2009, such as the Automotive Council, which in some ways became the model for what we did.  When I came in, the Automotive Council was established.  I think it had been established at that time.  It was doing some pretty effective work around supply chains, but they did need a fresh burst of energy and support, which I and my colleagues were able to give them.  We wanted to generalise that experience in other industries.  There was a legacy and it was a helpful one.

Q14            Chair: Can I just pick up on something that Chris started to mention, which is the sectoral approach?  You said in response to Chris that you did not pick winning sectors; I think that term was used.  But you did, did you not, because you chose 11 sectors in which you would concentrate attention?  Then you said there were no real criteria by which that happened.  How did you choose those 11?

Sir Vince Cable: Officials with economic advisers were sent away to think about those bits of the British economy that we should focus on.  They essentially looked at what we call in the jargon tradeable activities—in other words, goods and services that Britain is exporting or potentially exporting where we had a potential competitive advantage and how we can work with them.  That was the initial criterion and various numbers were crunched in order to produce a list of activities.

Q15            Chair: Of those 11, the creative industries were not included.  That seems odd.

Sir Vince Cable: Often there was some disagreement with officials about this.  I took the view that this 11 was not some kind of sacred number.  There was nothing special about being in as opposed to being out.  In the real world of private enterprise you have constant change and disruption.  You have sectors like ICT where dramatic things are happening and you have to engage with them.  They do have to work with Government over issues like skill training. 

As you say, I was very keen to encourage creative industries.  We set up a unit in BIS to help support them, working with DCMS.  They were not formally part of it, but I always attended the meetings of the Creative Industries Council and lots of good things happened, particularly on the training side.  The 11 was a rough working list, but I took the view that we should stretch the boundaries and be very flexible about it.

Q16            Chair: That was not clear, was it?  Again, picking up from what Chris was saying, industry would not have been certain in terms of what an industrial strategy was.  You could have been part of the first team, the 11, or you were not.  You perhaps were on the subs bench or you were not.  It just seems the clarity was not there, was it?

Sir Vince Cable: It was deliberately kept flexible.  I did not believe in first teams and subs benches.

Chair: I am sure Wayne Rooney did not either.

Sir Vince Cable: Certainly we were not trying to do a Gosplan-type plan, as in the Soviet Union.  I have memories of this.  You will remember that I was a special adviser in BIS at the end of the 1970s when we had the so-called Neddies, which were industry groups.  It was quite a rigid approach to planning.  That is not the way the modern world works. Although you may think it is imprecise, I thought it was very important to be flexible and be willing to work with industry groups as they emerge.

Q17            Chair: I understand you wished to be flexible, but was it so imprecise to be almost meaningless?  You were part of the 11, but it did not really matter if you were not part of it.  How does that provide certainty to business?

Sir Vince Cable: The certainty arose from the fact that we had solid policies of a general kind: things like the Catapult programme, the way we are approaching apprenticeships and general macroeconomic policy.  That is where the certainty came from.  If we had a group that was coalescing in a particular area, and railway manufacturing was a good example, there were real things to talk about. 

In the case of the railways, the main issue was how to get the British companies thinking and being engaged with the Department for Transport’s long‑term railway plan.  It also had specific issues around how you have higher level apprenticeship training.  Did we need a special centre to do that?  We did.  As you know, we created the centre for the training requirements of HS2.  There were business‑like discussions with groups of people in industry.  It was the companies, but we also had people from the labour side as well in most cases.

Q18            Chair: I do not want to keep pushing these 11 sectors, but it is important in terms of finding out some degree of the criteria by which they were chosen.  If they were included as part of the front bench, the first team or whatever you want to call it, how would they be dropped?  What would be the criteria?  Did you look at any criteria by which you would think, “That sector used to be important for the British economy but the world has moved on and therefore we have moved on to something else”?  Is that not the nature of flexibility?

Sir Vince Cable: It is.  I am trying to think of areas where we declined to devote scarce official resources to support.  One that you picked up as an Opposition spokesman was retail.  We took the view that the retail industry is terribly important in the British economy, but this is not a sector that is likely to be involved heavily in international traded activities.  We did not have an industrial strategy for the retail sector.  I think you criticised us for it at the time.  There was an implicit assumption that there were some bits we were giving more emphasis to than others.

Q19            Peter Kyle: Sir Vince, it is good that you remember so many of the Chair’s criticisms over the years.  You have a good memory for that.  When you became Secretary of State, in the very early days did you approach it as having a blank sheet of paper from which to work, stamp your authority, bring in and implement the things that you had been longing to for a long time as a politician, a former journalist, analyst and so forth, or did you spend the first period learning what went before you and taking into account consistency?  What was the priority for you as an individual coming in to being Secretary of State?

Sir Vince Cable: It was more the latter.  I did not have a preconceived view that we needed to embark on an industrial strategy of the kind that we did.  My own instincts were fairly liberal, with a small “l”.  I spent years and decades earlier observing and criticising the way that the old style of industrial policy did not work.  My instincts were not to go down that road. 

A whole series of events early on in the Coalition Government made it clear we had to approach things in a more structured way.  I have been over some already, but there were already in existence good groups like the automotive industry building up supply chains.  We needed to strengthen that. 

I know it was suggested I was talking too much about aerospace, but let me just give it as an example.  About six months after I came into office, the heads of all of the leading six British aerospace companies came to see me and presented some very alarming charts that showed that the British content in civil aviation was falling year by year by year.  They were making the point that successive British Governments have not shown sufficient interest in this sector and it is going to disappear unless you do something about it.  Out of that I worked with the officials to say we have to focus on how we work with the industry to strengthen the research base. 

Then we have the episode with Siemens, Bombardier and the railways.  There was a case, which again I think the Chairman of the Select Committee drew our attention to, which was a big tanker for the armed forces that went to Korea and nobody had really thought about.

Q20            Peter Kyle: You are describing sectors and industries that are large enough to be able to make a call to a Government department and get through to the Secretary of State pretty quickly.  Some of the people that have come to us and me and I have spoken to who most want a strategy are the ones who would not be able to make a call and get through to the Secretary of State.  It is why they rely on a strategy in order to find their place within a Government programme.

Sir Vince Cable: I was very conscious of this.  I will quote one or two examples—ceramics.

Peter Kyle: I was about to mention ceramics.

Sir Vince Cable: Some of your colleagues kept coming up to me in the corridors with problems around the ceramics industry.  I took the view that BIS needed to have a capacity, which often meant one official or half an official, to focus very specifically on some of their problems, but that they were not big enough in themselves to generate a substantial apparatus.  Nonetheless, you are quite right that there are these niche industries that are important.

Q21            Peter Kyle: We are trying to have an inquiry where we can learn about how we support industry into long term.  Many of the businesses that we and I have spoken to or have given evidence have said that what they want most is consistency over a long period.  Even though they do not necessarily agree with all the strategy, at least they know what they can get their teeth into and expect over a long period. 

When you were Secretary of State, you had the 11-part plan or the 11-sector plan.  Then for the last 18 months we have had a Government that has not even mentioned industrial strategy.  In fact, they have said that they actively do not have an industrial strategy and want to take a different approach.  Now we have one that does want an industrial strategy but has not spelt out what that is.  In times when there is such economic and social uncertainty going on with trading relationships abroad, do you see how that is intensely frustrating for businesses?

Sir Vince Cable: I do.  I keep in touch with some of the people I worked with in both sides of industry, and they do express frustration that they thought we had something worthwhile that was going and it suddenly stopped.  One of the attractions of the industrial strategy we had was it was designed to create a longer-term perspective on things than the political cycle, because a lot of activities, mainly manufacturing but some service activities, do have to think long term.  That is the nature of the beast.  If Government is constantly chopping and changing, that is not helpful at all.  That is why I very much welcomed the current Prime Minister’s revival of this.  She has a big, substantial legacy to build on and I hope that they are not going to reinvent the wheel.  You do not need to reinvent the wheel.

Q22            Peter Kyle: Based on your experience, because you are one of the longest serving Business and Industry Secretaries of State, how do you get the balance right between having a strategy that goes between different Governments of the same party and different Governments of different parties into the long term and yet gives the Secretary of State freedom to put their own emphasis or priorities into it?  From experience what would that look like?  How could you do it?  Is it possible to do it with the system of government that we have?

Sir Vince Cable: It does require enough generosity of spirit to acknowledge that your predecessors—not just me but my predecessors—did something worthwhile and you want to build on it rather than raze everything to the ground and start from scratch.  I am not sure how you create that, but that clearly is necessary.  The main business groups have a major role in this.  I do not know what they said to the Government when I left in May 2015, but I would hope that they said, “We have something worthwhile here.  It is very important for certainty and the support that we need to compete internationally.  Please do not try to reinvent it from scratch.”  Beyond that, the British political system is not terribly friendly to consensus-built policies.

Q23            Chair: You talked about the short‑termism.  Government is extremely hyperactive and it tinkers all the time.  Business is very frustrated at that.  The tax code is a good example of that.  How would you suggest, given your time in Government, that that culture of tinkering and hyperactivity could be altered?

Sir Vince Cable: There are success stories.  We are way outside of industrial strategy—pensions policy, you could argue.  Despite a lot of toing and froing and rhetoric, we have made very big long‑term decisions about pensions that transcend the political lifecycle.  That is a good story.  Some of the things that we did, and I think are continuing, in some of those particularly manufacturing sectors are good examples as well. 

It is an inherent problem and it is not just in Government.  You are dealing with equity markets that are also very short term.  You have an industrial strategy and then along comes a company—Pfizer, AstraZeneca—that threatens to blow a hole in everything you are trying to do in relation to, in that case, life sciences.  It is not just Government with a short-term perspective.  You are trying to deal with markets as well, which can throw you completely off course.

Q24            Chair: Other Governments, such as the German Government, will have to deal with events, and they seem to have that long‑term stability in policy, for things like apprenticeship policy, that we have never been able to establish.

Sir Vince Cable: I was very impressed with the German model.  It is a different country and a different history.  One should not try to draw too many parallels.  Some of the things that we tried to do in the industrial strategy were self‑consciously based on German ideas.  For example, the Catapult programme was in many ways a British version of the Fraunhofer system.  Our approach to higher apprenticeships had a lot to do with the German model.  The initiatives I took through the British Business Bank and the Green Investment Bank had echoes of the German KfW.  If we had a really good model of how long‑term industrial strategy works, probably Germany has more elements than most others. 

There are other countries, like Korea in Asia—and even the United States, which is often thought of as a free-for-all.  In many areas the Government works very closely with the sector on civil aviation, defence and internet-based industries through their Department of Defense.  They are much more strategic than we give them credit for.

Q25            Chair: You just mentioned the Green Investment Bank.  Do you agree with the current proposal that it is being privatised?

