Business and Trade Committee
Oral evidence: Industrial policy, HC 440
Tuesday 12 March 2024
Ordered by the House of Commons to be published on 12 March 2024.
Watch the meeting
Members present: Liam Byrne (Chair); Douglas Chapman; Ian Lavery; Anthony Mangnall; Andy McDonald; Mark Pawsey.
Questions 96 - 131
Witnesses
II: Dr George Dibb, Associate Director and Head of Centre for Economic Justice, Institute for Public Policy Research (IPPR); Sir Geoffrey Owen, Head of Industrial Policy, Policy Exchange; Paul Swinney, Director of Research, Centre for Cities; Giles Wilkes, Senior Fellow, Institute for Government.
Examination of witnesses
Witnesses: Dr George Dibb, Sir Geoffrey Owen, Paul Swinney and Giles Wilkes.
Q96 Chair: Welcome to the second panel in today’s hearing of the House of Commons Business and Trade Committee’s inquiry into industrial policy. To help set the stage, I will start off with a question about your take on the competitive challenges that the UK is facing globally. Sir Geoffrey, maybe I could start with you. How do you see the pressures on the UK and the competition that we now face? Are those pressures getting sharper?
Sir Geoffrey Owen: They are getting sharper in various ways, not least because the United States and the European Union have been moving strongly in the direction of having a more interventionist kind of industrial policy, supporting favoured industries with subsidies and other forms of protection.
My personal view is that we should be very cautious about going down that path. The targeted industrial policy of the sort that the Americans and the Europeans are now adopting has quite high risks. We should be careful about putting too much reliance on industrial policy as a source of higher productivity, better competitiveness and so on.
Q97 Chair: The competitive pressure is going up, you would say, and policy in the United States and Europe is ultimately what is responsible?
Sir Geoffrey Owen: No. China is a huge factor too, and other so-called developing countries such as Vietnam and so on are playing an increasing role. No, it is a global competition. It is just that there have been particular changes in the EU and the US of the sort that I just mentioned, which, among other things, have tremendously increased the attention on industrial policy. Other countries are wondering, “Should we be like them or not?” and so on. It is an extra spur.
Q98 Chair: George Dibb, what is your perspective on the competitive challenge?
Dr Dibb: I would agree with a lot of what Geoffrey has outlined already. The competitive pressure has significantly increased internationally. I certainly would not disagree that it would be risky for the UK to take the same approach and that we should proceed with caution.
We should note that the competitive pressures were previously high because of the rise of China and the developing nations. It has been a significant shift for comparable developed economies, such as the European Union and the United States, to step up with things like the green deal industrial plan and the Inflation Reduction Act.
That means other countries with similar challenges to the UK are now taking far more ambitious approaches. The UK has been visibly left behind. We should step up to that challenge.
Q99 Chair: We will get into responses in a second. We just want to set the stage on what the pressure looks and feels like. It is a combination of developing countries moving up the value chain—
Dr Dibb: That is a longer-term pressure. The much more recent change, occurring over the past few years, is in countries that share the same four challenges as us: the need to shift decisively towards net zero, the need to confront regional inequalities within a developed economy, the need to restore vitality and growth to the economy, and the need to confront future bottlenecks and geopolitical risks. The European Union and the US are doing so decisively. The UK has failed to make similar steps.
Giles Wilkes: I take a rather classical economic approach. Despite being a fan of industrial policy, the problem is not that other countries are getting better at doing things. On the whole, we benefit when other countries become more productive. Our problem is a productivity one.
Q100 Chair: Are the competitive pressures getting sharper?
Giles Wilkes: No, probably not. If you look back at the period leading up to 2008, countries like China were able to produce things much more cheaply and quickly back then. We were massive beneficiaries from that, as consumers of the stuff that they produced. That was an unacknowledged driver of our prosperity. Another country becoming more productive is not necessarily a problem because we can trade with that country. The global division of labour can be fine.
The problem, to which George has alluded, is that we are not making adequate preparations for the changes that our economy needs to go through, including a lot of difficult investments, most obviously for net zero. Other countries doing that better leaves us comparatively worse off. If China becomes much better at producing a lot of global goods, we are not necessarily hurt by that.
Chair: That is extremely helpful.
