Gavin Rice: Britain has an industrial policy – but at the moment, it’s made in China

Gavin Rice is head of political economy at Onward.

Whenever Rachel Reeves stands up to speak, one cannot help but wonder what she or this Labour government is for. Even her flagship announcement, a £39 billion splurge on homes for social rent, triggered groans in the pro-housing YIMBY community given its failure to address Britain’s real housing crisis: the lack of supply in homes for sale.

The reality is that Reeves’s review in fact involved tight settlements on schools and public sector pay and defence spending staying at 2.6 per cent of GDP for the foreseeable, with the prospect of further painful tax rises in the Autumn.

Some of Labour’s woes are self-inflicted: they increased spending by £76 billion in the Budget, increasing borrowing to £40 billion, forcing Reeves to squeeze cash out of welfare to restore her razor-thin headroom. But the truth is Britain’s fiscal woes reflect a much more serious and long-term reality.

Britain’s spending liabilities are rising inexorably over time, largely driven by terrible demographics. The only thing that could neutralise this without consistent tax rises is meaningful, sustained growth. Yet despite the economy growing by 0.7 per cent in the first quarter of this year, Britain’s growth record over the last twenty years has been pitiful – especially when measured on a per capita basis.

In fact, real net GDP per capita has been going backwards. Famously, real incomes and living standards have not improved since 2008, with the average American now one-third richer than the average British worker.

Looking at growth rates since 2019, Britain has lagged behind not only America but also France, Italy, Canada, and even the sluggish Eurozone average. French workers receive similar wages to their British counterparts, but work fewer hours, since France is around 20 per cent more productive.

And this is before considering the blow to living standards caused by Britain’s crippling housing crisis – our houses not only cost eight to ten times average income, they are also among the smallest in the world.

So while there has been a global slowdown since the financial crisis, with rampant inflation since the pandemic and the war in Ukraine, Britain is struggling with additional structural barriers to growth of its own. As argued brilliantly by the team at Foundations and others, many of these barriers are self-inflicted through our Byzantine network of planning and regulatory restrictions on investment and development, and our decision to run down our national supply of energy before we were in a position to replace it.

The result is our uniquely costly and prolonged delivery times for infrastructure, the highest industrial energy prices in the developed world and a four million unit shortage of homes.

Radical supply-side reform is needed to tackle these state-imposed barriers to growth. Rather than pursuing abundance, the UK is choosing to consign itself to penury. Petrol has been poured on the fire of stagnant living standards with mass migration of historically unprecedented levels – a ruse through which the economy can be made to look like it’s growing while pressure on housing, public services, infrastructure and the social fabric increases – whilst the underlying demographic trend means that pensions and the NHS will only continue to become more expensive.

But the liberalisation argument is only one part of the story. A major additional reason for Britain’s underperformance is that – as noted by Kemi Badenoch – the country is deindustrialising at breakneck speed. Hobbled by energy costs, output from energy intensive industries (EIIs) has fallen by a third in three years.

This matters because production and manufacturing industries are often the most productive and, crucially, experience the fastest productivity growth, because growth in total factor productivity (TFP) tends to be most pronounced in the types of industry that can apply capital to innovation through productive investment – in automation, skills, software, machines and R&D. British manufacturing has collapsed to less than nine per cent of GDP – one of the lowest rates in the OECD.

That’s why Onward is launching its new economic research programme with The Turnaround: Rebuilding Britain’s Economy, which calls for full spectrum reform of the economy. It argues that Britain must pursue domestic liberalisation with a plan for private sector reindustrialisation. This means growing capital-intensive export industries from aerospace and automotive to pharmaceuticals and chemicals, as well as the energy and infrastructure-intensive sectors of the future like quantum computing and AI.

To do this it will need a targeted regional strategy, policies to boost exports, and reform of capital markets to deploy British savings more productively.

It’s widely assumed that Britain’s collapse in industrial output and share of global trade is because importing manufactures is simply more efficient – that the market dictates that the optimal place for production is elsewhere. As argued by Michael Pettis, Steve Miran, Matthew Klein and others, Western deindustrialisation is just as much a consequence of mercantilist policies pursued by Beijing.

This is not comparative advantage, however, but comparative distortion. Britain doesn’t get to not have an industrial policy – and it would be suicidal for us simply to accept one dictating by Xi Jinping. Instead, we must seek to invest and produce more.

Turning Britain into a more productive country with more secure supply chains, better commercialised innovation, a stronger industrial base, and rising real wages won’t happen overnight. But if Labour is determined to pursue the current path of needlessly high energy costs, punishing producers and innovators while tinkering at the fiscal margin, then it won’t happen at all.

Radical change is necessary, to which economic liberalisation is part but not all of the story – liberalism in one country perhaps, but not simply absorbing the industrial policies of our rivals. Onward will be making this case over the coming months – change will be hard, and possibly painful, but it can be done. Decline is a choice.

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