Sir Vince Cable: Sorry, I did not quite—

Chair: The Green Investment Bank is in the process of being privatised.  Is that a good step in terms of creating a long‑term industrial strategy?

Sir Vince Cable: What I have seen of it I was not at all comfortable with, but we did discuss in Government the idea of bringing in private investment.  What was very important was in the Green Investment Bank there was at least an element set aside in order to do projects that would not necessarily have qualified through purely private sector judgment.  I have not followed the thing deeply enough to make a full criticism of it.

Q26            Richard Fuller: Sir Vince, some of us look on in horror at the eclipsing of the free market capitalist system in favour of an industrial strategy by Whitehall know‑it‑alls who want to tell companies how they should run their businesses rather than let them do the best with what they know.  How would you allay their fears?

Sir Vince Cable: You are producing quite an eloquent caricature of a world that did not happen.  There was never at any stage any suggestion of me as a Minister or officials telling companies how they should run their enterprises.  That was not the way the system worked.  Indeed, some of the most successful bits of the industrial strategy involved sectors like ICT, which are very disrupted, very unpredictable and very entrepreneurial.  We have no problem whatsoever in engaging with industries of that kind.  Even the most entrepreneurial sectors have needs of Government, particularly training.  As you know, one of the problems in ICT is a lack of coding people.  The system has not produced the right kind of people. 

Many of them are suppliers to Government, and therefore public procurement processes have to be geared to some kind of long‑term planning in their industry.  You can, as we discovered with the Catapult programme, help some of those very entrepreneurial industries test out ideas.  I am not in favour of top down planning.  I am not in favour of Ministers and officials instructing businesspeople how to run their affairs, but you can have good, collaborative work.

Q27            Richard Fuller: I worry that you are using modern words to describe precisely what happened before.  Even if you are not, I am worried that others will take your leadership and then mould and move it in such a way.  You talked about your own role in the 1970s with the Neddies—NEDC.  That was an era when the UK was called the sick man of Europe.  Why are we turning our backs on allowing businesses freely to make their own decisions to determine their own supply chains?  Why do they need Government to come in and say, “You need to do something about your supply chain”?  Why do they need Government to come and say, “These 11 sectors—or maybe not quite 11 sectors—are the important ones”?

Sir Vince Cable: We are not doing that and that is not what the industrial strategy is about.  Indeed, I do recall at the earliest stages of the argument we had within the coalition, some of your Conservative colleagues reacted like that. 

I can remember one occasion where one of the key Ministers—I think it was the Foreign Secretary, William Hague at the time—said, “I come from the place you come from.  I do not really believe in all this stuff.  However, what I have realised is that, even if you do not have an industrial strategy, by default the Government does have one because it is constantly making decisions on buying stuff or training programmes of one kind or another.  Either they are random, unco-ordinated and not leading anywhere, or you can do it on a more systematic basis, which is the way you, i.e. BIS, are now trying to do.” 

There was strong support among my Conservative colleagues—the Prime Minister, Chancellor and others—for the approach that we adopted because it had sufficient flexibility to accommodate market forces.

Q28            Richard Fuller: Lord Hague has changed his mind on more than one topic in the past year or so.  Are we using the phrase “industrial strategy” as an all-expansive thing that scares the children, where really what you are just saying is the Government is not very good at co-ordinating itself and we need to brush that up a little bit?

Sir Vince Cable: As I say, I do not think it scares the children.

Richard Fuller: It scares me.

Sir Vince Cable: All the business groups that I dealt with, and we had about five of them, were positive in varying degrees.  The small business groups would want to be sure they were not excluded from this process.  By and large, the industry groups were positive and individual companies, even when they were not part of these corporate bodies, welcomed the fact that the Government was trying to think long term and trying to think about the areas where markets fail—because they do fail.  We do undersupply things.  Britain has been very bad at support for innovation.  That is the kind of thing that through an industrial strategy Governments can do.

Q29            Richard Fuller: I think you would accept it is much easier to point at the problems than for Government to create sustained solutions.  You talk about the long term, but as Mr Kyle was saying your approach was different from that of your predecessor, and then in June of this year you said, “The coalition’s long‑term industrial strategy was working well but it has been allowed to decay.”  It did not last very long.  If you compare the term of your or the Government’s strategy with that of somebody like a GE or GSK, the Government is pretty short term even when trying to be long term.

Sir Vince Cable: That is why we were trying to do better.  I agree; Government is short term—maximum five years.  That is better than the 24-hour news cycle.  It is better than just responding to events.  We had a bad system and we were trying to make it a little bit better for business, particularly those industries that require long‑term time horizons.  You discouraged me from going down too far the aerospace route, but the fact is there are some sectors where you do have to think in decades—aerospace and the new cycle of aircraft. 

If we are talking about energy supply chains, we did some good work in the industrial strategy on oil and gas and the nuclear supply chains, because if these industries are going to happen and are going to expand, there is the issue about how they come back into British manufacturing.  If I give you an anecdote, the oil and gas companies used to come and see me because I was their so‑called relationship manager in Government.  They would ask me how the Government could help them in their affairs in the Middle East or whatever.  I would say to them, “There are these platforms out in the North Sea, none of which seem to be made in Harland and Wolff or Tyneside or Nigg Bay.  Why not?”  One answer was very revealing: “Nobody had ever asked us.”  I encouraged the process by which, through our industrial strategy and energy groups, we did think about how to get better British procurement, not forcing companies to take suppliers that they did not want.

Q30            Richard Fuller: There was no nod and a wink. If I was running a business and had a substantial amount of business with Government, and the country’s top Minister in Government came along and said, “Have you not ever thought about doing a deal with this company that is also in England?” I would not look at that as dispassionate advice I got from an independent consultancy.  I would look at that as a nod and a wink from Government that “this is what we think you should do”.  How do you get around that potential blurring of your responsibilities in Government when you make suggestions about how business partnerships should be structured?

Sir Vince Cable: It is not at all unhealthy to get big international companies thinking more creatively about how they could use British suppliers.  It was part of my job to encourage them to think in that way.

Q31            Craig Tracey: I just wondered whether you think the strategy that you created did enough to encourage small businesses to scale up or to be involved in the strategy.  Do you think in hindsight it was too involved in larger businesses?

Sir Vince Cable: We had a whole set of policies, which we arrived at through discussion with business groups, specifically to help small and medium-sized companies.  You may remember that five years ago the CBI, when John Cridland was secretary‑general, was promoting the so‑called gazelle companies.  In Germany they call them Mittelstand.  They are rapidly growing medium-sized companies that are not properly supported in the UK.  That was one of the main reasons for the British Business Bank and efforts to fill in that gap in financing.  It was the basis of the support we gave to the so‑called accelerator programme, which this Government abolished, regrettably.  It did have very high returns.  We had a whole series of very specific policies targeted at certainly the more rapidly growing of the small companies.

Q32            Craig Tracey: Are there any particular lessons that you learnt from your experience that you would pass on for the new strategy to help more smaller businesses engage in developing an industrial strategy?

Sir Vince Cable: The one big lesson we learnt as a result of the research that was done as a background is British small and medium-sized companies are much less successful at exporting than their opposite numbers in comparable sized countries, particularly Germany.  There is a deficit in the capacity of that group of companies to trade internationally.  It was out of that that we tried to give support.  As I said, the GrowthAccelerator programme was one.  The UKTI, which is the trade and investment arm of Government, was instructed to focus much more on that cohort of companies rather than the big companies, who could look after themselves.  A lot of lessons were learnt and they were applied.

Q33            Craig Tracey: We looked at exports quite a bit.  You mentioned that we are not as successful as our European competitors, especially with smaller businesses.  Why is that?

Sir Vince Cable: There is a big, complicated long‑term reason.  The fact that we had an exchange rate that was overvalued for very many years almost certainly did not help.  Maybe you could say that there was a lack of proper political support from successive Governments.  The German focus on exports is much more aggressive, single-minded and consistent.  We have never really had that.  It is a mixture of big economic factors, cultural factors and specific gaps in policy provision.  The main ones that Government could do something about were helping with loan and equity markets, which we did and we had very active policies there, and helping with mentoring support, which is what the GrowthAccelerator programme was designed to do.

Q34            Michelle Thomson: Morning.  In the light of the considerable uncertainty for business engendered at the moment by the Brexit vote, do you consider it then far more important for the Prime Minister to frame out a cohesive industrial strategy or considerably less important in the light of chaos reigning around at least for the next few years?

Sir Vince Cable: It is more important.  The big picture stuff is about whether we remain in the single market. Arguably for many of the manufacturing industries, the customs union is more important than the single market in some cases.  That is not something that is relevant here.  You guys will sort that out, for better or worse. 

Given all that massive uncertainty in the background, it is helpful if the Government has a clear programme for dealing with things that it can collaborate with industry on.  Long‑term training is a good example.  Whether we are in or outside the single market, we are going to need highly trained engineers and people in the IT sector.  You have to have a proper programme for dealing with it.  We are going to need proper support for innovation and research.  That is not conditional on our leaving or staying in the European Union.  There are a lot of things that industrial strategy does that are of enduring value, whatever trajectory the country takes on Brexit.

Q35            Michelle Thomson: You made a couple of themed comments, one of which was about cash often driving short‑term behaviour.  To what extent is it really realistic to focus on the value-add things when there are going to be continuing demands for, “How do you cover this?  How do you cover the withdrawal of funding in certain structural programmes in particular?”  There are a lot of questions around here.  I am just trying to drive out whether you think that something more than a meaningless framework of willingness to give the illusion of progress is achievable in the current climate, particularly over the next couple of years.

Sir Vince Cable: It is not meaningless.  I am not a leaver but we should not throw our hands up in despair and say, “It is all a terrible mess.  Nothing can be done.”  I am sure there is a lot of good, sensible policy that can be enacted whatever outcome there is from the Brexit negotiations.

Q36            Michelle Thomson: I am putting you on the spot here.  I hope you do not mind.  What are the top three things in your view that Mrs May should concentrate on, whether they are horizontal or sectoral?  Knowing what you know now, given your experience, what would they be?

Sir Vince Cable: I have hinted at several of them.  You have asked me to list three.  The first is having a long‑term coherent training policy.  Britain has been chopping and changing for years and decades.  We now have a framework based around apprenticeships, particularly higher apprenticeships, and getting those standards established.  Whether we are inside or outside the European Union, we have to do that.  That would be one, and that is both further education and adult education for retraining and universities. 

Secondly, public procurement: whatever happens, Governments continue to buy lots of stuff from the private sector, and you have to have a proper framework for dealing with it.  Thirdly, there is the research and innovation side.  One of our success stories was Innovate UK.  It has now been subsumed under a different body, which worries me a bit, but nonetheless it is still there.  The Catapult network is still there.  Those need to be built on, whatever future we have inside or outside the European Union. 

