David Skelton: Brexit can unleash a new era of reindustrialisation. But only if we are free from state aid laws.

17 Sep

David Skelton is the author of Little Platoons: How a revived One Nation can empower England’s forgotten towns and redraw the political map.

Brexit provides the UK with an opportunity to build a new, high-skill, high-productivity economy. A bold agenda of reindustrialisation can revive regional economies and see the levelling-up agenda made flesh. But we can only make the most of these opportunities if we aren’t unnecessarily restricted by the EU’s state aid laws. As a sovereign nation, we should be free to follow an industrial policy that is best for Britain. We mustn’t have the ability of the British state to support innovation to be hidebound by the EU’s strict state aid rules.

There were many reasons that we voted to leave the EU. The ability to set our own laws and have them made by people who were elected and could be held accountable was a crucial part of the decision to Leave. A clear message was delivered in the referendum from long forgotten “post-industrial” towns across the country that we needed to tackle regional inequality. The EU’s apparent insistence on maintaining state aid rules after Brexit would ride roughshod over the first and make tackling regional inequality much more difficult to achieve.

I’ve long taken the view that the restrictive state aid rules imposed by the EU were one of the major obstacles to us achieving a new economic settlement that benefits the whole of the UK. The pursuit of a level playing field for the EU meant that the parts of the country that I talked about in Little Platoons, which were heavily impacted by deindustrialisation, became stuck in an economic cycle of low innovation, low skilled, low wage work.

This was bad for post-industrial parts of the country, but also bad for the economy as a whole, with the UK’s low productivity problem being particularly pronounced in those parts of the country that had seen economic decline for decades. The recycling of UK taxpayers cash (a reminder that we were a net contributor to the EU budget for decades) through much trumpeted structural funding was no substitute for the fact that state aid rules bound our hands and prevented us from a more ambitious strategy to reverse decades of decline.

Now we have left the EU, it’s essential that the EU isn’t able to bind our hands again as we look to shift the economic paradigm to that of a high-skills, high-productivity, high-wage, tech-driven economy. Freedom from EU state aid rules represents an important opportunity for us to deliver that altered economic settlement and to pursue a bold strategy that focuses on a high-tech reindustrialisation of our economy. This should emphasise the importance of manufacturing (including green industry) in reframing our economy.

Crucially, manufacturing is generally higher skill, more productive and more export driven than other sectors. Whereas manufacturing accounts for less than eight per cent of the jobs in the UK, it accounts for around two thirds of our R & D investment – the kind of investment that is crucial to future growth and prosperity. This R & D emphasis also underlines the importance of manufacturing creating what Shih and Pisano have described as the “industrial commons” – skills and knowledge networks and clusters that drive innovation further.

An industrial strategy free from the constraints of state-aid policy means that we can support the businesses and sectors that are at the forefront of the new industrial revolution and also use the power of government to create innovation hubs in the regions, along with government-supported and business-backed centres of industrial excellence. A new industrial policy, free from state-aid restrictions, could aim to deliver high innovation industrial hubs in regions where the transformative power of a government accelerated industrial commons could have an enormously positive impact.

Any discussion about the positive impact of industrial policy and the importance of a state-aid regime that supports it is normally accompanied with the construction of straw-men or, more accurately, straw “lame-ducks” and the argument that any industrial policy will inevitably go down the route of Britain in the 1970s.

This is an ideological worldview that regards the bailing out of British Leyland as trumping any international experience in the decades since.  However, what that international experience has shown is that by far the biggest risk for the UK lies in us not pursuing an intelligent industrial strategy.

International experience shows that state aid and industrial strategy can not only help to turn around lagging regions but also place countries at the forefront of emerging technologies. And successful international experience illustrates that an ambitious industrial strategy shouldn’t be about “bucking the market”, but, instead working with the market and using market signals to maximise the impact of government investment.

In many parts of Asia, including Korea, Japan, Taiwan and Singapore, industrial strategy has used market feedback to develop a sectoral industrial strategy that has seen living standards and productivity surge. In all cases, the feedback mechanism of the market has allowed governments to identify sectors for future growth and provide government investment that has allowed these countries to be leaders in key sectors.

The mid-century United States, seen wrongly as a laissez-faire bastion, also provides an example of gains that can be made when business and government work together. The hero of that story is Vannevar Bush, who saw the importance of the government strongly investing in and incubating innovation and helping to transfer ideas from the initial invention to the marketplace.

