Will the chancellor’s industrial strategy hit the right targets?

23 Nov 16

The investment in productivity announced in the Autumn Statement is too narrowly focused to benefit the economy as a whole

The Office for Budget Responsibility’s downgrade to the productivity forecast - and the further details provided by the chancellor today on the government’s industrial strategy - together tell us two things. First: our productivity problem will continue to pull down earnings growth and tax receipts. Second: the industrial strategy that it seems the government will propose won’t come anywhere close to fixing this problem. 

The reason is a matter of simple arithmetic. To boost the productivity of the economy as a whole, we either have to get marginally better at doing most of what we do, or we have to get overwhelmingly better at doing a small proportion of the things we do.

An industrial strategy focused on supporting the invention and development of new innovations – as announced today – suggests the government is taking the latter approach. Supporting research and development (R&D) will have the greatest impact on the business sectors that do the most of it. These sectors – including pharmaceuticals, computer programming, automotive, and aerospace –are vital, but together currently account for only 5% of the country’s gross value added (GVA).

The productivity boost these sectors would have to experience as a result of additional R&D investment in order to boost significantly the productivity of the economy would need to be prodigious. Further, since the gains from that productivity growth would accrue predominantly to those sectors, it wouldn’t help to raise the wages and therefore living standards of the majority of the population.

It is true to say that innovations by these high value-added sectors create ‘general purpose technologies’ that other sectors can then adopt, making them, too, more productive. This is particularly true of innovations within the computer programming sector, for example: digital technologies can make all sorts of economic activity more efficient.

But IPPR research has shown that firms in the UK – particularly those within the low-wage service sectors – do not adopt technologies to improve their processes to the extent that they could, and that is one of the reasons that we are less productive at these activities (and have been for many years) than our major European competitors, such as Germany and France. These low-wage sectors account for a third of UK employment, and 23 per cent of UK GVA – so raising their poor productivity performance is key to achieving improvements in whole-economy productivity.

To fix our productivity problem, the government needs to acknowledge that, while science-based R&D is important for our future prosperity, we have to work with the economy we have – not the one we would like. That means recognising that our economy is 79% services: innovation looks very different in a service sector context, and the majority of service sector firms will be takers, rather than makers, of new innovations

Recent IPPR work concludes that, if industrial strategy is to help fix our productivity problem, we need to broaden our definition of innovation, so that it means adoption of existing technologies – particularly in a service-sector context – as well as the process of scientific discovery. We also need to place a greater weight on upskilling the workforce.  A third of employers in the UK provide no on-or off-the-job training at all, rising to nearly half among small businesses. Forthcoming research from IPPR will argue that unless employers are supported to further invest in training their own workforces, productivity will continue to be hampered by the use of low-skill business models.

The chancellor’s commitment to fund Sir Charlie Mayfield’s business-led Productivity Council, which aims to help businesses improve their management processes, is to be welcomed. But today’s announcements taken together suggest that the government remains committed to industrial strategy as predominantly about an old-fashioned concept of ‘industry’ comprising a minority of businesses and workers. This will need to change if we are to create a prosperity that is genuinely shared by all. 

The IPPR Commission on Economic Justice, launched last week, will investigate in depth the form that a new, bold industrial strategy tailored to the UK’s particular economic challenges – and strengths – should take. Working with a broad coalition of voices, the Commission will propose practical yet radical policies successive governments will need to adopt if we are to create an economy that works for everyone.

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