Paul Swinney: I would echo a lot of that. The position of the UK versus other countries in the world is not really my area, but the challenge has not become particularly more acute. The challenge for the UK is whether it can continue to be the home for the cutting edge of the economy and the next phase of industry that comes about. It is in a competition with other developed economies. That will continue to be the case. Has it got sharper? It has not got weaker, but it also has not necessarily got sharper.
Q101 Douglas Chapman: Does the Government have an industrial strategy?
Sir Geoffrey Owen: They are doing industrial strategy, if you like; they are intervening in various ways without describing it as being part of an industrial strategy. They are subsidising battery plants for electric cars. They are subsidising the Port Talbot steelworks, as you know. In fact, it was rather strange when the Conservative Government abandoned the strategy a couple of years ago or whenever it was. That was rather strange because most of the programmes that Theresa May and Greg Clark started in 2017 have continued. There may be some changes here and there, but they certainly have not scrapped them. The most significant institutional change was the cancelling of the Industrial Strategy Council. Again, I thought that was a bit strange and could not quite understand what the rationale for that was.
There is a sort of industrial strategy going on. The Chancellor has talked about five important sectors that we should be nurturing, expanding and so on, but for some other strange reason, there is a reluctance to use the phrase “industrial strategy”.
Paul Swinney: A strategy is something that sets out clear goals and has some actions underneath it on how to achieve them. I do not see that in existence within Government policy. There is industrial policy, but for me that is not the same as industrial strategy. We might have differences about what direction that strategy should go in, but I do not see any evidence of a strategy being in place in the first place.
Giles Wilkes: I really welcome your question. I listed about 30 different individual strategies that the Government have, from semiconductors to quantum theory and carbon capture and storage. There was a manufacturing plan announced at the beginning of Budget week last week.
Q102 Chair: Could you share that list with us?
Giles Wilkes: I will. I will not go through the whole thing.
Chair: We would be interested to see the list.
Giles Wilkes: What I would say—I would echo very much what Geoffrey and Paul have said—is that they have a furtive strategy. They have one, but they do not like to shout about it. It is in favour of lots of different sectors. There seems to be a difference of opinion between No. 10 and No. 11 about whether it is a good thing.
Q103 Douglas Chapman: What is the weakness of not having an obvious coherent strategy to help things move on? You mentioned earlier the big issues being productivity and adequate preparation for the future. Would these topics be part of the strategy, in your mind, if you were developing one for the UK?
Giles Wilkes: Yes, for certain. If your question is, “What is the downside of them doing it in this way?” when you talk to industrialists, investment is very difficult. The uncertainty that they are most scared of is political uncertainty and a lack of commitment and longevity from the political class, which they have seen plenty of in the last decade or so. The rhetorical commitment to there being an overarching strategy that is agreed upon, ideally across the political spectrum, makes a very large difference to industry.
Dr Dibb: I would agree very much with others. We have to go back to the definitions of what we are talking about to answer this question. Industrial policies are individual interventions that seek to shift activity within the economy from one area to another. An industrial strategy is the aggregate of many different industrial policies with a strategic aim.
The Government have individual industrial policies—for example, full expensing definitely fits that description—but they do not have an obvious overall strategy. Coming to this point, we have had significant churn on strategy. IPPR research shows that over the past 14 years we have had 11 different plans for growth or industrial strategies along with nine different Business Secretaries and seven different Chancellors.
To answer your question, that lack of strategic and vocal direction from the centre presents two challenges. The first, as Giles already said, is that we are not giving clear signals on the direction of travel to the private sector; that is the ultimate driver of the extremely low private-sector investment in the UK. The second—we pay less attention to this, but it is very important—is co-ordination within Whitehall. This is about the ability of different Departments to understand what the centre wants and to get in line with those overall strategic priorities.
Q104 Douglas Chapman: In terms of the way forward, if we were designing or looking at an industrial strategy for the UK in the future, you have mentioned a couple of solutions and things you would like to see. Sir Geoffrey, if you were picking a few things to make a recommendation to the Government on—“You need these elements within your industrial strategy”—what would they be?
Sir Geoffrey Owen: I am a bit dubious about the concept of an overarching industrial strategy into which all kinds of individual decisions can be fitted. Although I am in general sceptical about industry-specific intervention, on the basis of past experience, there certainly are areas where the Government can and should intervene.
An interesting case—I do not know whether you want to deal with it separately—is the steel industry. First of all, there is a question: is it a strategic industry? What does “strategic” mean in this context? In looking at what the Government have done, they seem to have focused very strongly on decarbonising the early stages of the steelmaking process. There is a strong case for that; it is a big carbon emitter and so on.
