The UK can’t afford to sit on the sidelines as the US, EU and China carve up the future of growth
Britain is both strangling prosperity today, and allowing outdated fears about industrial strategy to kill off prosperity tomorrow
So long to the old wave of globalisation and hello to the new. The old wave was characterised by highly subsidised, ultra-cheap Chinese manufacturing undercutting everyone. In the next wave, there will be a fresh challenge: oncoming floods of industrial subsidies not just from China, but also from the US, the EU and anyone else lured into the competition.
Anyone who thinks that we can simply stand back and let it all happen in the name “free trade” is, as British manufacturers have pointed out in a joint letter published by the Global Britain Commission, living in cloud cuckoo land. As if communist China’s entry hadn’t already spoiled the party, the need for climate investment has now become the door through which vast government largesse is about to be welcomed into the trading system. There is no point moaning about it. We need a strategy.
It should be obvious that we cannot compete on pure scale of subsidy. In fact, far from subsidising our precious industries, we are currently in the process of taxing them out of existence due to fiscal constraints. Before announcing that it will be building a £330 million vaccine factory in Ireland instead of the UK, AstraZeneca had spent months negotiating with our Government to try and make its investment here viable. Yet despite the wake-up call of Covid and the Ukraine war, our Government has succumbed to its longstanding, almost-pathological reflex: no special treatment, no supply chain nurturing, fiscal probity before all. Astra’s pleas fell on deaf ears.
This is evidently self-defeating. But the market reaction to the Liz Truss experiment showed that we cannot simply let the deficit rip either. What’s needed is a whole package of measures convincingly targeted at increasing investment, rather than the short-term consumption boom that Ms Truss seemed intent on generating. Unfortunately, Rishi Sunak abandoned the wrong piece of Ms Truss’ budget – the freeze in corporation tax – in favour of a cut to national insurance. This was the wrong way around.
It does not mean, however, that markets will accept no fiscal incentives to promote growth. In fact, I suspect that investors would tolerate a great deal of tax cutting and spending aimed at the right target, namely, promoting investment instead of consumption. They don’t all have to be big-ticket items on the budget scorecard, like a corporation tax freeze. The Centre for Policy Studies recommends, for example, a series of larger and permanent tax credits for investment in R&D and equipment and further subsidies for investment in emerging technologies via the newly established British Business Bank. In the grand scheme of things, this would cost peanuts.
There are non-fiscal levers to pull as well. One take on Britain’s stagnation – emphasised yet again by this week’s GDP figures, showing neither growth nor shrinkage – is the “coiled spring” theory of our economy. These islands are home to some of the most productive and advanced research and manufacturing hubs in the entire world, whose knowledge and services are in high demand.
So why aren’t they expanding faster? Because we are strangling them. The estate agent Bidwell’s drew attention recently by highlighting its estimate that there is demand for one million square foot of lab space in the super-productive region between Oxford and Cambridge. Availability is closer to 10,000 square feet. This is potential being wasted on a criminal scale thanks, as usual, to our appalling planning system. It would cost almost nothing to fix.
Aside from these fiscally uncontroversial measures, the British state also needs to overcome its fear of itself. For many a politician and mandarin, the idea of supporting industries conjures up ghosts of the 1970s, when vast caches of decaying, uncompetitive state capacity were kept running purely for the sake of placating unions.
It is many decades since that period and industrial policy in advanced economies has long since moved on. Chunks of Silicon Valley, Korea’s nuclear programme, Taiwan’s semiconductor industry and Japan’s robotics manufacturers have all benefited from huge amounts of state support. No one would label them dinosaurs. The common thread is that they have avoided becoming captured by producer interests and remained focused on their task: competitive, cutting-edge production. It should not be beyond the wit of the British state to follow these examples.
We cannot afford to sit on the sidelines. In the last year, the US has passed three acts, targeting infrastructure, semiconductor production and “inflation” (this last was in fact mostly about green energy) that will funnel a staggering $2 trillion over ten years into an array of domestic production and research. The EU has already announced that its precious “state aid” regime, the subject of so much Brexit haggling, will be relaxed in response, but it has yet to negotiate between its 27 members as to how much money it can spend on what. Here’s a spoiler: it won’t be able to match the US.
Britain left the single market precisely to avoid this sort of cumbersome horse-trading. We have an opportunity to be faster and more effective than our competitors. We have huge existing strengths in artificial intelligence, electronic chip design, life sciences and various green technologies.
There is no reason why the UK cannot carve out a lucrative niche in the new global economic model being built around us, allowing us to benefit from cheap products produced by subsidies spent elsewhere while also competing in high-value fields where we have the advantage. And there is no reason to feel so attached to our existing model, if it’s worthy of the name, with its record of chronic under-investment and misallocation of capital into housing stock rather than productive, risk-taking business.
On the other hand, there is every reason to fear stasis. The UK once led the field in areas like telecoms technology and nuclear power. But faced with cheaper and more committed competitors abroad, we lost faith in our own capacity and simply let these industries wither. Government bodies stopped giving out research grants or commissioning projects. The expertise and supply chains went elsewhere.
We face the same prospect now. If we allow it, Britain will be squeezed mercilessly out of the industries foundational to future prosperity. But we don’t have to allow it. Decline is a choice.
No comments:
Post a Comment