His importance has been summed up recently in the excellent work of Safi Bahcall. Bush understood that innovation and invention is key to future growth and prosperity, but also that early innovation is fragile and risky. Without government support, such innovation might well perish, but government support, through the likes of the National Science Foundation and DARPA allowed innovation to be nurtured at a crucial stage and resulted in a stream of inventions that transformed the economy.

Such a model, in which government nurtures innovation at the most important stage and invests in those companies at the cutting edge of key emerging technologies could be transformational for the UK economy, which already has a world-leading research base but often lacks the ability (or often means due to distorted or inefficient funding models) to maximise the commercialisation of innovation.

Government is in a position to support innovation at the most fragile stage of the innovation process in a way that the market simply cannot. An effective industrial strategy could maximise the UK’s strengths and use the directional sway of government to promote long-term growth outside of the South East. Such an ambitious policy would not, however, be fully possible under the stricture of EU state aid rules.

Brexit represents a remarkable opportunity for an economic renaissance in the UK. We no longer have to have ambition or imagination restricted by the EU’s state aid rules.

This renaissance could place the UK at the vanguard of the most industries and technologies over the coming decades. It could also bring about a lasting and meaningful transformation of parts of the country that have long been characterised by economic decline. This requires a sensible and strategic role for government, based on an independent economic policy that isn’t limited by the narrowly restrictive nature of EU state aid limits.

David Skelton: Brexit can unleash a new era of reindustrialisation. But only if we are free from state aid laws.

17 Sep

David Skelton is the author of Little Platoons: How a revived One Nation can empower England’s forgotten towns and redraw the political map.

Brexit provides the UK with an opportunity to build a new, high-skill, high-productivity economy. A bold agenda of reindustrialisation can revive regional economies and see the levelling-up agenda made flesh. But we can only make the most of these opportunities if we aren’t unnecessarily restricted by the EU’s state aid laws. As a sovereign nation, we should be free to follow an industrial policy that is best for Britain. We mustn’t have the ability of the British state to support innovation to be hidebound by the EU’s strict state aid rules.

There were many reasons that we voted to leave the EU. The ability to set our own laws and have them made by people who were elected and could be held accountable was a crucial part of the decision to Leave. A clear message was delivered in the referendum from long forgotten “post-industrial” towns across the country that we needed to tackle regional inequality. The EU’s apparent insistence on maintaining state aid rules after Brexit would ride roughshod over the first and make tackling regional inequality much more difficult to achieve.

I’ve long taken the view that the restrictive state aid rules imposed by the EU were one of the major obstacles to us achieving a new economic settlement that benefits the whole of the UK. The pursuit of a level playing field for the EU meant that the parts of the country that I talked about in Little Platoons, which were heavily impacted by deindustrialisation, became stuck in an economic cycle of low innovation, low skilled, low wage work.

This was bad for post-industrial parts of the country, but also bad for the economy as a whole, with the UK’s low productivity problem being particularly pronounced in those parts of the country that had seen economic decline for decades. The recycling of UK taxpayers cash (a reminder that we were a net contributor to the EU budget for decades) through much trumpeted structural funding was no substitute for the fact that state aid rules bound our hands and prevented us from a more ambitious strategy to reverse decades of decline.

Now we have left the EU, it’s essential that the EU isn’t able to bind our hands again as we look to shift the economic paradigm to that of a high-skills, high-productivity, high-wage, tech-driven economy. Freedom from EU state aid rules represents an important opportunity for us to deliver that altered economic settlement and to pursue a bold strategy that focuses on a high-tech reindustrialisation of our economy. This should emphasise the importance of manufacturing (including green industry) in reframing our economy.

Crucially, manufacturing is generally higher skill, more productive and more export driven than other sectors. Whereas manufacturing accounts for less than eight per cent of the jobs in the UK, it accounts for around two thirds of our R & D investment – the kind of investment that is crucial to future growth and prosperity. This R & D emphasis also underlines the importance of manufacturing creating what Shih and Pisano have described as the “industrial commons” – skills and knowledge networks and clusters that drive innovation further.

An industrial strategy free from the constraints of state-aid policy means that we can support the businesses and sectors that are at the forefront of the new industrial revolution and also use the power of government to create innovation hubs in the regions, along with government-supported and business-backed centres of industrial excellence. A new industrial policy, free from state-aid restrictions, could aim to deliver high innovation industrial hubs in regions where the transformative power of a government accelerated industrial commons could have an enormously positive impact.