Another ingredient in the steel case, which probably applies to other industries, is the relevance of national security. Is it important for national defence or security that we should have a strong steel industry? Should it be strong in all phases from the iron-making end down to the finishing end? The national security angle is quite an important one in thinking about industrial policy. For example, it is not just the front end, the steelmaking, but all these rolling and finishing mills. Do we have gaps in our range of steelmaking capacities that are dangerous from a defence point of view? If so, what can the Government do to fill those gaps?
There was a case a couple of years ago, as you may remember, when Sheffield Forgemasters, a steel company in the north, was taken over by the Government because that particular company was more or less the sole producer of specialised forgings for nuclear submarines. That was a special case, but the national security argument, if that is a reason for defending or protecting the steel industry, needs to be set out and explained.
Q105 Douglas Chapman: Mr Swinney, is there anything you would add to the list of things to take to No. 10?
Paul Swinney: Again, you do want a strategy that guides in terms of the private sector and parts of Whitehall, but also guides in terms of the local and is about what local areas are trying to achieve within the national economy. That would be helpful.
My position is that industrial strategy should focus much more on the roles that different places play in the national economy rather than focusing too much on sectors. I am sceptical about the ability of policymakers to pick out what the growth sectors are going to be in 10 or 20 years’ time. Even if we do identify those sectors, I am not entirely clear on how policy will be different as a result.
If we are going to move into ever more knowledge-based type activity, those types of activities will require access to lots of skilled workers, appropriate commercial space and good transport links to link those workers to the jobs. That is much more about getting the benefits right in order to get companies to come and invest in particular places rather than saying, “It is going to be sector X and sector Y.”
Q106 Douglas Chapman: If we had something like that, we could virtually do away with levelling up entirely because it would happen as a matter of course, in your view. Finally, Mr Wilkes, do you want to add anything to the list?
Giles Wilkes: One element that I am slightly biased towards is that the Government should commit to grand challenges. In other words, we know our economy and our society are going to change in certain ways over the next 20, 30 or 40 years. This is something we started under the Theresa May Government. It is about net zero, the changing in the way we transport ourselves, the ageing economy, artificial intelligence and big data. You do not have to be Mystic Meg to know that the world is moving in this direction, and therefore the commitment is credible.
We also need to think very hard about the issues raised by Lord Richard Harrington in that excellent recent report about the difficulty of engaging with the Government. For people on the outside, knowing who to speak to is like confronting a labyrinth. Most good ideas in industrial intervention bubble up from the outside. We are failing to take them in by being so impenetrable.
Finally, we need to focus on the question of Civil Service capacity, for the very reasons that Geoffrey illustrated earlier. National security and other difficult trade-offs require real expertise to finesse. It is not a simple matter of just making or trading. You really do need adequately paid civil servants who have real longevity in their roles to be able to help you with those.
Chair: As you may have spotted with this panel, we are trying to get to the bottom of the right balance between horizontal policy, vertical policy and spatial policy. Mr Pawsey is now going to prosecute the questioning.
Q107 Mark Pawsey: I am going to go to Sir Geoffrey in the first place because you posed a whole series of questions about whether national security was important. With the greatest respect, as a witness giving evidence to the Committee, we were hoping you would give us answers rather than questions. How important is national security, for example in respect of the steel industry in ensuring that we have a foundation industry to support other industries?
Sir Geoffrey Owen: I do not have an answer. All I would say is that decarbonising Port Talbot is only one element in thinking about how we protect or preserve the steel industry. Steel is a globally traded commodity and we are heavily dependent on imports from other parts of Europe and elsewhere.
The issue, which is a very difficult one that relates to supply chains more generally, is about how self-sufficient we want to be and in what areas. We cannot be totally self-sufficient in all branches of the steel industry, but it may be that there are certain products that have a particular defence-related component, such as heavy plate-making or something of that sort, where for various reasons our capacity has reduced very sharply in recent years. We should perhaps think about what could be done about that.
Q108 Mark Pawsey: You are suggesting that we think about these things without really giving us a suggestion of where you and your organisation might sit in terms of making those decisions.
Sir Geoffrey Owen: As I said, in general I am much keener on horizontal and non-sector specific policies than vertical ones, but one can point to some areas, such as where national security or net zero are involved, where some direct intervention by the state is helpful.