Q37            Amanda Solloway: Good morning.  I am just thinking about strategy in terms of national strategy.  How does that translate into regions?  I wonder if you think it has been successful.  I come from the Midlands, but has it been successful in terms of LEPs and their impact, the Northern Powerhouse and the Midlands Engine?

Sir Vince Cable: If I were giving an honest assessment of the successes and failures of the industrial strategy we had, among the negatives would be the fact that we never really properly integrated it with regional policy.  That was partly because regional policy, if I can call it that, as I know Scotland is not a region—decentralised Government—was in a state of flux. 

We had abolished the RDAs.  The LEPs had come in and we were beginning to get combined authorities, but it was a constantly moving picture and we never really got to the stage of agreeing how much of what we called industrial strategy should be devolved to those areas.  It was done very much on an improvised basis. Where there were very active combined authority projects, Manchester being the obvious one, they took on quite a lot of activities that I would call industrial strategy. 

What I was concerned with as the Secretary of State was to prevent the devolution of decision-making, which in general I am very much in favour of, becoming a fragmentation of some of the more sensible national initiatives.  We were very anxious to avoid each of the LEPs or combined authorities setting up their own innovation centres in competition with what we were doing nationally, because that is just a massive waste of resources, or trying to set up a completely new system of apprenticeships that did not apply in other parts of the country.  You need a strategic approach, but within that as much as possible should be devolved.  I am sure when Michael Heseltine, who was very much driving that process, comes in he will underline it.

Q38            Chair: I have a very final brief question.  Thank you very much for your time, Vince.  In terms of foreign takeovers and how that is within the context of an industrial strategy, should we restrict much more?  Do we sell off the crown jewels far too much?

Sir Vince Cable: We should have a more restrictive approach.  I heard what the Prime Minister has been saying about this and I have a lot of sympathy with her approach.  We should not be trying to politicise takeovers.  It is not just foreign; it is domestic as well.  The existing regime under the 2002 Enterprise Act and the European mergers directive is too permissive and the grounds that exist, which are security, media and the financial sector, are too narrow. 

I came to the conclusion, particularly after the AstraZeneca and Pfizer affair, that we did need to have some protection of concentrations of British science, which have been built up over many years with taxpayer support.  You cannot just let that go, particularly when takeovers have very questionable motivations.  I would support efforts, particularly as we are no longer apparently in future constrained by European law, to allow more intervention, certainly on those grounds.

Q39            Chair: For companies like ARM that have been sold, would that have been stopped under your watch?

Sir Vince Cable: On the case of ARM, I was asked for comments at the time.  The company that has taken over ARM is quite a benign company with a very good long‑term perspective, but nonetheless it was quite a blow to our efforts to create a British advanced ICT sector for ARM to go.  That would have been a priori a good case for intervention.

Q40            Chris White: One quick question: in summary, would you describe yourself as an interventionist?

Sir Vince Cable: Yes, but I am also an economic liberal and a very strong believer in supporting British business.  Any sensible regime has to have a mixed economy, and a mixed economy is supporting enterprise but also having a framework of intervention or industrial strategy—whatever words we want to put for it.  Although I had many disagreements with my colleague the Home Secretary, on this particular issue we happened to be on the same page.

Chair: Vince, many thanks for coming in.  That was very helpful.  Thank you very much for your time.

Examination of witnesses

Rt Hon George Osborne MP; Rt Hon Lord Heseltine

Q41            Chair: Gentlemen, welcome to the BIS Select Committee.  We are grateful that you have given up your time to come and give evidence to us.  Lord Heseltine, I will come to you in a moment.  George, many thanks for coming in.  I really appreciate it.  In your 2015 Autumn statement you said to us in the House of Commons, “Businesses also need an active and sustained industrial strategy. That strategy launched in the last parliament continues in this one.” Do you think you had an active and sustained industrial strategy?

Mr Osborne: I think we did.  By the way, thank you for inviting me to come and speak to the Committee.  I think we did.  It was put together with Vince Cable, who you have just been talking to.  Michael Heseltine was an inspiration behind it.  It was fully supported by the Prime Minister, David Cameron, and indeed as far as I was aware every member of the Cabinet. 

It involved a combination of things: a horizontal approach, which was supporting business, cutting business taxes and investing in economically productive capital like transport; but then it also involved picking both specific sectors, like the automotive or aerospace sector, and specific parts of the country, whether it was enterprise zones or the broader Northern Powerhouse initiative.  The answer is yes.

Q42            Chair: I will come on to sectoral approach and regional policy in a moment.  Given that and given your firm defence of an active and sustained industrial strategy, the new Prime Minister has talked about implementing a proper industrial strategy.  Are you a bit narked that she seems to be trashing your record?

Mr Osborne: Whenever you get new politicians in post, they always want to announce new things.  The key thing is the continuity that has underlined the approach of the Theresa May Government and the David Cameron Government, which is they are committed to industrial policy, something that was not in the Conservative lexicon or certainly had not been since the days when Michael Heseltine was in the Cabinet.  Broadly speaking the approach I can see them pursuing in energy and regional policy and the like is very similar.

Q43            Chair: Is that not the problem?  Every politician—a new Prime Minister, a new Chancellor, a new Cabinet Minister—wants to leave his or her imprint, so there will be initiatives and new announcements, people will tinker and people will try to give the impression that this is new, and business is sitting there trying to win orders and make profits and saying, “This is so uncertain.”  Is the short-term political culture of this country at odds with putting in place a long-term industrial strategy?

Mr Osborne: It does not have to be.  It is human nature that new people in new jobs want to do new things.  That is true, by the way, if you are the chief executive of a business as much as if you are a Cabinet Minister.  The key thing to look at is essentially the agreed strategy that has been adopted by the new team.  The agreed strategy that has been adopted by the new team is that we should have an industrial policy, that certain sectors should receive active Government support, that Government should be pro‑business, that devolution should continue and that the Northern Powerhouse should be supported.  I would look behind the blizzard of press releases to the continuity of the policy, and I see a lot of continuity.

Q44            Chair: Did you read or hear Greg Clark’s first speech as the new Secretary of State?

Mr Osborne: Yes, I read it.

Q45            Chair: What did you think of it?

Mr Osborne: I thought it was very good.  First of all, I have a huge amount of time and respect for Greg Clark.  He was a Minister in the Treasury.  I worked alongside him in the Cabinet.  He is a very smart Minister who has thought about these issues over a 20 or 30-year period.  His approach is, again, one I totally endorse.

Chair: In that speech he says, “Yet for too long Government policy has treated every place as if they were identical.”  In terms of that regional policy, are you not narked?  That sounds like a criticism of the Northern Powerhouse to me.

Mr Osborne: No; I did not take it as such.  Of course, we had the Prime Minister at the Conservative Party conference going out of her way to reference the Northern Powerhouse and promote it, as well as other initiatives.  Of course, I have been particularly associated with developing the concept of the Northern Powerhouse, which we can come on to talk about, but I also developed the concept of the Midlands Engine, which was linking to the automotive industry there and the skills, in particular, that we need to bring on in that part of the country.

Andy Street is now, of course, the Conservative mayor, or would‑be mayor—we will leave that to the people of the West Midlands—but as chair of the LEP developed a good, sensible strategy in the Midlands, linking businesses with the skills that local further education was producing.  Although the Northern Powerhouse is a particular concept that is unique to the north of England because of the geographical proximity of the cities there, that does not mean that we were not active in trying to promote science and agritech in East Anglia and Cambridgeshire, manufacturing in the West Midlands, and the like. 

We understood and we recognised—and this Government continues to recognise—that different parts of the country are different, have different strengths and need different support.

Q46            Chair: Vince Cable, when he came before us just a couple of minutes ago, said that one of the failures of the Coalition Government was that it did not really integrate industrial policy with regional policy.  With the benefit of hindsight, is that fair?

Mr Osborne: I do not think it is particularly fair.  I would want to hear what Vince said in the full context; I am afraid I did not hear him.  We were trying to integrate the two.  Car manufacturing is particularly focused in the West Midlands, but, as you well know, in the north east there is an incredibly important car plant in Sunderland.  Nothing is ever going to be a perfect fit, and you should not be looking for something that is completely perfect.  You have to live with the reality of the geography of the country and the dispersion of business within the country.  We were trying to integrate the two.

Q47            Chair: Thank you very much.  We will come back to Northern Powerhouse and other matters in a moment. 

Mr Osborne: Of course.

Q48            Chair: Lord Heseltine, welcome to the Committee.  We are really grateful that you are here.

Lord Heseltine: It is very kind of you to invite me.

Q49            Chair: You have vast experience, spanning many decades.  In all that experience—from, say, the Wilson Governments onwards—which Government did industrial policy the best?

Lord Heseltine: I do not think there has been Government that did an industrial policy with the conviction and the scale that you would expect to find in other countries.  There have been individual Ministers who have set out on the journey, but, without the slightest doubt, the Cameron Coalition and the Cameron Government would be the one that has put in place the elements of an industrial strategy more ambitious than anything that I can think of any other Government having done.

Q50            Chair: Why have we not put in place the ingredients of a proper, sustained industrial policy over the years?  What are the reasons for that?

Lord Heseltine: It is the ideological divide between the parties.  The election of 1950 was fought by the Conservatives on the basis of a document produced by Rab Butler, called The Industrial Charter.  At that time, the left of politics was in favour of the commanding heights of the economy being nationalised and of punitive taxation.  Understandably, the right of politics did not want anything to do with that, and had a much more simplistic, deregulatory approach: “Get off our backs.  Get rid of all these encumbrances.”

That sort of division characterised most of my political career.  The beginning of the breakdown in my view was under Margaret Thatcher, where we began to explore using public money to create public‑private sector partnerships.  We started in Liverpool and in London in 1979, where you saw the agencies, the urban development corporations, the partnerships coming into place; you saw gearing becoming part of the strategy.  John Major enabled me to take it further in the 1990s, but I do not think it evolved further than that until David Cameron, with George Osborne as Chancellor, began to change the direction quite firmly—or “to accelerate the direction” would be more accurate. 

It is now unrecognisable, in my view, and unstoppable.  The essence of what they had to do was to recognise that local economic strength is the building block upon which the economy rests.  It is not a whole economy operating to a conformist pattern.  There are many different regions, industries, skills and opportunities.  The more sensible approach is to try to evolve on what, in the industrial world, would be called a SWOT analysis—the strengths, weaknesses, opportunities and threats—based upon the reality on the ground. 

We have now seen over the last six or seven years a very considerable devolution of power, a very considerable increase in the partnership arrangements, and a very considerable increase in the competitive allocation of resources and of the intensification of rewarding success with more money.  In other words, it is differentiating between one region and another.

Q51            Chair: You talk about the tensions between a centralised state and what regions and localities will want.  What about tensions within central Government and having a proper cross‑Government approach when it comes to industrial policy?