Any discussion about the positive impact of industrial policy and the importance of a state-aid regime that supports it is normally accompanied with the construction of straw-men or, more accurately, straw “lame-ducks” and the argument that any industrial policy will inevitably go down the route of Britain in the 1970s.

This is an ideological worldview that regards the bailing out of British Leyland as trumping any international experience in the decades since.  However, what that international experience has shown is that by far the biggest risk for the UK lies in us not pursuing an intelligent industrial strategy.

International experience shows that state aid and industrial strategy can not only help to turn around lagging regions but also place countries at the forefront of emerging technologies. And successful international experience illustrates that an ambitious industrial strategy shouldn’t be about “bucking the market”, but, instead working with the market and using market signals to maximise the impact of government investment.

In many parts of Asia, including Korea, Japan, Taiwan and Singapore, industrial strategy has used market feedback to develop a sectoral industrial strategy that has seen living standards and productivity surge. In all cases, the feedback mechanism of the market has allowed governments to identify sectors for future growth and provide government investment that has allowed these countries to be leaders in key sectors.

The mid-century United States, seen wrongly as a laissez-faire bastion, also provides an example of gains that can be made when business and government work together. The hero of that story is Vannevar Bush, who saw the importance of the government strongly investing in and incubating innovation and helping to transfer ideas from the initial invention to the marketplace.

His importance has been summed up recently in the excellent work of Safi Bahcall. Bush understood that innovation and invention is key to future growth and prosperity, but also that early innovation is fragile and risky. Without government support, such innovation might well perish, but government support, through the likes of the National Science Foundation and DARPA allowed innovation to be nurtured at a crucial stage and resulted in a stream of inventions that transformed the economy.

Such a model, in which government nurtures innovation at the most important stage and invests in those companies at the cutting edge of key emerging technologies could be transformational for the UK economy, which already has a world-leading research base but often lacks the ability (or often means due to distorted or inefficient funding models) to maximise the commercialisation of innovation.

Government is in a position to support innovation at the most fragile stage of the innovation process in a way that the market simply cannot. An effective industrial strategy could maximise the UK’s strengths and use the directional sway of government to promote long-term growth outside of the South East. Such an ambitious policy would not, however, be fully possible under the stricture of EU state aid rules.

Brexit represents a remarkable opportunity for an economic renaissance in the UK. We no longer have to have ambition or imagination restricted by the EU’s state aid rules.

This renaissance could place the UK at the vanguard of the most industries and technologies over the coming decades. It could also bring about a lasting and meaningful transformation of parts of the country that have long been characterised by economic decline. This requires a sensible and strategic role for government, based on an independent economic policy that isn’t limited by the narrowly restrictive nature of EU state aid limits.

Neil O’Brien: No, more economic prosperity doesn’t depend on more social liberalism

13 Jul

Neil O’Brien is MP for Harborough.

Danny Finkelstein took issue with Boris Johnson’s idea of “levelling up” in the Times the other day. He reviewed the work of Richard Florida, a thinker dubbed the “patron saint of avocado toast” for highlighting the role of bohemian urbanites in driving economic regeneration.

Danny concludes from his work that, “Social liberalism and economic prosperity go together.” He argues that: “in order to match the success and power of metropolitan areas, non-metropolitan places need to become more… metropolitan.  The problem with the metropolitan “elite” isn’t that there is too much of it. It’s that there aren’t enough members of it, drawn from a wide enough background and living in enough places.”

I hesitate to disagree with one of the smartest columnists on the planet. But economic growth and social liberalism don’t always go together.

What about the Victorians, combining breakneck growth with a religious revival and tightened public morals? What about Japan during their postwar decades of blistering growth and conservative “salaryman” culture? Over the last 70 years, Britain has become more socially liberal as our growth rate has slowed.

Even in Britain today, it’s highly questionable. London is the richest and fastest growing part of the UK.  But where is opposition to homosexuality and pre-marital sex strongest? London. Where is support for censoring offensive speech highest? London.  The capital mixes liberal metropolitan graduates with religious immigrants. Its success is shaped by both.

Danny’s other argument has more important implications. Is it really the case other places must emulate London to succeed? Like other capital cities across Europe, London has grown faster than the rest of the country since the 1980s. The shift to an economy based on “office jobs” over has favoured the centres of larger cities.

But we shouldn’t get too carried away by the idea that hipster-powered megacities are sweeping all before them. For starters, there are successes elsewhere. Cheshire has high tech in a rural setting, with productivity and wages above the national average.  Milton Keynes likewise, because it’s easy to build there. Productivity in Preston has grown faster than average because it’s a transport hub with advanced manufacturing.