Q109 Mark Pawsey: George Dibb, you told us a strategy was a series of policies coming together. We have set out a clear policy in respect of the steel industry. We have decided that we do need to be producing steel in the UK. How should that manifest itself? What should Government do to build that into a broader strategy?
Dr Dibb: We should not present vertical and horizontal industrial strategies as an either/or. We can do both. Going back to the previous question about what we would propose if we were to do an industrial strategy, between the four of us we reconstructed the 2017 Greg Clark industrial strategy. It did foundations, it looked at skills, it was place-based and it had grand challenges within it.
To achieve those things, you are going to need both horizontal and vertical. You cannot launch a moonshot unless you have a solid foundation to launch from. Yes, we need to nail the overall economic conditions, such as the barriers to trade and fundamental skills. We need to get the governance in place, but we should also take, in our opinion, a market-shaping rather than market-fixing approach. Instead of trying to identify individual market failures, we should recognise that no bit of the economy exists without interacting with or touching the state through regulation or whatever it might be. If we are going to try to shift those sectors over the long term, we want all of those indicators pointing in the same strategic direction.
We would focus on the two sides of what shapes a market: on the production side and on the purchasing side. On both of those, there are international examples and a strong evidence base of interventions that you could take.
Q110 Mark Pawsey: How about what the UK has done in the past? Have we got that right in recent years? Has the market simply been in our favour? Is it our legacy? Is it that we were early starters and everybody has now caught up?
Dr Dibb: There are good examples of where we have done both. The success of the installation of offshore wind was undoubtedly a success of industrial policy. That was largely through interventions on the purchasing side through contracts for difference. We did not take the same approach on the production side to ensure that we captured the economic upside of that manufacturing commensurate to the installation capacity.
On the other hand, with the Covid-19 vaccine and AstraZeneca during the pandemic, the UK Government did take a really strategic approach on both sides by being, as we heard on the previous panel, a good customer or a strategic customer, putting in place purchase guarantees.
Q111 Mark Pawsey: Giles, we have just heard from George about how demand meant the product was developed but it was not manufactured in the UK. Why did that go wrong? How can we intervene better to prevent the equivalent of what happened with wind turbines happening in other sectors?
Giles Wilkes: First, I would slightly question the premise that we might have gained 10,000 or 20,000 jobs if we had entirely been able to internalise the supply chains of offshore wind. That would have been lovely, but the most important thing about the offshore wind is getting the renewable energy into this country.
The choice that was being confronted at the time—I was in Government for some of this period—would have been in effect to charge consumers slightly more in order to ensure that the production was here. The invisibility of that trade-off would have been something that would have bothered the Treasury quite rightly.
Q112 Mark Pawsey: Why would it have needed to cost consumers more? We could have simply made land available, improved the planning process and provided better foresight about the demand to encourage manufacturers to make those turbines here rather than import them from elsewhere.
Giles Wilkes: To be fair, some of that was done, hence the Siemens plant in Hull. A lot of those activities took place. As a result, there is a decent facility at Hull doing that.
The reason is that a very straightforward vanilla auction process would have looked at the cheapest one available at the time. As you will recall, the price of offshore wind was dropping very hard. The advice would have been that, if you were to say, “Hold on a moment; are you also going to guarantee local supply?” they might say, “Yes, but we are going to need a little help financially.” I can only speculate as to how much more.
Ideally, you get the best of all worlds and you somehow make the UK the best place in the world to do it. I am just saying that it would not have been a conservative assumption to say that we were necessarily going to achieve that.
Q113 Mark Pawsey: Sir Geoffrey, if I can come to you, you have spoken about the limited ability of Governments to predict which industries will grow and prosper. If the Government cannot do that, why should they have a policy or a strategy at all?
Sir Geoffrey Owen: They certainly have a strategy, if we want to use the term, for research and development. In deciding where funds for basic or private research should be carried out, they have to take a view about which technologies look like being—
Q114 Mark Pawsey: Why should the Government do that instead of relying on the market to do it?
Sir Geoffrey Owen: We cannot do everything. For example, if you take an industry like semiconductors, for various reasons we have a rather small semiconductor industry and not very much in the way of manufacturing. The overwhelming strength of that industry is in Asia, in Taiwan and so on.
Q115 Mark Pawsey: Sir Geoffrey, many of the semiconductors that are being manufactured in Taiwan and other parts of Asia were developed here. Why did we not take the ideas and get through that valley of death to manufacturing here?
