The green transition can kick-start a revival in UK manufacturing

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The writer is a former UK business secretary and former EU trade commissioner

Rishi Sunak says his “plan” for the economy is delivering — and if lower inflation was enough he might have a point. But there is a deeper, and more threatening, malaise facing the economy: the reluctance among investors to back British business. Pension funds are looking elsewhere for returns, venture capital is frequently shy and the London Stock Exchange looks weak.

We don’t have to accept this. The UK’s underlying strengths are well established, from the rule of law to our great research universities and our broad cultural appeal. We need to mobilise these and other advantages, giving a fresh sense of direction to the economy.

Britain is not alone in Europe in finding it hard to compete with the economic allure of the US mixture of dynamic capital markets and generous government subsidies. And the prime minister is right to point to Britain’s scientific and technological prowess. But this power is not being harnessed within a wider economic plan.

In particular, Sunak’s refusal to acknowledge that government needs to back innovation through regulatory reform — and his reluctance to use government intervention to mitigate investment risk — is hampering Britain’s appeal to private capital. This is not simply or primarily about business taxation. It is more about giving investors confidence in the long term and consistent direction of government policy.

One area of uncertainty concerns the government’s commitment to net zero targets and renewable energy. Sunak thinks he smells electoral advantage by soft pedalling on these policies, but he is discouraging would-be investors in decarbonising power generation, heat and transport. Prevarication prompts businesses and investors to look elsewhere in Europe, Asia and the US, where there are stronger signals to invest in decarbonising assets and technologies.

These countries understand that stability is a necessary but insufficient condition to generate private sector investment — a free and competitive market is the starting point but not the only basis for economic success.

This insight is at the root of a new analysis by the Institute for Public Policy Research centred on the transition to green energy. Some argue that Britain’s future exists only as an advanced services economy; the IPPR makes the case for using the energy transition to foster advanced manufacturing as an objective of government policy.

In the UK, we can already identify manufacturing strengths and spot new competitive advantages in the race to meet the world’s growing demand for green products — we are the eighth largest green product exporter in the world. Our existing industrial capabilities point to expanding manufacturing in wind energy, green transport and heat pumps.

If we align the UK’s university and research strengths, an educated and flexible labour market, our entrepreneurialism and a strong regulatory bias in favour of innovation and new design, we can make the most of these opportunities. It is too late to create an industry building solar panels here, but not too late to develop the grid-level storage capacity to transform the economics of solar power. There are similar possibilities offered by the UK’s strong science base — and similar demands for sympathetic government policy.

We cannot properly capitalise on our strengths without nurturing manufacturing as well as services. It was not inevitable that the UK should have lost over a third of manufacturing capacity since the 1990s. Despite this, the IPPR study highlights that productivity growth was five times higher in manufacturing than in services between 1997 and 2021 — and that manufacturing is linked to two-thirds of private sector research and development in the UK.

The Conservatives, in rowing back on green ambitions, have chosen politics over economics. But in Labour party circles, the need for active government support for advanced manufacturing is recognised. What is less clear is how to provide it — including how to rebalance regional economies, a key Labour objective.

In my experience as a former business secretary, talking in generalities about industrial policy is easier than designing the unique interventions needed for each sector: the conditions for healthcare innovation will not be the same as those for the energy transition or the defence industry. The substance of government action will need to range from financial support to regulation, planning and competition policy.

Deepening the interventions that can foster fresh manufacturing growth will not be simple or easy. Renewal is possible, though, as long as we go with the grain of the new markets created by the green transition, the great challenge of our age.


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