Lord Heseltine: Yes.

Q52            Chair: I have a copy of your book, which was published in 1987 or 1988.

Lord Heseltine: Something like that.

Q53            Chair: In terms of making sure that we have a proper industrial policy, you wrote then: “The Secretary of State for Trade and Industry should therefore have, within the Cabinet, greater seniority than now, and he”—it says “he”—“would need a markedly stronger department.  Just as there is the Home Affairs Committee of the Cabinet, so the Industry Secretary should have the power base of a new Cabinet committee, of which he would take the Chair, on which other Cabinet Ministers whose activities have consequences for industrial policy would also sit.” 

Given your experience in Whitehall for the best part of half a century, Lord Heseltine, is one of the problems that the dominance of the Treasury, with a domineering Chancellor with his tentacles everywhere, hinders the proper execution of an industrial policy?  No names—no names.

Lord Heseltine: Let us name names, because George Osborne’s tenure at the Treasury was in my view exceptional to any other Chancellor of whom I have had experience.  He not only did the traditional thing of Chancellors, which is saying, “No,” and “We are going to balance the books,” and all those very proper objectives, but he had a strategic view about how the policy of the Government should change to a much more local, regional and partnership approach.  Without the slightest doubt, the changes that are taking place would not have taken place had it not been for his personal control of the Treasury.

Q54            Chair: I am just trying to push in terms of the inherent contradictions and tensions between the fact that the Treasury wants to, on a short–term basis, balance the books, but also have a very viable industrial strategy and sector.  We heard it before in respect of Vince Cable saying that the Ministry of Defence did not really buy in, certainly at first, to industrial strategy.  You can understand that in terms of balancing the books for the MoD, they just want to buy kit for the Armed Forces at as cheap a price as possible, but that does not help our long‑term defence industry. 

In terms of those contradictions, I do not know, George, as Chancellor, what you did in terms of turning a blind eye to those short‑term fiscal considerations in pursuit of a longer-term defence industrial strategy.  How do you resolve those tensions?

Mr Osborne: There are always going to be inherent tensions.  When you are trying to buy military equipment, are you trying to give your soldiers, sailors and air crew the very best equipment you can buy anywhere in the world, or are you trying to support a particular factory in a particular part of the United Kingdom?  You have to balance both.  A good example is the fact that we lost in this country the ability to build submarines, because there was a hiatus in our submarine building programme in the 1990s. 

It has been unbelievably expensive for this country, for all of you as taxpayers, to start that submarine capacity again in Barrow.  The submarines have been very expensive to produce, because we have had to start from scratch.  There, a bit of long‑term thinking might have been, “The country will probably need submarines for the long term.  We should invest in the submarine‑building capacity of the United Kingdom.”  The same is true with complex warships, where there is a stop‑start of Ministry of Defence orders for frigates, destroyers and so on.

We were trying to get to a point where there is a more regular drumbeat, to use the technical phrase, of defence procurement.  That is defence procurement supporting an industrial base, but crucially it is an industrial base supporting top‑class defence equipment.  In the end, understandably, departments have particular priorities. 

The Department of Health wants to deliver the very best possible NHS.  The life sciences industry that sits behind that risks becoming a second‑tier concern of the department, understandably, because they are trying to get people into A&E and make sure that cancer waiting times are coming down.  That is what, as elected representatives, we are broadly asking the Department of Health to do.  In order to make life sciences something that the Department of Health cares about, or defence procurement or industrial strategy something that the Ministry of Defence cares about, you do need to drive it from the centre. 

Here, a Prime Minister—or indeed a Chancellor working with a Prime Minister—can provide that sort of central leadership.  I would say it takes more than a Cabinet committee or a very talented Industry Secretary.  It requires a whole‑of‑Government effort.  The whole of Government has to not only agree an industrial policy but then see it implemented and progressed during its term.

Q55            Chair:  Does that need to be driven from the centre with the full buy‑in of No. 10 and No. 11?

Mr Osborne: In practice, yes, because unless you are going to completely recast the British body politic, the centre is held by No. 10 and No. 11 Downing Street.  As I say, that is not to disparage the work that individual ministries will do, but it is not their primary concern.  You do not need to tell the Department of Health that they need to be on the performance of the National Health Service.  They know that.  You may need to tell the Department of Health, however, that life sciences is part of an important whole‑of–Government industrial strategy.  You may also need to chase them in that respect.

I am picking the Department of Health, but I should say, as it happens, the current Secretary of State, Jeremy Hunt, is personally very interested in the life sciences strategy, so it may be a poor example.  I just use it as an illustration.  Unless you have the centre driving it, where it is not the primary responsibility of a Government department, it might lose focus.

Q56            Chair: The Department of Health is a good example.  I have heard industry—companies that want to bring forward early medical technologies—saying, “The fragmentation of the NHS now, as a result of Government reforms, means that if we are to try to get early intake of drugs in a particular market, we will go to the States.  We will not go to England.”  That is to the detriment not only of patients but the long‑term health of our life sciences as well, is it not?  Why is that being allowed to happen, if we are going to have that cross‑governmental approach?

Mr Osborne: I do not recognise it.  I will give you a good example: one of the most significant acts of devolution, which goes largely unremarked upon here in Westminster, is the devolution of the National Health Service to Greater Manchester.  It is the only place in England where that has happened.  It is a really dramatic piece of devolution.  I am a Member of Parliament in Cheshire, neighbouring on Manchester.  They are conducting quite complex and controversial hospital reorganisations, which as constituency MPs we know can be incredibly controversial.  I am looking at the Member for Bedford here. 

However, because there is a sense in Manchester that it is owned locally, and driven by clinicians, I would say it has made remarkable progress.  In Manchester, the devolution of the NHS has allowed the university and the life sciences industries there to work with local people and local clinicians.  Internationally, people like US drug companies are looking at Manchester and saying, “That is a great place to work with new treatments, early-stage therapies and the like, because it is all connected.”

I would give you that as an example of where what you would describe as fragmentation, and what I would describe as devolution, of the National Health Service in Manchester has helped industrial strategy. 

Lord Heseltine: You touched on the Ministry of Defence and you gave the impression that you thought they had no industrial strategy. I do not agree with that.  I think the Secretary of State for Defence is constantly wrestling with this issue.  Do you buy at the marginal cost of American-procured equipment, or do you develop your own?  Almost certainly it will be more expensive and less certain to develop your own, but at least you preserve the national industrial base and your ability to compete for the second or third generation. 

That is written into every Secretary of State’s dilemma, and the Ministry of Defence is perfectly prepared to pursue an industrial strategy.  Anyone who knows the history of the RB211, the Rolls‑Royce engine, knows how simple this analysis can turn out to be.  You have to realise, however, that behind the procurement of the American industrial base lies the Pentagon and NASA, and the money that is available to develop their kit in the name of the defence or space programmes, which is then sold at the margin once it has been developed by the taxpayer, is a phenomenon that faces certainly all European economies—and any economy except perhaps those of China and Japan. 

That is why you will find, for example, that with the European fighter aircraft and with the Tornado there were partnerships across Europe, because that was the only way we could afford the base from which to preserve our industrial unit.  It is true of Airbus, which is a vital part of the British economy, because the French were determined to preserve the European base for civil aviation.  It would not exist without that national input. 

Following on from the questioning you had with Mr Osborne, the proposals that I put forward were that there needs to be, as my book said, a powerful industrial strategic commissioning committee.  I now believe it needs to be led by the Prime Minister.  I recommended that in No stone unturned.  David Cameron set up such a committee.  I do not think it was as active as it might have been, although there were many things that were happening that could have been associated with it.

The new Prime Minister, Mrs May, has made a virtue of such a committee, of which she is the chairman.  Nobody can expect to have answers within a matter of days or weeks as to how it will operate, but the essence is that every Government department needs to have a statement of industrial policy, which is subjected to the scrutiny of that strategic industrial committee.  As George said, there simply is not the culture in many departments to think about the wealth‑creating process associated with the function for which they were set up, and that needs to change.   

Q57            Peter Kyle: I have a few questions for both.  Mr Osborne, if I could start with you, it is great having you here as a witness, because you were at the very top of Government for six years.  You have a great experience to share about how we tackle the challenges.  In your experience, what best delivers change in policy that makes a tangible difference in the front line, when you are a Secretary of State or at the centre of Government?

Mr Osborne: You have to be prepared to take a hard decision.  In the end, quite often, as we have just been discussing, there are choices that face politicians and Ministers and officials, and the political system tends to mitigate making a choice.  Usually people are disappointed if you make one decision over another.  In the end, the significant things that Government do are often quite controversial and are exclusive in the sense that some other decision has not been taken.  If you have an industrial policy that favours every single sector, it is not much of an industrial policy. 

Of course, however, if you do not favour certain sectors, they will complain, and the Members of Parliament with significant local employment in that sector will say, “It is outrageous that this sector has not been included.”  You end up with the lowest common denominator, which I always think is the risk in Government.  You must therefore be prepared to push it and be controversial, and risk upsetting people.

Q58            Chair: Did you do that in Government?  Were there examples in terms of when BIS was coming up with sectors?  They had 11, and we heard from Vince that 11 did not matter and essentially anybody could turn up—going to the lowest common denominator.  Did you say, “We are not going to help support that; that is not where Britain has a comparative advantage, and we are not going to devote resources and attention to it”?

Mr Osborne: To be honest, I do not have a specific recollection of whether there was a sector that was excluded.  A good example is the retail sector: it is a huge employer in the UK and is very important, but does it really need a whole Government department supporting it?  It is very innovative off its own back.  Sectors that tend to have more of an involvement with Government, such as aerospace, automotive, life sciences etc., lend themselves more to that kind of effective industrial strategy. 

By all means you can set up committees and publish papers saying you care about all these sectors, but if you want to do something that helps, normally there would be a requirement of money, policy change, getting legal changes through Parliament, and the like.

Q59            Peter Kyle: There is so much that we could go into here, and I would dearly love to.  The point about strategy is that you assumed, interestingly, that any strategy has to be sectoral.  It does not necessarily have to be sectoral.  That is not the question; let us not go down that rabbit hole yet.  I suspect Mr Fuller will take us down there shortly.

The other point about having a strategy is that, as Mr Cable said, he had a sectoral approach and a business partnership programme that he set up, and yet some companies that did not fit into that programme came and knocked on his door.  My point to him at that point was: “If you are not a business big enough to demand a return phone call from the Secretary of State, what do you do?”  That is when you need a strategy that is very clearly understood and that you can exercise. 

My point to you is that presumably the most powerful thing for you, as Chancellor, is to have your patronage of a policy, because you can personally drive it through, but your time would not allow that, for many things.  You can appoint a tsar; you can have a Cabinet committee; you can have a strategy.  There are all these tools that you have.  Which ones do you feel were the most effective at getting things done?