Sir Geoffrey Owen: It is a complicated story that applies as much to other European countries as it does to the UK. America was a leader for a while; Japan was a leader; now the Taiwanese and South Koreans are strong. You cannot point to any one particular Government mistake or whatever.
As you are aware of, it is interesting that we have a world leader in the semiconductor industry in the form of ARM. In my understanding of the history, that cannot be attributed to industrial policy. It was an entrepreneurial effort by people in Cambridge and elsewhere to develop this technology. They benefited from wider policies and the strength of Cambridge University in the relevant scientific research and so on, but nobody predicted that ARM would become a hugely important player in the world semiconductor industry. One should be wary—that is all I am saying—of predicting that this is the industry we should be backing.
Q116 Mark Pawsey: Paul Swinney, is it the role of Government to identify winners and back them or should we leave that to the market?
Paul Swinney: I am concerned that it is difficult to pick out what those sectors are going to be in 10, 15 or 20 years’ time. There will be differences in the policy approach that we take, but in general the policy approach should be fairly similar. It is about those horizontals in particular.
If we think about the semiconductor industry, wind turbines or renewable generation, the challenge of competition for the UK is not about the manufacturing of those things, which the UK is just not as well placed to do because it is a higher-cost place to do that relative to the Far East, for example. The challenge is about how to try to get the high-value stuff in. If the high-value element of chip development is happening in the UK and the production is happening elsewhere, we should be less concerned about that.
In the same way, we could also look at wind turbine development and production. Yes, we have the Siemens plant in Hull, which is good for Hull from a jobs perspective, but in my understanding the design of those turbines does not happen in Hull. The design happens in Manchester. That partly explains why Manchester is increasingly doing better than places like Hull, because it is capturing that high-value stuff.
That is what we should be focusing on. For me, we need to think much more about the horizontal and the spatial as opposed to trying to pick out individual sectors.
Q117 Chair: We are going to play a little game now. It is Budget 2025. I am going to give you all £100. You have to make a choice about what fraction of that £100 to spend on horizontal strategies, what to spend on vertical or market-shaping strategies and what to spend on spatial strategies. Mr Mangnall is then going to come in and test your answers. Just indulge the game for a second. I just want to tease out where the differences are.
Dr Dibb: Do I have to indulge it rather than questioning the premise that there is a separation between spatial policy and—
Chair: I appreciate that you are an economist.
Dr Dibb: What were the three categories?
Chair: They were horizontal, vertical and spatial.
Dr Dibb: I would put £10 of my £100 on horizontal policies because we have got the broad shape of that quite well. We probably need to invest a bit more in infrastructure. Let us say £20, because it makes the maths easier, on horizontal policies and then £40 on the other two.
Giles Wilkes: I would put half of it into spatial policies, specifically for mayors to try to increase the size of their travel to work areas. I suspect I am stealing something from Paul’s expertise.
Chair: That is fine. We will mark it between the four of you.
Giles Wilkes: I would put the other half straight into Civil Service capacity, which is market-shaping, and particularly regulatory capacity, which is too slow-moving.
Q118 Chair: That is arguably horizontal, but we can argue the toss. Paul, what would you do?
Paul Swinney: I would do 10% vertical. There will be some elements probably where you can do a little bit around the edges, particularly thinking about mission-based and trying to change the nature of the economy as opposed to picking out individual sectors. There will be some money that needs to go there.
I would split the rest of it between horizontal and spatial. As George says, there is a bit of overlap there. Ultimately, the horizontal is probably the most important. I would go 50% for horizontal, but spatial would be close behind with 40%.
Sir Geoffrey Owen: I would go for 70% on horizontal and split the other lot, maybe two lots of 15% or something of that sort. I think these place-based strategies have a very close link with national strategies. To mention one example, south Wales has a promising compound semiconductor sector. It is not competitive with Taiwan; it is not trying to do the same things as Taiwan. It looks as though it might be quite promising. The Welsh Government have been quite active in supporting that sector, but if it is going to flourish, it does need some substantial support from central Government, partly from UKRI, the research agency, and partly in other ways. The two lots of 15% overlap into each other.
Chair: I will come back to some of those differences. Mr Mangnall, you will have noticed that there was quite a lot of money going into the spatial.
Q119 Anthony Mangnall: I had noticed. I have made notes about it as well. I am wondering whether we can start with you, Dr Dibbs. How should Government choose which sectors to support, then?
