A modern industrial strategy to underpin UK economic success

24 April 2017

Earlier this year, the UK government launched a consultation on Industrial Strategy – a set of policies aimed at underpinning business growth and enhancing productivity performance.

This is a timely initiative. Facing the potential challenges of Brexit, UK businesses need a consistent policy framework to support investment and guide key decisions over the years ahead.

A modern Industrial Strategy differs from the interventionist policies pursued in the UK in the 1960s and 1970s. We have learned from that experience – and from policies in other countries - that a much better approach is a “horizontal” strategy aimed at improving the economic conditions affecting businesses across all sectors.

Though manufacturing industry is a vital part of the UK economy, accounting for around 10% of output and 8% of employment, the majority of our economy is now driven by services - which make up around 80% of output and employment. A modern Industrial Strategy therefore needs to be relevant to all sectors and industries, as well as manufacturing.

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PwC has recently submitted its detailed response to the government’s Industrial Strategy consultation paper. We see four broad themes which are needed to underpin future economic growth and productivity increases across the UK economy.

The first is to develop skills and education, particularly focussing on vocational and technical training. PwC research finds that countries with well-developed systems of vocational education for those who don’t go to university – such as Germany, Austria and Switzerland - have higher employment rates for young people. We estimate that matching the performance of these leading economies in vocational education could boost UK GDP by around £45 billion or 2.3%.[1]

The second key theme should be to upgrade our national infrastructure, particularly the UK transport system – but also by supporting investment in housing, clean energy and broadband networks to underpin the growth of the digital economy.

The UK has already embarked on the most ambitious programme of investment in transport infrastructure that we have seen for many decades. The challenge policy-makers now face is to maximise the potential of key projects such as HS2 as they move from the planning phase, through construction and delivery and into operation. Investment in transport infrastructure needs to be delivered efficiently and without unnecessary delay, while ensuring value for money in terms of the economic benefits and impact.

A third priority for an Industrial Strategy should be to support investment, innovation and growth across the whole range of private sector businesses – large and small, in all sectors of the economy. Government spending and tax support for research and development as well as other aspects of the innovation process should continue and be enhanced. The government should pursue a post-Brexit trade policy which seeks to achieve the best possible UK access to overseas markets – so that the UK remains an attractive location for international investment and business activity. Market access is important both for goods and services trade, as the UK has a particularly strong competitive position in tradeable services – such as financial and professional services and the creative industries.

A comprehensive programme of tax reform – aimed at lowering tax rates and limiting allowances and exceptions to broaden the tax base - would also be supportive of business growth and investment. There are many areas of taxation in the UK which would benefit from fundamental reform, including income and employment taxes, the taxation of savings and capital gains, taxation of property and VAT and other expenditure taxes. We need to ensure the whole of the UK tax system is properly adapted to the 21st Century economy, which is being shaped by globalisation, technology and major demographic and environmental challenges.

The final theme which should underpin the UK’s Industrial Strategy is a set of policies which aim to create a better regional balance of economic activity, as we set out in the Demos-PwC Good Growth for Cities Index. The development of transport infrastructure to improve connectivity within the UK is an important mechanism for ensuring more balanced growth – not just between London and the South East and the rest of the UK, but also within individual regions. Devolution of responsibility for specific policies to local and regional bodies can help to support economic development, by allowing decisions to be more responsive to local requirements.

The policies needed to implement a successful Industrial Strategy are not just the responsibility of one or even a few government departments. They cut across all areas of government policy. The tax system – which shapes the competitiveness of the economy in so many ways and affects business of all sizes – should play a key role.

A successful Industrial Strategy needs to be based on a consistent long-term approach to policy. But it also needs to be focussed on delivery. Key policies need to be delivered efficiently and effectively so that economic benefits are realised in a timely fashion to meet the challenges of a post-Brexit economy.

You can access the full PwC consultation response document here

[1] http://www.pwc.co.uk/services/economics-policy/insights/young-workers-index.html

 

Andrew Sentance

Andrew Sentance | Senior Economic Adviser
Profile | Email | +44 (0)20 7213 2068

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