Confidently facing the economic challenges ahead

The new Government has taken office against a backdrop of huge economic challenges. Global competition is increasing, the world economy is experiencing uncertainty, and there is a challenging Brexit process with implications not least for employment, trade, investment, regulation and key industries. At the same time the UK’s long-standing problems endure, including a long-tail of low skilled jobs, poor productivity, a trade deficit, inadequate infrastructure and low levels of business investment. A divided UK means many places face considerable economic challenges, particularly low wage growth and low productivity, although six new metro-mayors now hold greater economic powers.

The election featured little on the increasing pace of technological change such as automation, but this is already having profound impacts and creating new opportunities, reshaping products and services, and employment and business models. Further challenges are that our economic and social models result in too much being owned by too few, which stifles competition and creativity. Questions of trust in corporates continue yet there is also a sense of how purposeful businesses can bring greater societal benefits. The Government must respond to these challenges with a renewed economic mission that shares rewards more fully and supports a more competitive, dynamic and resilient economy.

ResPublica offers eight priorities for the new Government to help achieve this:

1. Bolster commitment to the industrial strategy and build political consensus with a new National Industrial Strategy Advisory Commission: in past decades, the UK has suffered from piecemeal and short-term policy and lacked enduring institutions that support industrial approaches and build long-term agreement and certainty. Examples like the closing of the Regional Development Agencies demonstrate short-term political choices not embedding long-term certainty. A new Government must reaffirm the industrial strategy, providing clear purpose, and build political agreement to give longevity to the strategy and certainty to business. Leading industrial nations such as the US and Germany have built long-term success upon anchor institutions, like Darpa and the Small Business Administration in the US, both set up in the 1950s. Germany’s technical education system has a long history and political, business and societal support. We must have similar institutions too. To build consensus, certainty and political agreement behind industrial approaches, a National Industrial Strategy Advisory Commission should be created with representatives from political parties, chairs of the economic select committees, representatives from national governments, metro-mayors, academia and industry. A regular independent appraisal of the industrial strategy, through an Office for Budget Responsibility model, should report to the Commission to determine progress. The Commission should also assess the alignment of the industrial strategy with the implications of Brexit.

2. Align Brexit and industrial strategies in a holistic approach: the way in which the Government withdraws from the EU will shape critical UK economic drivers, many of which overlap with the industrial strategy, including exports, R&D spend, foreign investment, skills pipelines and infrastructure. Yet, the huge Brexit ramifications and corollary processes are not sufficiently aligned to the industrial strategy – and they must be. The Exiting EU and BEIS Departments should not be silos and it should be further recognised and addressed that the challenges (and opportunities) cover many departments. The Government should establish a Whitehall structure, Future Industry, dedicated to securing policy consistency between Brexit and the industrial strategy across all departments, which would be reported to the National Industrial Strategy Advisory Commission. Leaving the single market in particular affects key export-intensive and regulated sectors. Their supply chains, from automotive components to food packaging, rely on EU elements of the supply chain, which currently cannot be met outside the EU. Industry will face higher costs or the UK has to grow a domestic part of the supply chain, which in turn would need a specific industrial strategy focus – demonstrating why and how industrial strategy and Brexit processes need to be linked.

3. Ensure specific duties for local and national institutions to address systemic sector issues, and connect industrial strategy, places and sectors: challenges such as poor infrastructure or skills gaps are common to many industries but there is also sector-specificity which requires tailored solutions. The current government’s ‘sector deals’ are an important step, but they are few in number and industries face challenges that need resolution. Industry requires a joined-up framework of local and national institutions able to accurately identify and resolve ‘place’ needs, and identify opportunities for sectors, supply chains, clusters and the anchors of industries – ‘primes’. BEIS should develop a Programme for Place-Based Primes to ensure institutions underpinning the industrial strategy, such as the National Infrastructure Commission and Local Enterprise Partnerships (LEPs), have a specific sector remit and places and sectors connect through the industrial strategy as well as the local strategies outlined in the Conservative manifesto. National institutions and government units that underpin the industrial strategy, should also be located across the UK, underpinning that the industrial strategy does not rest simply within London and Whitehall.