Dr Dibb: We heard some of the evidence in the last session. There is a growing evidence base out there that the UK does have some quite strong existing manufacturing strengths, at least in green sectors. My answer will probably be largely focused on green sectors because that is where a lot of our recent work has been focused.
The approach could probably be spread out a bit more broadly. We have to come up with three different broad categories. First, there are the areas where we are currently strong and we just need further support. Forthcoming work from IPPR shows that across green manufacturing products the UK already has comparative advantage in about a third of those.
There is a second category of things where we should seek to be good in the future based on a strategic choice. For example, one of those areas 10 or 20 years ago would have been offshore wind. We could have looked at the geographical characteristics of the UK and said, “This is going to be an important area for us.”
Thirdly, there are probably going to be sectors that will require long-term support. They may never be cost-competitive with other countries, but we might want them here for reasons of national security or resilience.
Each of those will require different policies to support them. We should be clear about why we are seeking to support a sector. This also goes to a point that Giles made earlier around state capacity. We do not have a huge amount of evidence or a rigorous evidence base in the UK to make those decisions. We need that. We need to expand state capacity in decision making. Our frameworks for how we make decisions need to go beyond things like static cost-benefit analysis and allow us to make strategic choices.
Q120 Anthony Mangnall: Thank you for that. I am keen to get a better understanding of what the Government’s criteria should be. I am interested in the fact that PwC set out a number of targets for the strategy: there should be genuine comparative advantage; there should be significant long-term growth; there should be an important contribution to economic security; and it should help to address priorities of inclusive growth. I recognise that some will agree with that and others will disagree with that.
The UK Trade Policy Observatory also made a point about directly addressing market failures. It said that the most efficient market policy is one that addresses those failures. From what you have just said, how do you set out the criteria for Government to try to implement something that will be successful?
Dr Dibb: I would really push back against the idea that we should only seek to be good in areas where we currently have comparative advantage. That is not how other countries have developed. The diversity of exports and industrial strengths has declined in the UK, whereas in other G7 and OECD countries it has increased.
If we are thinking about an industrial strategy to get us to net zero, nobody has comparative advantage in a lot of the areas that we are going to need to be strong in. Nobody is making them at the moment, but we know we are going to need those products in the future. There is a real market opportunity that we could seek to capitalise on. That is not solely seeking to be good in areas where we currently have comparative advantage.
Sir Geoffrey Owen: This whole question of choice is absolutely fundamental. How do Government choose a sector? An interesting case, which is worth mentioning for a couple of seconds, is the question of batteries for electric cars. What is interesting about that is that in 2017, when the Faraday programme was launched, Sir Mark Walport, who was then the Chief Scientific Adviser, wrote a rather complete prospectus for why it was important for the UK to do something in batteries for electric cars, where our position was weak. He set out in quite some detail, most of which was implemented, a set of steps that the Government should initiate in order to make the UK a more attractive place for investing in battery-related technologies and so on.
If I could just mention one thing about that, which I would like to emphasise: nobody knows whether that programme has been successful or not. Has the Walport prospectus worked? Which bits of it have worked? Which have been less successful? What can we learn from it? What was interesting about it, in relation to new or hardly-developed industries, was that he set out a co-ordinated approach. It started with basic research, went through Innovate UK for the application of the research, and then went on to the car makers that use the batteries.
Walport presented it—probably Greg Clark agreed with it—as a model that could be applied to other industries where we are starting something relatively new. I would like to see—I do not know whether this is something that outsiders should do—some assessment of what worked and what did not work.
Q121 Anthony Mangnall: Your approach is a much broader one. It is not asking Government to pick winners and losers. It is trying to set the environment that can allow businesses of all types, colours and interests to thrive and succeed.
Sir Geoffrey Owen: Yes.
Q122 Anthony Mangnall: What measures should the Government introduce? We have seen a few over the last few years around capital allowance and trying to attract better investment or reinvestment. If you could click your fingers tomorrow and be in charge, what would you like Government to do? What would you do?
Sir Geoffrey Owen: I am not sure I have a very clear answer, but the whole question of the financing of growing companies is a big issue. It has been a big concern for successive Governments. We have not really cracked it.
As somebody mentioned earlier, we have quite a successful record of starting firms, but they tend to get bought up or do not grow into big ones. Maybe there are some weaknesses in the City and the way that the stock market is organised and so on, which could be put right with Government help. I would put quite a lot of emphasis on that financing area.