Mr Osborne: For a Chancellor, you have essentially two moments in a year, the Budget and the Autumn statement, where you can bring together the whole of Government and get Government signed up to a strategy.  It is a collaborative effort, so Vince Cable and I, in the Coalition Government, would spend many weeks before one of those events working out a joint plan.  It was no good if he came out and attacked it on the day; that would not work for me and it would not work for him.  It had to be a collaborative approach. 

Quite often it requires in practice, as I say, some resource from Government and it requires the ability to make a decision.  Everyone here is in favour of infrastructure.  We are all in favour of building more infrastructure, until we come to specifics.  Then suddenly, “We do not want that road, that runway, that railway or that nuclear power station.”  If you are going to pursue these things, you have to make a decision.  The Hinkley Point nuclear power station shows the number of people who are in favour of a nuclear power policy, but just not this nuclear power station here.  That is fine, but it means nuclear power stations will not be built. 

It is very good news that the new Theresa May Government is proceeding with that project, because without that there would be no future nuclear power industry; there would be no nuclear engineering skill base in the UK in the next 20 years, and so on.  You can talk in theory about, “Let us go and build some other nuclear power station somewhere else,” but that will take a long time.

Q60            Chair: On that point, then, George, do you think, given your time in Government, that you dragged your heels over airport expansion?  Should you have gone quicker?

Mr Osborne: The country has collectively dragged its heels over several decades—or indeed about 60 years—over airport expansion.  At least the Cameron Government has set us up for a decision on Heathrow or Gatwick.  Again, we have to take it, as a country.  It is a classic example; there are specific communities affected.  I happen to represent the constituency in Britain that had the last runway built in it, the second runway at Manchester Airport.  It was opened in the General Election where I became an MP, by the then Prime Minister Tony Blair.

Of course, the first thing that happened, for the first four years, was that I got a huge amount of complaints from residents about noise.  I totally understand that, and people wanted compensation.  The communities affected by runways are, of course, the people who shout loudest, and the MPs who represent those communities campaign the loudest, doing their job.  However, again, Governments that are serious about economic productivity improvements need to go ahead and build runways.  We cannot claim we will be trading with the rest of the world if we do not have airports that planes can land in. 

Q61            Peter Kyle: Agreed.  I completely agree.  Let us get on with it.  To come back to the point, the example you gave, about Hinkley, was an interesting one, because it is one that you personally did the deal for.  You personally went to China.  You personally met with senior chiefs.  You were very actively involved in it.  I do not think the Chancellor will be as hands‑on with an industrial strategy, and we are trying to nail down an industrial strategy here.  There is no way you are going to get a Chancellor who will have the kind of enthusiasm for managing an industrial strategy that you did for delivering Hinkley C.

Mr Osborne: Except the Government has committed to the Hinkley C plant.

Q62            Peter Kyle:  Exactly.  Let us get back to the industrial strategy.  We have given you credit.  Let me just put forward something that I think you did not have a grip on in the same way, and that was your celebrated announcement of the Productivity Plan.  That was more like what we are trying to scrutinise here, which is a Government strategy.  You delivered the plan; you announced it in the Chamber.  There was a good document with lots of aspirational statements in it that were going to be delivered.  Then it went out to different departments. 

Mr Osborne: Yes.

Q63            Peter Kyle: We had one of the Ministers here talking about their part of the document, but the Minister could not tell us any plan for delivering her responsibilities in the plan.  When she was asked how she was being performance-managed or scrutinised for her aspect of delivery, she could not say.  When she was asked, for example, “Do you report to a Cabinet sub-committee?” I was told, “That was yesterday’s thinking.  We do not do that kind of thing anymore.  It is all about delivery; we will go and get it done.”

A few PQs later, it turns out that she did report to a Cabinet sub-committee, and it was chaired by you.  This was your plan, a Cabinet sub-committee that you chaired, and the Ministers did not even know that they were part of it. I am really trying to get to the bottom of this.  If we are to have a strategy, let us have a strategy that somebody has a grip on and that somebody delivers.  How are we going to do that?  You did not do that with the Productivity Plan.  You did it with the things that you personally had an interest in, with the Northern Powerhouse, with Hinkley and some of the other infrastructure things as well. 

How do we get a grip on a cross‑departmental strategy?  Businesses need it.

Mr Osborne: Yes.  The good news for the politicians in the room is that I do think there is a role for politicians in a democratic system. 

Peter Kyle: Phew. 

Mr Osborne: I do not buy the caricature that the country is just run by the Civil Service, and the Jim Hackers come in and out. Michael Heseltine is a brilliant example of it.  The Docklands, the City Airport, the Docklands Light Railway and all the things that have gone to transform one of the poorest communities in Europe into an incredibly successful commercial place would not have happened without M Heseltine. 

I am sure there are lots of things that we did not get right, we should have done more of and so on.  I am not claiming our record is perfect at all.  But my experience is that you need someone.  It can be a junior Minister, if it is quite a discrete area, but it normally requires the Secretary of State, backed up by the Chancellor and the Prime Minister, to drive the thing through and to progress-chase and to keep coming back to it.  Otherwise it just becomes a thing that was announced but then disappears off into the ether.  That is just tough.  It requires effort and sustained application. 

Q64            Peter Kyle: Lord Heseltine, when we look at where the economy is moving to, we hear and talk about the fourth Industrial Revolution and the massive challenges that it will place on our economy’s ability to re‑equip itself.  You look at the breadth of challenge that the economy faces, right the way through from materials—composites, ceramics and new materials that the economy will need—to the skills agenda.  The skills that will be needed in the new economy will be absolutely huge and profound.  People are going to need the kind of flexible social skills that we have needed in the past, but failed to deliver, times 10 or 15 in the upskilling of the workforce. 

We have not been able to deliver it in the past, but we will need to deliver better in order to be a world leader, even before we talk about Brexit.  How do you have a strategy that encompasses everything from materials right through to skills, and is achievable? 

Lord Heseltine: You start with education, and as I understand the figures, which I think are accepted by the Government, we are 29th, as a country, in the world league of education.  If we accept that, we will never be a world‑beating economy in the future, because it is all about people.  It is about education and then about skills.  If you want to have skilled people, you had better educate them properly before you start making them skilled.

These are two areas that are not within the purview of the BEIS department but that cry out for the strategic commissioning committee, chaired by the Prime Minister, which needs to set standards that are relevant to the best in the world, not the 29th.  If I could design an industrial strategy, it would start in the primary schools.  I think the figure, again, is of the order of magnitude of one‑quarter of the kids coming out of our primary schools are illiterate and innumerate by modern employment standards.

What are we going to do about that?  There has to be an answer.  My own view is clear: there needs to be a much bigger devolution to the people who know where those schools are, know the people who run them, and know where the inadequate results are coming from.  In my personal experience of life, show me the problem; show me the person in charge.  I have seen in Northamptonshire, for example, an initiative called Race to the Top, which George, very sensibly, referred to in a speech he made.  It set out to eliminate, in that area, inadequately performing schools.  We need that across the country, and we need it yesterday.  We have spent a lot of time discussing the theories and structures of education.  What we want is good head teachers. 

Wherever you go in this country, there is a skills shortage—wherever I go, anyway.  That is a serious problem facing the expansion of the economy, and it is a highly centralised process, now transferred from the former DTI to the Department for Education, but not devolved on the scale that would seem to me to reflect the market opportunities. 

Those are the first beginnings of an industrial strategy, which clearly indicate that you have to have the central direction.  I must just say I have never seen a Chancellor do as much to push the economy in the direction that he believed it should go.  You ask interesting questions about the Productivity Plan, but even having the Productivity Plan was a step in the right direction.  The Chancellor cannot run the country.  They can have a major impact, but in the end you are down to the individual departmental Ministers, and if you do not bring them into account, you will not get the results. 

Human beings being what they are, they run their own show, and many of them may not have a particular priority.  Certainly the pressure from the commentariat, including Parliament, the national newspapers and all of that, will not concentrate on the industrial opportunity of the Ministry of Defence or, indeed, the Department of Health. 

Q65            Peter Kyle: I have been the chair of governors for the last five years, and still am, of a secondary school that was in special measures and failing completely.  It has as its expertise entrepreneurship, and is now an incredible example of what you have just described.  I am very proud to have been a part of it; I could not agree more.  Just to make the link, when I was at secondary school I remember very well you, as Secretary of State, getting in a bus with a bunch of business leaders and driving to areas that needed investment, and using the phrase, “We do not have a magic wand.”  I remember this very well. 

Are you saying that, if you were in that position today, you would be driving off to schools, and as a Business Minister you would be as focused on the skills and the young-person challenge that we have, as you were then in areas that were de‑industrialising?

Lord Heseltine: The education performance and skills shortage is the absolute sine qua non for a successful industrial future. 

Mr Osborne: I completely agree with that, by the way.

Lord Heseltine: George and I always agree, in truth.  There was a thing that George was saying on which I would like to just expand a little.  I do not believe that an industrial policy is about helping particularly an industry that you think can develop.  It is about the performance of the economy at large.  The first thing that an Industrial Secretary, in my mind, does is to analyse where the economy is, and then to ask the question of the relevant department, “What are you doing to help, where relevant?”

It is not about pushing money at them; it is merely about doing an analysis of how good we are, and how we could become better, in any field—not just the industrial base, because that is, after all, 12% of the economy.  We have to think about the mass of other service industries and opportunities.  It is when you get into that sort of analysis that productivity becomes the process of concern, following from the relative under‑education and skills problem.  If you have those two things wrong, you are not going to get the productivity. 

As I understand it, we are one‑quarter less productive than America and Germany; they can stop work on a Thursday evening, but we have to go on working until the Friday evening just to catch up.  You cannot build a successful economy on those sorts of statistics.  All I am doing is trying to widen the perception of this commission to look at what the whole is about, not just sectors of it. 

Q66            Amanda Solloway: Good morning to you both.  I would like to turn to one of my favourite topics, which you know is around regions and devolution.  In terms of the national industrial strategy, do you think that the LEPs are working?  Do you think the Northern Powerhouse is working, and the Midlands Engine?  Is this the message we are getting across?

Mr Osborne: I will go first.  First of all, one of the most significant reforms that is under way is to link business rate income to local authorities so that is a direct incentive on councillors to allow development to take place.  As we all know, at the moment there are plenty of incentives on councillors not to let development take place, because of local objections.  The best thing you can do to drive local growth is to provide direct incentives to communities to see that growth take place.

Q67            Chair: George, can I just interrupt you there?  Sorry.  How does that help the north?  I want to mention two specific examples.  Redcar, with the loss of SSI, have seen a collapse in their business rate revenues.  Hartlepool, my own constituency, has a nuclear power station that pays something like 36% of all business rates into that local authority.  How does 100% retention of business rates, given the vulnerability of having one particular company or large manufacturing industry that could collapse, help the north? 

