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Industrial Strategy or Political Tactics?

Dr John Constable: GWPF Energy Editor

The House of Commons committee responsible for scrutinising the Department of Business, Energy and Industrial Strategy (BEIS), has just published its first review of the government’s flagship “Industrial Strategy”. While critical of the Secretary of State’s approach, the Committee’s own analysis seems to suffer from the same fundamental faults; it focuses on tactical measures that have short-run effects, and are thus relatively powerless to deliver the macroscopic outcomes that are intended. This is particularly evident in the superficial approach to energy supply, and to the supposed opportunities of a low carbon transition.

In one of the most useful passages in the BEIS Committee report the authors note that the current “Industrial Strategy” is “the latest in a long line of Government-commissioned documents, stretching back many decades, which has identified shortcomings in the UK’s economic performance on matters like low productivity, insufficient investment in infrastructure and R&D, skills deficiencies and poor export performance” (p. 11).

To illustrate the point the report quotes from an early 1960s Cabinet paper by Harold Macmillan, then Prime Minister, which, aside from the distinctive and trenchant elegance of its phrasing, could easily be mistaken for a passage from this year’s Industrial Strategy paper, or indeed from the Committee’s own review. Macmillan writes of making a “radical attack” on the “productive and structural” “weaknesses of our economy”, of enhancing “competitive power” by measures to “increase our productivity”, and not only observes that “Britain needs to be brought up to date in almost every sphere of life”, but that steps must be taken to “rectify the imbalance between south and north”, the “’rich’ areas and the ‘poor’ regions”, so that the resulting “grave social anomalies” are addressed.

Understandably, the Committee finds little reason for supposing that the latest iteration will be any more successful than those that have gone before, but its own criticisms struggle to be constructive. They correctly note that “the Green Paper has little discussion of the implicit tensions and conflicting demands that exist in policy making”, but in its own comments on “Affordable energy and clean growth” the authors provide a clear example of the same superficial engagement, for example when they carelessly write of “security of supply, decarbonisation and affordability as equal priorities” (my italics), or blithely assume that it is easy for the promised but as yet unpublished Emissions Reduction Plan to be “coherent and consistent” with the Industrial Strategy (p. 50).

But of course it is not straightforward, for rather than just a marginal trade off, there is a fundamental conflict requiring that one or other of the objectives is substantially sacrificed in order to meet the other. Indeed, the Committee must have some inkling of this because elsewhere it expresses the fear that government will, after all, put a “higher priority” on affordability than on “progress against carbon budgets” (p. 48).

In fact this concern is probably groundless, at least for the time being, since there is every sign that government, or at least Mr Clark, Secretary of State for BEIS, is clinging to the idea that it is possible “to keep costs down for businesses” while decarbonising, and that there are “economic benefits”, rather than net costs, to “the transition to a low-carbon economy” (Industrial Strategy, p. 11). With subsidies to renewable electricity currently running at about £5 billion a year in the UK, and stretching out at this rate for decades, such a view is nothing short of bizarre. Indeed, the committed oncost will be a grave obstacle to economic stability let alone growth even if the claimed and somewhat implausible capital cost reductions in offshore wind, for example, are supported by dramatic and at present unlikely reductions in the system costs need to address intermittency.

Read alongside each other, both the government’s Strategy and the Committee’s review seem to agree in their errors, but at least the Committee succeeds in pointing to the principal weakness affecting both analyses. The Strategy, they say, “provides a long list of policy interventions but little by way of ground rules to provide a framework for future decision making which […] should be the core of any long-term strategy.” In response it is true that the Committee does little better, but they are unquestionably right in saying that what government has so far outlined does not have the structural simplicity of a strategy aiming at long term changes, but rather exhibits the detailed messiness of short-run tactics. A cold-hearted observer noting, for example, the still secret support offered to Nissan (repeatedly cited with approval in the Committee report) might wish to add that these are political not than industrial tactics.

But, assuming that one agreed that Government should have an Industrial Strategy, what would it look like? It would be certainly be simple, aiming to control only primary variables under government control and with undoubted macro-economic consequences. The secondary and tertiary phenomena,the selection of sectors for development, determination and creation of appropriate workforce skills, regional distribution of industries, scale and character of industrial R&D, and so on, would be allowed to emerge spontaneously in response to short-term and localised signals as appropriate. Emergent phenomena are not the proper subject of a strategy.

The primary variables essential to a strategy would be corporate and personal taxation, international trade tariffs, and, crucially, general regulation. Indeed, given the growing recognition that economics has hitherto underestimated the importance of energy in the theories of growth and particularly capital formation and cost (a point discussed on this blog elsewhere: “Energy and the Theory of Growth”) the character of any regulation coercing an economy in its choice of fuels would probably be of the first importance.

Indeed, in this sense we already have an Industrial Strategy, though it is one inhibiting rather than encouraging industrial activity. Successive governments, at least since Mr Blair’s Energy White Paper of 2002, have determined to compel the economy to use expensive rather than cheap energy, a decision that has had short term effects which are already visible, and which, if maintained, will have very long term, systemic consequences that are not yet evident.

If Mrs May is sincerely determined to favour re-industrialisation of the UK economy, removal of coercions favouring costly energy sources over less expensive ones is an essential strategic, long term decision. It would also, as it happens, be very good tactics.