Q123 Ian Lavery: Mr Wilkes, you were a special adviser to Theresa May, and before that Vince Cable, on industrial economic policy. I wonder whether you can just explain to the Committee what the strengths and weaknesses of the industrial strategy in 2017 were.
Giles Wilkes: In retrospect, it looks like a pretty decent attempt. I would say that as one of the people behind the scenes who was pushing away at it.
Reflecting on the earlier question from Mr Mangnall about how you choose, we had a relatively sober set of criteria that meant we had targets that were relatively easy to stick to. The questions I would have asked were: is the direction of travel clear in this area of the economy; do we have some long-term advantages; are these all long-term investment areas of the economy, where we have to make commitments that last for a long time? In many ways, both of those strategies had a reasonable approach to those and would have presented targets that people would have kept to.
The biggest weakness of both was undoubtedly intra-Whitehall, in that you cannot have a successful industrial strategy if not every part of Government believes in it. Although we tried to do that in the slightly centralising and imperious way that Downing Street will—that involves telling people that this is your policy, announcing speeches and muttering darkly if they do not help—there was not anything like the same ownership.
At some point I mean to go through speeches from the Treasury, look up the phrase “industrial strategy” and see how often they mention it in their keynote speeches. I suspect the answer is very little, despite the fact that, at the outset of the Theresa May Government, in the form of the national productivity investment fund, Philip Hammond announced a really quite handsome sum of money that could have been used for it. There was an unwillingness to get behind it.
A lot of industrial strategy requires different Departments to resolve real differences of opinion about serious matters like planning or national security. If you just leave it to over-promoted special advisers like me to go around trying to fix it, you will have the success that you see.
It needs to have consistent high-level ownership across the Cabinet and a willingness to deal with the inevitable silo-isation, if that is a phrase, that happens in Government when they are trying to pursue cross-governmental aims.
Ian Lavery: As you have just said, you are the main weakness.
Giles Wilkes: I am here to apologise.
Q124 Ian Lavery: I only jest. Maybe a slightly controversial question is Boris Johnson versus Theresa May. Mr Johnson replaced the 2017 industrial strategy with the plan for growth. Looking back, was that the right thing to do? Was it more beneficial? Should we perhaps have stuck with Theresa May’s approach, which you have just basically outlined? Perhaps each individual could give us a very brief answer to that.
Giles Wilkes: I would say it was a mistake. The plan for growth in appearance was a ring-round of Whitehall asking, “What are you all doing that we can stick into our various chapters?” It was published quite quickly. It was not a preconceived strategy. The industrial strategy was at least an attempt to be one. My bias is clear.
Dr Dibb: I would agree with that. For all the weaknesses of the 2017 strategy, it was the best and closest approach that the UK has had to a serious industrial strategy in some time. The replacement of it with the plan for growth was a serious rollback.
IPPR research of Civil Service staff numbers at the time showed that the replacement of the industrial strategy with the plan for growth involved the scrapping of a 50-to-70 person industrial strategy directorate within the Business Department and replacing it with 0.5 full-time equivalents, half a person, within the Treasury.
That is because the Treasury saw the plan for growth as a single one-off project, a thing to pull together priorities and put it out there in a PDF, rather than an ongoing programme of seeking to shape the economy. It also involved the scrapping of significant oversight and governance bodies such as the Industrial Strategy Council. It really was a terrible mistake.
Sir Geoffrey Owen: I have two points. First, Boris Johnson was instinctively a strong interventionist. He wanted to create world-leading companies. I have heard it said—I am not saying this is correct at all—that if Boris had still been around, the battery company called Britishvolt, which seemed for a short period to be a great hope for the future, would have survived. I do not know whether that is right, but his instincts were quite strongly interventionist.
As far as the cancellation of the strategy is concerned, I saw that as a purely political decision. It was something that Mrs May had done and the attitude was, “We are a different sort of Government and we do not need it anymore.” It was a mistake. It could have been modified in some way. It was a bigger mistake to scrap Andy Haldane’s Industrial Strategy Council, which was doing quite useful work. It was a political error.
Paul Swinney: The constant churn of policy in this area is the big challenge, but there may be issues around the specifics in the 2017 strategy. For me, it was probably too sector-focused. If you are going to do these sorts of things, it has to be credible and long-term. The fact it can just be dropped just like that and replaced by a PDF shows how little weight these types of things have.