Mr Osborne: I can come on to a broader point about the north, but of course there is still going to be redistribution.  We live in a single country, where money is transferred from the richer parts to the poorer parts.  You will always have to deal with the failure of a single very large employer, whether it is the Redcar steelworks or the Pfizer site in Kent.  You then need the activist ministerial taskforce and compensation for the loss of business rates.  However, one of the biggest problems in general has been the misalignment of where resources are collected by local government, and local economic growth.  They are not aligned.  A community needs to see the direct benefits of saying, “We are going to let this industrial park expand.” 

A good example was the Pinewood Film Studios, one of the largest film studious outside the United States.  It was not allowed to expand because local councillors did not want Pinewood expanding, because none of the local people wanted it to happen.  In the end the Secretary of State intervened and overruled it, but perhaps if the local community had said, “And by the way, we will see the benefits of that in our business rates,” it might have helped.

Chair:  How was R2‑D2?  I remember the picture well.

Mr Osborne: Yes.  I think you will find that robot is now a ball.  As you know, I was the Chancellor who did the negotiation with Disney to get the Star Wars films to Britain.  We were in direct competition with Vancouver and one US state.  It is $1 billion of film production in the UK, supporting thousands of skilled people—not just the film stars and directors, but the people who do the lighting, the sets, the modelling, and the costumes.  It is an example where Ministers should be prepared, in certain cases, to get directly involved in something. 

Coming back to Amanda’s point, devolution is important for aligning economic incentives.  In the case of Derby, there are some fantastic companies, as it happens: Bombardier, Rolls‑Royce and Toyota and so on.  If you really empower the local area—and I will not speak specifically of Derby, but powerful elected mayors have the scale to be able to deliver this—you can make even more of the constituent parts in the East Midlands.  That is without, as I say, straying into all the local politics about the mayor in that area.

That is the way to align devolution with economic growth.  The Northern Powerhouse was not just announced by George Osborne in a speech in a Manchester museum a couple of years ago.  It was bought into as a strategy by the local elected leaders of these cities.  It was a combination of local and national government working together to come up with an agreed plan, with transport investments, with devolution of power to these cities, with investment in science infrastructure and the like.  It is now wholly bought into by the private sector, which is what the new organisation I have created, the Northern Powerhouse Partnership, will continue. 

Q68            Amanda Solloway:  Can I just come back on the Chair’s point?  Is there something we should be doing where there is a possible conflict of interest and local decisions being made that possibly are not in the best interests of the locality?  Should there be some more involvement?  Is this where the mayor would come into it, or is it a Government intervention?

Mr Osborne: Mayors work because they can be a single point of accountability.  They have worked in cities across the world. I might be getting my history wrong, but the Conservative Party was against the creation of a Mayor of London.  Michael Heseltine will disagree, but for reasons of London politics the Conservatives were against the creation of a mayor.  Then a mayor was created, and of course the Conservatives have held the mayoralty for a period.  Having an elected mayor has been a real success for London. 

Mayors, particularly in city regions and across coherent parts of the country where there is a clear identity, can be very effective ambassadors for the area, force through change and get local councils across different local authority boundaries to work together.  I am quite excited about this revolution that is going to happen next spring, when we have these mayors across not just the north of England but the West Midlands.  The order still needs to go through, but we hope they will be in Lincolnshire, Cambridgeshire, East Anglia, Norfolk and Suffolk, in Bristol and across the country. 

It is not just a northern phenomenon.  We are changing local government—by the way, entirely with the consent of local government.  This is not one of those enormous reorganisations that Parliament has insisted upon and has imposed upon people.  This has come from areas that want it. 

Q69            Amanda Solloway: I suppose the question is, ultimately, is there a mechanism where Government can intervene, and should intervene, if a decision is not being taken appropriately? 

Mr Osborne: Ultimately, national Government, on nationally significant planning issues, does need the ability to overrule an area, but that should be a last resort.  You should be trying to align.  It used too often at the moment, precisely because there are no incentives to local areas to allow development.  We are all collectively guilty of this as elected politicians, whether as Members of Parliament or councillors: you know you can object to something, knowing that the Secretary of State, acting for the Government, can overrule you and it is not your fault, because you were aligned with the local campaign to stop it happening.

That leads to charges that it is undemocratic and local people have not been listened to.  It is much better, in my view, to align incentives so that local people see a positive from development, and they allow more of that development to take place, and as a result can be trusted with more involvement in what that development is, and where exactly it should take place.  We have been trying to move to this over recent years, but the current system basically relies on the veto or the override of the Secretary of State.

Q70            Chair: That is not real devolution, then, is it?

Mr Osborne: Yes; that is why you need to devolve business rates, which is happening now, over this Parliament.  That is why you need to give elected mayors control over things like strategic plans and the like.  We are moving in a healthier direction.

Q71            Amanda Solloway: I just have a couple more questions, if I may.  In terms of the Northern Powerhouse, and specifically the Midlands Engine, do you feel as though there is an understanding in the Midlands as to what the Midlands Engine specifically is?

Mr Osborne: First of all, you asked me about LEPs earlier.  You happen to have a very strong LEP in that part of the country.  There is a coherence between what the big employers want there.  I agree, by the way, with the earlier challenge: trying to give small and medium‑sized businesses a voice around the table is a constant challenge in these policies.  The combination of a LEP, the new agreement to the new local government structures, the mayor and the like will all help.  There is a coherence to the Midlands Engine.  It is different. 

With the Northern Powerhouse I am often asked, “Oh, it is fine for the Northern Powerhouse, but what about the rest of the country?”  You need bespoke solutions for different parts of the country.  In the north you happen to have series of cities across the Pennines that are geographically close to each other, and if you improved the transport links, invested in the science and the industry there, you could make the whole bigger than the parts.  It is a quite specific policy.  It is not just a championing of the north.  It is understanding that Leeds, Manchester, Hull, Liverpool and Sheffield are all geographically close to each other, and we need to ensure there are links up to the north east. 

The Midlands Engine is a different concept.  It is working with big employers in a large urban area and getting a partnership developed on things like skills.  It is making good progress. 

Q72            Amanda Solloway:  Thank you.  Lord Heseltine, I know that devolution is close to your heart.  Does devolution currently match how you thought it would be?

Lord Heseltine: We have not got there, yet but we are moving, and irreversibly.  It is worth saying that it is quite wrong to think that what we are doing is setting local engines of economic or political power free to do what they want.  That is not what it is about.  It is a partnership.  The central Government is fully entitled, with its mandate, to have its policies implemented.  It cannot be possible for individual parts of the economy to say, “We do not care what the central Government was elected to do; we are going to do something else, using the taxpayers’ money that comes from central Government.”  That is just not a viable concept. 

Of course there are checks within the process of allocating the funds, and the central Government looks at the bids.  It is worth thinking about what the bids are.  It has the ability to choose between them, or differentiate, or part accept, or whatever it is.  It is a deal; it is a partnership; but it is a partnership based on the initiative of the local economy and the people who play a big role in it, both public and private sector.  Both have a veto. 

The question you asked about the LEPs is important.  They have come on unbelievably well.  Are they all perfect?  No, they are not.  Human nature does not lead to that wonderful state of affairs, but there are some very good ones.  There are some doing a good job.  There are others that probably need to be asked a few questions.  The danger of that—and this has been a historic danger—is that the pressures start developing, focused on the weaker ones, saying, “Why do you not take the whole thing back into central Government?”

My experience, such as it is, of running a company is that if you have a branch office that is failing, you do not incorporate it into head office.  You change the boss of the branch office.  Where there is a weakness, it is important to analyse it, identify it, and correct it, but correct it within the devolved framework.  The results are so much better than they ever would have been, not just in the quality of the decision but the additional gearing that the private sector is now adding to what the public sector can afford.  It is billions of pounds a year.  It is very encouraging.  It has gone further than we might have hoped, but it has not gone as far as it will one day go.

Q73            Michelle Thomson: I just have a quick question for George, to pick up on a point Amanda was making.  We have heard a lot of talk in this session today about the north.  Where I come from, we call that the south, and here is the deep south.  Just to reorientate, if I could, to Scotland, I am interested in your comment about further devolution.  Given that is the case, why was there such resistance to additional, meaningful powers for Scotland to grow its economy?  Even after the much vaunted recent Scotland Act, 85% of tax‑raising powers will still reside in this Parliament.  That impedes the ability of the Scottish Government to really indulge in the ambition to grow the Scottish economy.  How does that reflect what you are saying?

Mr Osborne: Essentially, without rehearsing all the arguments, we asked Lord Smith to come up with a package, try to get cross‑party agreement to it, and then implement that package.  We did not want to second-guess his conclusions.  There was always a challenge around corporation tax, where, although the Scottish Nationalist Government wanted control of corporation tax, our concern was that you would then start to undermine—

Michelle Thomson:  Compete.  We might compete.

Mr Osborne: I suppose it would be up to the Scottish Parliament to decide what to do, but we thought an integrated UK economy would lead to potentially all sorts of very unusual tax‑motivated behaviour by UK companies.  The movement would not necessarily all have been in one direction, by the way, since we have quite dramatically reduced corporation tax in the UK.  We made an exception for Northern Ireland, because it had the very unique challenge of this land border with the Republic and the much lower rate there—although, again, because corporation tax is coming down, that is becoming less of a differential. 

From memory, that was one discussion we had, but again Lord Smith agreed with us on that and came to his own conclusions.  The Scottish Government have lots of instruments at their disposal to support great Scottish industries.  There are times when they have used them effectively, and times when they have not.  I would say at the moment, as my general observation on Scottish devolution: let us see how the powers are used.  There have been very dramatic changes to the powers available to the Scottish Parliament in the last few years on income tax, welfare and all sorts of other areas.  Let us see how that works now, over the coming years, before rushing into a further constitutional argument about further change.

Lord Heseltine: There is, of course, another aspect of this, which is: what does devolution mean in Scotland?  There is a suspicion that it means devolution to Edinburgh.  I do not know how Inverness, Aberdeen and Glasgow see their prospects of getting the devolution deals that are now on the table within the English economy.

Michelle Thomson: We will start with increasing it from 85% control here, and we will see how we get on.

Q74            Richard Fuller: Whether we like it or not, one of the most important contextual factors for our industrial strategy will be the shape of our future arrangements with the European Union.  I wondered if I could ask three specific points, which I will group into one because of time.  How important to you both is it for the UK’s future industrial policy for us to be able to secure our own trade agreements?  Specifically, as a result of Brexit, are there specific industries at risk, and conversely with untapped potential, that we should be looking to support?  Thirdly, there is lots of talk about the single market.  What do we need, in your opinion?  What do we need for a successful industrial policy?  What do we need in terms of our future arrangements with the single market?