On the surface, large cities outside London have done well.  Since 1997, our 16 largest cities grew their GDP faster than their surrounding areas: Leeds grew faster than West Yorkshire, Manchester faster than Greater Manchester, and so on.

But on average, those cities saw also slower growth in income per head than their surrounding areas. In other words, people became more likely to work in city centres, but that growth was fuelled by people commuting in from smaller places around them. Their growth has been powered more by smalltown commuters than flat-cap wearing uber-boheminans.

It’s right that there are cities outside London that have things in common with it, and might benefit from similar investments. Lawyers in London will soon get Crossrail. So why have lawyers in Leeds waited 20 years for a tram?

But too often Richard Florida’s work leads politicians to focus on shiny cultural facilities. A cool art gallery in West Brom.  A national museum of pop music in Sheffield. It’s not just that these projects flop and close. It’s that they distract from two bigger issues.

First, most people aren’t graduates – so we need a plan to raise their productivity and wages too.

Second, places outside urban centres are perfectly capable of attracting high-skill, high income people – with the right policies.

Britain’s economy is unusually unbalanced compared to other countries.  Pre-tax incomes in Greater London are nearly 60 per cent higher than the national average, but more than 20 per cent below average in Yorkshire, the North East, Wales and Northern Ireland.  These imbalances mean our economy is overheating in some places and freezing cold in others, slowing growth overall. There are no major economies that are richer per head than Britain which have a more unbalanced economy.

But these imbalances don’t represent pure free market outcomes. It’s true that low-skill, low wages places can get stuck in a vicious circle. True that some places on the periphery have very deep problems. Nonetheless, the British state doesn’t do much to stop that – in fact it does a lot to unbalance growth.

Consider how we spend money. Capital spending on transport infrastructure in London is nearly three times the national average. Research funding per head is nearly twice the national average. Nearly half the core R&D budget is spent in Oxford, Cambridge and London. Spending on housing and culture per head in London is five times the national average. We’re “levelling up” the richest places.

We’ve rehearsed these problems for years, but not fixed them. Instead of chasing flat white drinkers, we need to find a cool £4 billion a year to level up R&D spending in other places to the levels London enjoys. Fancy coffee can come later.

Consider our tax system. Overall, the tax rate on business in the UK is about average.  But we combine the lowest headline rate in the G20 with the lowest capital allowances. The combined effect of this is a huge bias against capital intensive sectors, particularly manufacturing.

That in turn has a regional impact, hurting places more dependent on making things: manufacturing accounted for only five per cent of London’s productivity growth since 1997, but nearly 50 per cent in the north west. A hostile tax system is one reason Britain has deindustrialised more than any other G20 country since 1990, and why manufacturing’s share of the economy is half that in Germany or Japan.

Manufacturing should be a key part of levelling up outside cities: it needs space, not city centre locations. In English regions outside London, wages in manufacturing are about nine per cent higher than in services, and manufacturing productivity grows faster than the economy as a whole.  But Britain’s excessive focus on professional services makes it harder to grow high-wage employment in non city-centre locations.

Consider where we put our key institutions. In Germany the political capital was Bonn, and is now Berlin. The financial capital is Frankfurt. The Supreme Court is in Karlsruhe. The richest place is Wolfsburg, home of Volkswagen. There are major corporate HQs spread across the country. TV production is dispersed because central government is banned from running it.

In Britain, all these things happen in just one city. We’ve talked about this for years, but made little progress.  In recent years, we managed to move one chunk of Channel 4 to Leeds, and a bit of the BBC to Manchester. But that’s about it. Whitehall only wants to move low-end jobs.

The debate on levelling up is frustrating, because we know some things work, but we don’t do them. “Regional Selective Assistance” boosted investment in poor places with tax breaks and subsidies.  Thanks to evidence from natural experiments, we know it boosted growth. Yet it was allowed to wither.

I don’t want us to be just another government promising the world, then not delivering. Politically, it’s vital we deliver. Lots of people who haven’t voted Conservative before put their trust in us last year. It’s telling that the centre point of the seats we won is just outside Sheffield.

We won on a manifesto combining centrist economics, (50,000 more nurses) mild social conservatism, (ending auto early release) and national self-confidence (Getting Brexit Done).  Levelling up is central to all this. We promised voters steak and chips.  We could serve up avocado toast instead, but we shouldn’t be surprised if the voters don’t thank us.