George Osborne’s Budget speech set lofty aspirations. He said it was about reforming the nation’s economy, so it can have enduring growth, and jobs in the future.”

He wants a rebalanced, sustainable economy that promotes green employment. The Government’s Plan for Growth aims for strong, sustainable and balanced growth that is more evenly shared across the country and between industries”.

These are fine words, and few would disagree with the aim. They are not, however, matched either by his analysis or action. Nowhere in the Budget or in The Plan for Growth is there any evidence that the business tax cuts, regulatory tweaks and relatively minor changes to public investment that are promised will deliver a major economic transformation. The Chancellor wants to put fuel into the tank of the British economy’ and is spending £5 billion on tax cuts. But there is little point refueling a wreck.

The British economy is poor at creating new private sector jobs. Research by the Manchester Business School suggests that of the 1.3 million new jobs created during recovery from the last major recession, over half were due to public spending alone. Public sector employment increased, but so did employment, nominally in the private sector, that relied on public funding. 1.3 million manufacturing jobs were lost, but finance and banking created only 35,000 new posts. Public spending took up the slack.

If that pattern is repeated, even the optimistic official growth forecasts imply that only 780,000 new private sector jobs would be created. This would leave a shortfall of 520,000 jobs. Unemployment would remain stubbornly high, with poorer areas worse affected.

The evidence shows that successful attempts in the past to restructure an economy have relied on decisive and confident government action. Strategic government intervention will be needed to deliver it now. This requires a completely new approach to economic policy in general, and industrial policy in particular. This report starts to set out this approach.

Objectives

The starting point has to be clear economic objectives anchored in wider social objectives. UK industrial policy has failed when clear objectives have been absent. It has worked best when there have been objectives that fitboth industry capability and wider social needs – as in the case of pharmaceuticals and aerospace.

These objectives need to be developed in a transparent and democratic way. They are about the direction of our society, not some narrow technocratic agenda. In this report we have developed the case for ten objectives that flow from three broad, progressive goals: high well-being, environmental sustainability and social justice (see Box 1). There should be discussion about whether or not these are the right objectives – but not, we hope, about whether there should be objectives in the first place.

Why the government needs an industrial strategy

Some industries will be better placed than others to achieve any set of objectives, and this should guide any government strategy for selective intervention.

Of course, the choice is constrained by the realities of international competition, but neither the choice of industries nor decisions about how they should develop are totally constrained. We can create advantage rather than simply passively accepting our place in the world. We recognise that this argument will make some uneasy. Until recently, it was presumed that government attempts to steer the economy towards any destination would end up destroying the engine needed to get there. We believe, however, that the opposite is the case.

National competitive advantage is rather like individual company competitive advantage: it relies on developing a level of specialisation that cannot easily be reproduced by our competitors. It requires us to build up a complex array of strategic, interrelated supplies, institutions and companies. Taken together and co-ordinated, these separate elements may constitute competitive advantage, even if individually they do not.

But why is government needed to create this advantage? It isn’t always — but sometimes it helps, for two reasons.

First, the benefits of this co-ordination flow to everyone involved, not just the initiator. This means that sometimes co-ordination is worthwhile for the whole of society but the necessary investment is not in any one firm’s interest. Government then has to step in.

Second, sometimes the costs involved for some companies outweigh the benefits – even once an industry is successful. Government involvement is needed to adjust incentives so that everyone benefits – otherwise one player may drop out and the whole system may fail.

Government may also have a crucial role to play in overcoming generally recognised market failures, and in ensuring that UK industry is not disadvantaged by the activities of other governments.

How should government intervene? Seven lessons from the past

The following are seven lessons from past successes and failures, in the UK and Asia:

  • In Asia, industrial policy was joined up to other government regulation, expenditure and public service provision. Policy-makers ensured that it was part of an integrated economic policy framework.
  • It is essential to have intelligent targets for priority sectors, based on the kind of understanding of the current and potential future shape of the market that can only be discerned by working closely with industry. Interventions in UK car manufacturing in the 1970s failed because such targets were lacking.
  • These targets should ideally be anchored to broader social objectives – such as those of the NHS in the case of British pharmaceuticals or UK defence in the case of aerospace. This gives them credibility and durability in the face of short-term pressures.
  • Government procurement is a particularly powerful tool – especially when combined with the right regulatory regime, as the British pharmaceutical industry has found.
  • It is important not to continue with interventions after they have achieved their purpose. This is a mistake that was made in some cases in Korea and Japan, where prolonged intervention led to capture by vested interests, excessive regulation, bubbles and bloated organisations that could not be allowed to fail.
  • Allocation of credit and investment to individual firms should generally remain with the private sector. Government should normally avoid being an implicit or explicit guarantor for firms or an industry. It can, however, guide investment and credit to particular sectors.
  • The autonomy and technical capacity of officials are critical, helping to guard against lobbyists and vested interests. This is often seen as part of the success of Japan and the Asian Tigers.

What is needed now

Policy makers need to build on lessons such as these, as well as on the kind of objectives set out below. The aim must be to develop an approach to industrial policy equal to the systemic challenges we face, together with institutional arrangements capable of applying this approach. nef (the new economics foundation) is embarking on a programme to do this, building on a range of existing work. It will be part of a broader analysis of the long term Great Transition’ needed in the economy and society if we are to meet these twenty-first century challenges.

Ten objectives of a progressive economic policy

  1. A decent income for everyone. GDP is not the key variable. What matters is whether everyone has enough for a good life.
  2. Secure, full employment. This is a key driver of well-being.
  3. Stable communities, with work spread throughout the country. We need jobs where people are – not growth bought at the expense of social stability.
  4. Satisfying work. The quality of their work is important to most people.
  5. Work in the right quantities. Too little work damages well-being. But so does too much.
  6. An economy that encourages people to do things rather than passively consume things. Active forms of consumption have been shown to enhance well-being.
  7. An economy and forms of consumption that flourish within environmental limits. We need an economy that is compatible with sustainable forms of consumption.
  8. Investment in the infrastructure and human capital needed for a sustainable economy. This requires a green new deal’. The results must be resilient and adaptable to change.
  9. Security of supply of vital goods and raw materials. We need at least a contingency plan for a world without an efficient international trading system.
  10. An economy that allows us to prosper while encouraging other countries to adopt sustainable economic policies and to enter into effective international agreements. We need economic policies that fit a foreign policy designed to advance these vital national interests.