Lord Heseltine: We have three Ministers now in charge, a brilliant set of appointments, in my view, because they can come up with the answers that have escaped me.

Q75            Richard Fuller: On each of them?  Lord Heseltine, given that the public have voted for us to leave the European Union, one of the issues that comes up specifically is about trade agreements.  You have been President of the Board of Trade.  In your view, is it important that the United Kingdom should be able to secure its own free trade agreements?

Lord Heseltine: I myself am a bit worried about the words “free trade”, because I do not know where that exists.

Richard Fuller: That is true, sorry.  Trade agreements.

Lord Heseltine: The ability to trade seems to me an important part of our future.  That seems to me such a ridiculous statement, but it is nevertheless the case.  We have to find places to trade, and if there are all these markets that have escaped the attention of British exporters, it will be marvellous to have it pointed out to them by the new Minister responsible.

Richard Fuller: Okay.  George?

Mr Osborne: I agree with what my successor, Philip Hammond, said at the Conservative conference.  He said, “The country did not vote to make itself poorer.”  That was not the intention of the majority who voted to leave the EU.  We want to make sure that we continue to have the closest possible economic relationship with the place where over 40% of our exports go.  That should not be to the exclusion of closer economic ties with other parts of the world.  I did not think that was inconsistent with being a member of the EU, but now we are leaving the EU we should certainly pursue those avenues. 

A good example of that is our relationship with China, where I personally invested a lot of time and effort to try to improve our economic ties.  As we approach this as a Parliament, and as the Government approaches this, we should be making sure we retain close economic relationships with the place where many British companies export their goods.  How that happens is something we are going to see over the next couple of years.  There will be plenty of debate about it.

Q76            Richard Fuller: I am sure, but hopefully you will help to inform that debate, Mr Osborne. 

Mr Osborne: I am still here in the House of Commons.

Q77            Richard Fuller: Specifically on the issue of trade agreements, there is a choice to be made, one that we have to decide.  We can continue to pursue trade through the European Union, and efforts like the TTIP, or we can say that it will be helpful for our industrial policy and future wellbeing—making us richer, not poorer, as your successor wishes us to be—to have the instrument of trade policy back in our own hands and supporting our own industries.  It can lead to a better outcome for our country than pooling that with the might of the European Union.  It is a specific question: which is better?

Mr Osborne: You want to maximise your trade opportunities with all your export markets and potential export markets. 

Q78            Richard Fuller:  You have to decide which way to do that.  You cannot do it both ways.  You are either in or out.

Mr Osborne: Yes.  We want to do more trade with Australia, to take an example, but that should not be at the cost of less trade with Germany.  You want to be doing more trade with Germany and more trade with Australia.  In these discussions over the next couple of years, we need to try to find arrangements that enable us to do both.

Q79            Richard Fuller:  One final effort at either of you: on trade, I agree with everything you have said in terms of outcomes, but there is a means.  There is an important decision to be made.  We can talk about the means, but it would be helpful for two people who have had a significant impact on shaping our industrial policy to give a hint or clue about to which side of that important decision you wish this country’s future to point.  Either we are going to secure trade agreements with the European Union, and our industrial policy will be seen in the context, from the point of view of trade, of the priorities of the European Union, or we can bring back to ourselves the toolkit that says, “Our trade for our industries.”  What is your advice?

Mr Osborne: We should try to avoid being put into that binary choice.  As I was saying, it is no good increasing your trade with Australia if your trade with Germany, France and Belgium suffers dramatically as a result.  We need to do both.  You cannot escape the fact that we will be doing a huge amount of trade—not just in goods but of course in services—with our near neighbours, some of the most prosperous and advanced economies in the world.  You want to be trying to do both at the same time.  It will be one of the interesting challenges for this negotiation over the next couple of years.

Richard Fuller: This interaction has been an interesting challenge too.

Q80            Chris White: To you, first, George, I would just say that I applaud the language.  As a Midlands Member of Parliament, in the Midlands Engine and the march of the makers we have seen a renaissance, certainly in the automotive sector.  Some of the Committee may have been surprised this morning to hear from you and from Vince Cable beforehand that there has been an industrial strategy for some time.  I suppose my question to your first of all is: why was this not more explicit?  Why was it not more out there?  We have had Ministers in front of the Committee before who would rather choke than put the words “industry” and “strategy” together.  Why has that been the case?

Mr Osborne: Michael might be better placed to give the longer history of this, but my reading of it was that such was the industrial failure of the 1970s that there was a complete aversion, not just in the Thatcher/Major Government but in the Blair Government, to even talking about industrial strategy.  It only started to re‑emerge, to be fair, towards the end of that Labour Government, and then with the Coalition Government, where we came to understand that perhaps you could pursue an industrial strategy that did not involve just vast subsidies to British Leyland.  There was a more modern approach to it.  We were certainly not reluctant to use the phrases “industrial policy”, “industrial strategy” and the like. 

Inevitably, political attention cannot be focused everywhere, and in the early years of the Coalition Government, the scale of the budget deficit and the public expenditure squeeze absorbed a lot of the political attention, totally understandably.  People were less interested in some of the other things that that Government were trying to do. 

It was towards the end of that Government and certainly in the last year that things like devolution and support of the automotive sector in the West Midlands or the Northern Powerhouse got more attention, not just from the media but from people, such as when I was the Chancellor.

Q81            Chris White: Thank you.  That leads me on to what I wanted to ask Lord Heseltine.  You are talking about these very regional things, and perhaps some sectoral things.  To quote back to you, Lord Heseltine, “The Ministry of Defence has an industrial strategy.”  That would challenge my concept of what an industrial strategy was—not “the Ministry of Defence is part of an industrial strategy” but “it has an industrial strategy”.  Are we going back to the siloisation and isolated strategies, or is that part of a greater strategy?

Lord Heseltine: I think it is part of the Ministry of Defence strategy.  You only have to look at the budgets of the Ministry of Defence to see why it has to have a strategy.  It spends huge sums of money on research and development, and what is the point of researching and developing unless you are going to buy the product?  You then have an industrial base that is dependent upon your past procurement processes.  Do you want to preserve it? 

When it comes to the decision to procure a new piece of kit, and in come, inevitably, the Americans, with a cheaper and working offer, there is a Treasury view and there is a tough-line view, saying, “Why the heck do we go on spending British taxpayers’ money?”  The ministry will be divided, and the Secretary of State will have a decisive role in determining that.  The figures are interesting, because you then realise how much R and D money the American procurement system puts into its industrial base, usually before we develop the kit.  You remember the Rolls-Royce situation, and how it broke the company and all of that. 

You look at the opportunities to share the development costs with the European neighbours, who will do a meaningful deal with you in technological terms.  It is much harder to do such a deal with the Americans.  Although they will do deals at the forefront of technology with you, if you are in the lead it is very difficult to get into the American procurement system on the same scale that you can the European one.  These things all throw up strategic judgments, which the ministry has to make.

Personally, I have negotiated some of the biggest deals this country has ever done in this context, but I have also seen it the other way round.  When I helped to create the European Space Agency, the Ministry of Defence was against this proposal, because they said it would threaten the special relationship with the Americans.  It was not until I became Secretary of State for Defence that I realised that was complete rubbish, and we incorporated the Ministry of Defence into the British National Space Centre.

I have moved around sufficiently to know that there are strategic judgments being made, but often by people who say we have not got an industrial strategy.  On my first day in the Department of Trade and Industry, I said, “What is our strategy?”  “Secretary of State, we are not allowed to use those words.”  I got into the detail of it all and rapidly found that the best of their civil servants were concentrated where the taxpayers’ money was heaviest.  Often that had to be, in energy terms, in important subsidies to keep various shows on the road.

What the ministry did not do was say, “Where are Britain’s best opportunities?” and put their civil servants there.  I remember an example of Keith Joseph coming to a ministerial meeting to talk about the steel industry.  It must have been in the 1970s, I think.  He talked exclusively about the nationalised steel industry.  He did not mention the 10% that was in the private sector, because the briefing would all be about where the taxpayers’ money was going.  Nobody had done a SWOT analysis as to what the national interest was. 

We have not talked about small businesses, but if you get into the subject of small businesses, you will find that our support for the small business sector is quite inadequate compared with our competitors.  Anyway, it is up to you to ask the questions.

Q82            Chris White: No, we are all listening eagerly.  There was one thing you said previously that I do agree with: that a strategy should also encompass issues such as education.  You also said that the industrial strategy should start through primary education.  Would you suggest in terms of an education policy, if you were going to invest in education, that investing in our primary education would be the first place you would look?

Lord Heseltine: We spend a great deal of money on our education system.  We just do not have enough people with the capacity to run the schools as head teachers.  That is the problem, and that is what should attract attention.  Let me say one thing: there is no shame in a head teacher saying, “Look, I am a brilliant teacher.  In the classroom, I can work wonders with these kids.  Perhaps I should not have made the step to try to run hundreds of kids in a school”—and when you get to the secondary stage, it may be thousands of kids. 

That is a very different job from being a teacher.  Helping people back from being head teachers who are probably not best suited to managing a school is a perfectly reasonable and laudable thing to do.  There should be no shame in it; but from the point of view of the young people, a failing school is a starting point in life from which they will never fully escape.

Q83            Chair: Gentlemen, you are being very generous with your time, but I want to crave your indulgence for a couple of extra minutes.  George, I want to just focus a couple of questions on the Northern Powerhouse, if I may.  Lord Heseltine, I know you have had experience of this, so you might want to comment.  It was very telling—revealing, if I may say so, George—that you said, “Across the Pennines, and the cities of Manchester, Liverpool, Sheffield, Leeds and Hull,” and then you mentioned as an aside “the north east”.  As a north easterner, it does feel like the north east is an aside.  What has the Northern Powerhouse done for the north east?

Mr Osborne: Indeed, we have had the great announcement today that the Great Exhibition of the North will be in Newcastle and Gateshead.

Chair:  Yes; true.

Mr Osborne: That is a good example.  The north east is a very important region of the country.  It has a huge amount going for it.  We have made big investments in things like the Institute for Ageing in Newcastle, doing world‑class research into the science of ageing.  We talked already about the automotive industry and the like.  It is a shame, in my view, that the authorities of the Newcastle-north east area have not decided to proceed with an elected Mayor, but we are not imposing those decisions on people.  That is for that community to decide.  In Teesside, however, I am very pleased to say that is proceeding. 

I am not separating the north east from the rest of the Northern Powerhouse.  There is an original concept, which was the geographic proximity of these northern cities. There are 10 million people living within a 40-mile radius of Manchester.  That is a similar size to London or Tokyo as population regions, and they are quite close together.  Manchester to Leeds is the same distance as the Central Line in London, but not nearly as many people make the journey every day.  Smart investment in transport infrastructure across the Pennines, investment in science and the like, can help them become more than the sum of their parts. 