These strategies are supposed to be getting the private sector and different parts of Whitehall together, bringing the national and the local together and uniting everybody behind one thing to tackle decades-long challenges. If people think they can be scrapped by the next Government or the next change of leadership, there is no credibility. That is the more fundamental problem that we need to be thinking about.
Q125 Chair: Giles, you spent half your money on something called capacity building in Government. Your institute produced quite an interesting report yesterday about the centre of Government and its role in all of this. What would you like to get out of all this money that you have just spent on capacity building? How many people are we talking about?
Giles Wilkes: I am very much influenced by the work of better researchers than I am on questions like the lack of responsiveness of our regulators, for example. There was an excellent recent piece by Peter Foster of the Financial Times about the lost opportunities of Brexit, which was a surprising one given his normal stance.
Q126 Chair: If we are trying to improve the technical expertise of Government to make better policy decisions, are we talking an influx of 10 people or 1,000 people? What is your perception on the capacity?
Giles Wilkes: We are probably talking hundreds, if anything. For example, I have heard that Treasury numbers have increased by 1,000 or so from the low numbers of thousands that they normally have, largely in response to new requests on things like economic security. Those sorts of numbers are all you need.
If we are trying to replicate some of the skill sets that exist in consultancies, consultancies will have a few dozen people who are able to master a sector and advise on it. It should not be very much more than that.
Q127 Chair: We are talking about £60 million in resource cost.
Giles Wilkes: Yes, it is not very much.
Q128 Chair: It is not a big number. You will have heard Dr Valero rehearse the argument this morning for an independent growth and productivity commission, something that is a bit more permanent as an institution. Is that a good idea? Is that sort of idea a good thing?
Giles Wilkes: Nostalgia for what was a really excellent Industrial Strategy Council can make people too optimistic about what these types of institutions can achieve. People hope that they will have the same effect on policy as the OBR and the Bank of England have on fiscal and monetary policy, whereby they provide a level of credibility and long-term commitment that almost takes it away from politicians. You cannot do that in industrial strategy. Industrial strategy is too inherently political in every way.
The Industrial Strategy Council and the sorts of institutions that you have just referred to, Chair, are great because they can greatly improve our analytical capacity, which is often far too speculative and grabbing from one think tank or another. These bodies would be great for guiding policy, but they would not take away the really difficult commitment issues.
Q129 Chair: Is there a case for some epicentre where some of these decisions come together?
Giles Wilkes: I think so, yes.
Dr Dibb: I will not touch on whether inflation is political or not. Lots of things that are political in the economy are farmed out to outside bodies.
Giles is right that the nostalgia for the Industrial Strategy Council may be quite strong. We needed something in that space, but its mandate was extremely weak. The mandate that Theresa May and Greg Clark gave it was only to—
Chair: But there is a role for an institution.
Dr Dibb: Yes, there is. We could look at things like the Climate Change Committee, which is an independent statutory authority that has a strong secretariat that can do independent research. That is the direction we should go in.
Q130 Chair: Paul, is that an idea you would support?
Paul Swinney: I am not really sure what it would do.
Sir Geoffrey Owen: I am very much against tinkering with institutions. The Industrial Strategy Council had a relatively narrow focus and that was good. It was good. It was there for a particular reason and it did useful work. For example, it looked at the whole process of vaccine development. It asked, “What could we learn from that? Was it a good example of industrial policy?” and so on.
As far as possible, we should avoid constantly tearing up one institution and putting up another one. I am a bit uneasy about the broad scope that is being envisaged for the proposal you just mentioned.
Chair: That brings us to a conclusion of what has been an absolutely brilliant discussion. Thank you very much indeed. You have basically told us that competitive pressures are increasing but that could be as much about others preparing for the future faster. Today, you have described more of a bag of policies than a strategy. We have had a really useful conversation about the balance between horizontal, vertical and spatial.
It is fair to say that the average across your answers would put about half of the money into horizontal, with spatial not far behind and vertical perhaps in third place. There were some very clear arguments for it, not least market-shaping policy and national security overrides. Sir Geoffrey made the valuable point that in R&D strategy we make these choices already. There has been a pretty broad consensus about the need for some institution and better models for decision-taking and evaluation.
You have been tremendous witnesses. You have given us really useful evidence for our inquiry. Thank you very much indeed. This concludes this panel.