4. Accelerate economic devolution: The programme to equip all cities and areas with the powers and budgets to drive their own economic success must be advanced. The UK remains the most centralised countries of its size, with a lack of institutions below the national level, almost uniquely in OECD, and with English local government having the most circumscribed powers of any equivalent tier internationally. Metro Mayors must have control over LEPs, as they do in London and Manchester, to provide much more effective co-ordination for infrastructure, skills, digital, business support and economic development. Outside of newly elected metro-mayors and devolution deals many localities are still relatively powerless when it comes to shaping their economic landscape. Localities also need the ability to undertake effective and detailed economic analysis to drive business support, growth and industrial strategies. Brexit offers an opportunity to redistribute powers and budgets to localities, including to enhanced LEPs and LEPs consortia through a Brexit Devolution Dividend, linked to the Shared Prosperity Fund in the Conservative manifesto.

5. Meeting the digital and low carbon transitions: we face two significant transitions ahead – moving to a clean energy low carbon future, and a digital and data transformation that is reshaping all economic and social models. A clear pathway is needed, recognising winners and losers and providing options for the latter, through the establishment of a Generational Transformation Commission. This should also examine how we harness the future to invest in and transition the present. The UK did not develop a sovereign wealth fund on the back of natural resources as other countries did. We must not make the same mistakes with the assets of today. A new wealth fund, Future Britain, is outlined in the Conservative manifesto. The Commission would assess how the fund could be supported by today’s assets such as digital leadership including online retail market, and enabling wealth accrued in digital, automation and data does not drive stateless profits, but brings collective returns. Similarly, in energy this could mean supporting public co-investment schemes for mutual assets in renewables which bring shared long-term returns.

6. Ensure programmes are incentivised to bring wider public benefit through new investment zones: the UK has to ensure that investment in infrastructure, and in particular the new housing the country needs, secures as much leveraged benefit as possible across all of the country. These programmes must embed local growth and explicitly drive wider economic benefit through developing skills, UK supply chains, SME clustering and innovation. Enterprise zones (in England) have been criticised for not meeting the benefits promised. They should be replaced with new Investment Zones; partnerships where there is significant public and private investment such as a housing building or transport programmes. With a range of incentives, these zones would encourage the bringing together of institutions, both local and national, to secure maximum public benefits such as an uplift in innovation and R&D application, skills training and scaling SMEs. In addition, Government silos should be further broken down over a concerted two year programme to deliver a business-orientated, adaptive and entrepreneurial government machinery, including across agencies, which is much more responsive to the diversity of business needs and models and seeks to create co-ordination across increasing devolved arrangements: this is not just about effective regulation but effective processes.

7. People-centred productivity through Worker Voice Deals: Technological change is already having a profound effect on how employees’ voices are heard. We have more fragmented work environments and business structures, and business models are becoming more automated. As a result, the voice and value of employees are in danger of being disregarded, further storing up challenges in our economic models. With evidence clearly linking stronger employee voice with better productivity, as well as being key to promoting self-value at work, the industrial strategy should expand and embed employee engagement through Worker Voice Deals – partnerships and incentives to raise standards and incentivise industries as part of sector deals and localities in place deals. This can run alongside a drive to incentivise employee ownership as well as reshaping employment rights to ensure the individual is respected amidst increasing management by automation and algorithm.

8. Champion business model plurality: The industrial strategy and business policy should not assume a PLC model as default, but rather must recognise the plurality of business models. Business support and processes, corporate governance and regulatory environments should be recast to explicitly encourage more purposeful companies and community wealth building to deliver a much broader and deeper range of societal benefits. Supporting new models would embed purpose, give more voice to employees, diversify ownership, enable the wealth of business to be more evenly spread, and help restore trust. Just as the UK led globally on the corporate code, we should seek to be at the forefront of governance and practice on new business models. This should enable businesses to easily transition during their cycles to more mutual, employee-owned and purposeful practices, with a new business structure for this – the Chrysalis Company. Mutual models must also be at the heart of new housing and garden cities areas to retain wealth and assets locally. The government should look at commissioning a National Assets Audit, to obtain a picture of the assets across the UK, from shareholding to property, financial holdings to community assets, to inform and underpin a diversifying of asset ownership