However, the north east is a very important part of that; it is just a bit further away geographically, and therefore needs some more specific interventions for the north east.

Q84            Chair: In terms of that wish, I think from everybody, to integrate industrial policy and regional policy, have we not seen some failings?  A year ago, there was the crisis in SSI and the wider north east steel industry; I know, Lord Heseltine, you had some role in terms of the Tees Valley with regard to that.  Why was more not done to help Redcar and the wider steel industry? 

Secondly, the chief exec of Nissan a couple of weeks ago said the uncertainties of Brexit meant they would not invest in the Nissan factory in Sunderland. An active industrial strategy would be trying to mitigate that risk as soon as possible, and it does not seem to be happening.  What would your response be to Nissan’s chief exec, if you were still in No. 11?

Mr Osborne: This Government and this Parliament have to make the UK the place to make cars in Europe, as it has been over recent years.  We need to ensure that the future for the automotive industry is very successful and that it is an environment where: people want to come and build their cars; there is access to a skilled workforce; the tax regime is right; and the local economy will support the car plant.  We also need to ensure they can export those cars into the continent of Europe. 

We are a European base for car manufacturing, and famously produce more cars out of that plant in Sunderland than the whole of Italy does.  That has to be part of something we focus on in the coming years, and we have to overcome the challenges that present to us.

Q85            Chair:  Do you wish you had done more to help the steel industry?

Mr Osborne: The steel industry faced, essentially, an enormous shock, which was the collapse of the world steel price, and I cannot think of an example of a sector where the Government, at the time, was more interventionist.  My colleagues and I were actively engaged in the commercial negotiations to try to preserve an industry that was of strategic importance to the UK.  There was and has been a lot of intervention, but of course it was against a very challenging backdrop. 

Frankly, if you went to any advanced economy in the West, or indeed if you went to China, they were talking about the problems of steel overcapacity and the price.  The interventions have made a difference.  Of course the challenge of Redcar, where of course it was a devastating blow to the workforce, has been to get in there and provide skills support, and provide financial support to that community and to remediate the industrial site there.  Michael Heseltine has been very involved; he can speak more about this as well. 

Q86            Chair:  Anything to add on that, Lord Heseltine, in terms of the impact of the crisis in the steel industry?

Lord Heseltine: There was one thing you said that I would like to concentrate on, but I will willingly talk about the Redcar site.  Your question, I think, was: what has the Northern Powerhouse done for the north?

Q87            Chair: For the north east, yes.

Lord Heseltine: The Northern Powerhouse covers a bigger area.  I remember when I left the Department of the Environment in 1983 that I was begging the chairman of the development corporation to show me some money spent on the ground.  He said, “I can paint some churches.”  He bought the big historic cranes.  That is where he spent the money, and that was three years.  Now, the Northern Powerhouse is in the same context.

If I had made a speech in 1983, saying, “Do not worry.  We are going to have HS1; we will have the Olympics; we will have the City Airport; we will have Canary Wharf; we will have ExCeL,” people would have locked me up.  You do not know.  That takes me back to the Redcar site.  First fact: unemployment is lower in the area now than it was before the site closed.  A remarkable transformation is going on in the Tees Valley.  It is a huge tribute to the local people, local industrialists, the spread of activity that is taking place and the high technology inputs that are coming.  I was overwhelmed with the impression that it created on me. 

The SSI site has been losing money on a significant scale for a long time.  No one has come forward with the slightest interest in acquiring it; it is an 800‑acre site on the south bank of the Tees, and it is bombed out.  All round it is more bombed‑out legacy of yesteryear.  There are 5,000 acres on the south bank of the Tees that would depress any visitor and create memories of yesteryear.  On the north bank of the Tees, it is exactly the opposite.  It is full of investment; it has lots of jobs, big expansion and all of that. 

This Government has allowed the local people to create a mayoral development authority, which is the only one outside London, to take over the 5,000 acres and to rejuvenate in fact not just the site itself but the whole of the south bank of the Tees.  Twenty years from now people will look back and marvel at what has been done as the most exciting, adjacent to the major deep-water port, redevelopment of the Tees Valley.  But there is no short‑term fix.

Q88            Chair: Gentlemen, I have three very quick questions, mostly to you, George.  You have £1 of capital transport expenditure to spend.  You must have had these debates in the Treasury.  Where do you spend it?  Do you spend it to alleviate congestion in the south east, or do you spend it to boost economic development in the north?

Mr Osborne: The truth is you have to do both, because the static economic analysis will always say, “Spend it in the centre of London,” but that is obviously a mistake.  You cannot just spend it all on the centre of London and it would not be right; we are a United Kingdom.  It is spread more widely, and it comes to the point Michael has been making.  You have to see the future opportunity that it will bring.  High Speed Two will transform, in my view, the centre of Birmingham; it will bring incredible benefits to Manchester, Leeds, Crewe and other stations along the line. 

You have to see the future potential.  There is a problem in the way Government come up with their value-for-money models on big infrastructure. 

Q89            Chair: Should you have done more to change that gap between spending per head in the north and spending per head in London?

Mr Osborne: As I said, the reason I was increasing the transport budget was, as I say, to get it increased across the country.  I would make an observation about the mode of transport.  We spent a lot on railways, and we will be spending more in the future.  It is actually roads that people use; it is only recently that we have started, as a country, rebuilding our roads and building new roads.  That needs to be continued.

Q90            Chair: Thank you.  You mentioned earlier—it was Lord Heseltine—that you and George agree on everything, which was very heartening to hear. 

Mr Osborne: We are Conservatives.

Q91            Chair: I did not think Conservatives agreed on anything anymore. 

Mr Osborne: No, no, no.

Q92            Chair: David Laws published a book.  David Laws was your Chief Secretary to the Treasury—

Mr Osborne: Briefly.

Q93            Chair: —for about the same length of time that Sam Allardyce was football manager.  He wrote this: “At the end of October 2012 the Heseltine Report was published, urging the Government to devolve more economic powers from the centre to the regions.  George Osborne didn’t seem very impressed.  At a meeting he described the Heseltine Report as ‘a very personal report’ and ‘a bid to steal every Department’s capital budget’.” 

Mr Osborne: That is why I co‑opted it.

Q94            Chair: “David Cameron joked that the whole thing sounded like a fourth‑term priority.  The ever‑sharp George Osborne added, ‘Yes, a fourth‑term priority, but for a different Government.’  The Prime Minister urged that we should be diplomatic in responding to the Heseltine Report, as”—and I quote—“‘Michael is a very big beast in the political jungle.  Upsetting him over this would be as risky as interrupting a silverback while he’s mating.’  It was an interesting and vivid image.”  George, have you been travelling to Damascus recently?  Why the change?

Mr Osborne: I find with lots of these memoirs they do not account with my own recollection of what was said in the room. 

Q95            Chair:  But is that true?

Mr Osborne: No.  David Cameron and the team who worked around him in 10 Downing Street, and I, commissioned Michael because we always thought the best of the Conservative tradition combines the dry economic rationalism of someone like Nigel Lawson—low tax rates, simple tax systems and the like—with the interventionism, energy and industrial strategy of a Michael Heseltine.  I am not sure that Michael will agree with what I say, so this is risky territory for me.  The Conservative Party and Conservative Government are strongest when you combine those two things.  Since you referred to those alleged conversations, which, as I say, I do not remember at all—

Q96            Chair:  He was not there for very long, though, George.  You should be able to remember everything he said.

Mr Osborne: He was there in 2010. 

Chair:  2012.

Mr Osborne: Yes, but he was only in the Treasury in 2010.  Anyway, you can get David in to give his account.  We wanted Michael’s expertise.  We commissioned that report; it was collectively our idea.  I think it was a 10 Downing Street idea.  Michael can speak for himself, but the vast majority of it has been implemented, and long may it continue.  One area remains to be looked at, which the Committee might want to consider: Michael spoke interestingly in that report about doing more with the chambers of commerce in England, and that is unfinished business.

Q97            Chair: Following on from that, Lord Heseltine, I think there were 89 recommendations in the report.  Are you happy in terms of the recommendations being implemented?

Lord Heseltine: You do not get 100% of anything in life, but to have got the scale of take‑up that the report attracted is amazing.  More important than just the accept/not accept the action is that the work has made such progress.  I have had the privilege of working with George in that implementation.  Greg Clark has had me in his office now for six or seven years, I suppose.  The quotations you read do not surprise me, because there has been a growing understanding of the potential. I do not believe the simplicity of those quotations for two reasons.

First of all, frankly, I have form.  Everybody knows what I believe, if they are in this world, because I have spelt it out in black and white, and the intervention between breakfast, lunch and God knows when was deliberately used to confront my party with what I believed to be a message that had to be heard.  David Cameron invited me to sit on the policy group before he was elected as Prime Minister.  After he had become Prime Minister, I became Chairman of the Regional Growth Fund. 

The significance of that was that, and I would not be surprised if George himself did not note this, I proved that gearing could deliver far more expenditure than the Government could afford.  All over the country, and particularly in the north, we saw the schemes that were publicly financed but with anything like twice as much private money added.  The gearing process was under way before they commissioned No stone unturned.  No stone unturned was the logical extension.  They gave me a huge privilege: I had an official from every Government department, and freedom to say what I wanted.

The truth is that they would have known what I was going to say.  They never asked to talk to me or anything like that, but of course, in the way the mafia works, they would know what I was going to say.  They could have tried to stop it, but they did not.  Immediately it came out, in no time at all, they gave it a very warm welcome.  You could say that was just politics, and big beast‑ism and all that, but the fact is that since that time the process has become much bigger and deeper, and I am very pleased to have been associated with it.

Q98            Chair: Gentlemen, you have been very generous with your time.  I just want to finish with one final question.  Do not be like that; I can ask more.  You are both big beasts in the political jungle: whether you are silverbacks doing whatever, I will leave that. 

Mr Osborne: Is that not what Nigel Farage used to describe Donald Trump?  I am not sure we would want that.

Q99            Chair:  Oh dear.  Let us not go there.  Let us not go there.  In terms of the field of industrial strategy, as big beasts, what specific piece of advice would you give to the new Prime Minister on this?

Mr Osborne: The advice is advice she is anyway pursuing of her own accord, which is: for it to work, it has to be driven from the centre.  You have great Ministers in people like Greg Clark and Sajid Javid, but in the end, they will need the support of No. 10 and No. 11 Downing Street.  The fact that she is chairing the Economy and Industrial Strategy Committee is a very good sign that she wants to provide that.

Q100                                                                                                                                                                               Chair:  Thank you.  Lord Heseltine?

Lord Heseltine: Look across the field, and do not just specialise in individual components of it.

Chair:  Gentlemen, thank you very much for your time.