It’s Time to Start Using Development Orders

Last week, Angela Rayner seized control of plans for a new “garden town” in Kent, preventing Swale Borough Council from torpedoing the proposal. Residents were “gobsmacked” and “disgusted” by this central government intrusion. But, I say, good for her! Ange’s unapologetic takedown of entrenched blockers is a sight to behold. But, she could, and should, do more. 

Much ink has been spilt over the UK’s broken planning regime but it's a crucially important issue. Over the last few decades, house prices and rental costs have skyrocketed. All the while, we’re failing to build critical infrastructure like reservoirs, forcing providers to draft farcical contingency plans to tanker water from Norwegian fjords. 

Burdened by local vetoes and rolls of red tape, the UK’s planning system has devolved into a tangled bureaucratic quagmire, hamstringing our economic potential.

Despite widespread acknowledgment of the system’s manifold flaws, successive governments have struggled to overhaul it. Time and again, MPs and local authorities have buckled under pressure from their constituents, preventing real change. This is hardly a surprise, the current system rewards short-termist politicians who block developments and prioritise the needs of existing residents.

Although sweeping reform of the disastrous Town and Country Planning Act remains the boldest solution, we must face up to political realities. The Labour government’s recent planning proposals, while well-intentioned, show that they’re not prepared to tackle this behemoth head-on. 

But YIMBYs take heart! There’s a solution hiding in plain sight - Development Orders.

Introduced in the Town and Country Planning Act of 1990, somewhat less evil than its progenitor, Development Orders are a little-known but powerful tool with the potential to ramp-up housebuilding. They empower ministers to grant planning permission for specific projects or entire areas, bypassing local authorities. Though I’m usually hostile to such top-down interventions, Development Orders serve as a necessary counter measure to the restrictive, state-mandated planning system that’s currently wreaking havoc on our housing supply.

Development Orders have already seen some limited success - facilitating home extensions and the development of film studios. However, their real power lies in their untapped potential.

With Development Orders, the Secretary of State could sidestep local and regulatory roadblocks, fast-tracking essential development. So, rather than waiting for their designation of grey-belt land to filter through the sclerotic National Planning Policy Framework, ministers could simply greenlight new housing and infrastructure in areas that fit their criteria.

They could also be used to create a bespoke regime where house building would be approved within a 10 minutes’ walk of any railway station. Adam Smith Institute research demonstrates that this would stimulate the construction of staggering 1 million more homes within the Green Belt surrounding London alone, unlocking ugly, unproductive land ripe for development.

Of course, Development Orders aren't purely vehicles for more housebuilding, they also restore a much-needed sense of stability. If a project meets the set criteria, it can move forward without fear of a council veto, opening the door for smaller developers. Currently, the housing market is so wildly over regulated that building anything is effectively banned. Only big businesses are able to navigate the existing morass of red tape.

In the hands of a courageous politician, Development Orders could transform the UK’s housebuilding potential, liberalising planning through the back door. Instead of getting bogged down in neverending consultations, politicians could simply pull this lever and get Britain building. 

The UK’s planning regime is at the heart of the housing crisis - and much of our broader economic malaise. Ramping up the use of Development Orders would be a great first step to tackling this prevailing problem. After all, the state created this mess, so why not use the power of the state to fix it?

We’re all going to get so rich, aren’t we?

We have a new government fund - we’ve forgotten what it’s called but we’re assured that it’s really exciting - which is going to invest our tax money in the industries of the future.

But on Thursday night, at a court in New York, Northvolt’s lawyers filed for bankruptcy protection amid a cash crisis for the European battery champion.

More than just investing in those businesses of the future that are obviously going to work - for, of course, even dumb and stupid capitalists operating in markets can achieve that, hunh! - our tax money is going to be invested in those strategic industries of the future. Even, alongside strict conditionality!

Despite raising more than $15bn (£12bn) from investors, bondholders, pension funds and European governments since it was founded in 2016, this week the company had less than one week’s cash remaining – $30m.

We’re all gonna get so, so rich, right?

Tim Worstall

Luring humans works better than lashing them

Kingsley Amis said it about higher education but it works for governance too: More means worse.

Almost 1m under-25s are not in work or studying, new figures show, underlining the scale of the worklessness crisis as the Government plots a crackdown on benefits.

The number of young people who are not in employment, education or training – Neets – climbed to 946,000 in the three months to September, according to the Office for National Statistics (ONS).

It marks the highest number of workless 16 to 24-year-olds since 2014, and is up by 9pc from 871,000 a year earlier. The number of young Neets has risen by almost one quarter since the pandemic.

Recently we’ve had the cost of employing youngsters pushed up by significantly raising that youth minimum wage. We’ve been insisting for some time now that large scale youth unemployment is the very sign we need to show that the youth minimum wage is already too high. The recent budget also significantly increased the employer tax burden of employing young people. We’ve also had, effectively, the recent nationalisation of apprenticeships. Which has, to no one’s surprise at all, led to fewer apprenticeships.

So much for industrial policy with strict conditionality then.

At which point we’re no doubt about to gain more of that industrial policy - with strict conditionality - to solve the problems caused by the last bolus of it. The lashings of employers will increase until morale improves.

We insist that luring people into employing snotty youth works better.

For example, say we abolished the minimum wage. Teens could go to work and learn stuff in return for a sandwich and a bottle of pop at lunchtime. Employers could try youths out at that same price. Taxes upon employing such tryouts could be zero. Apprenticeships could be freed from the dead hand of the bureaucracy and undertaken upon whatever terms anyone wanted. Finally, we could simply abolish all out of work benefits for those under 24. We’re not wholly sure that even we agree with each and every one of those ideas. But we really are sure that if that were done then youth unemployment would pretty much vanish. Vanish by luring employers into taking the chance rather than lashing them for not.

Or, a little less controversial. Youth unemployment is currently caused by what government has already done. Rather than then asking government to do more to solve the problems it has, itself, created why don’t we run with the idea that government should stop doing the things that cause the problems that require solving?

And once we put it that way around why would we stop at youth unemployment as an area requiring this as a policy stance?

No government isn’t the solution, we are not anarcho-capitalists. But less government has a definite ring to it.

Tim Worstall

Advice to Howard Lutnik: Policy design should start with reality

Just a little note to one of those likely to take office in January. Policy design - on whatever - should at least start from reality. This is true of the business taxation system. Therefore we’d recommend that Mr. Lutnik, likely the next Commerce Sec, start with what actually happens.

Apple….”they make the parts in China, they put the parts together in Taiwan, then they wave their magic wand and it floats over Ireland….and then it comes to America and there’s a 3% profit in America….” and, well, no.

It’s more that the parts are made in Taiwan - processor and so on, by value the parts are made outside China - and then put together in China. By a Taiwanese company, Foxconn, often enough. Then Ireland and America, well, no.

For Apple has been very clear over the years, it runs its business in two segments. Outside North America is indeed run through Ireland, inside North America does not. The business of selling iKit to North Americans operates in terms of cashflows, profits, taxation and so on, exactly as a domestic US company. It’s entirely true that some other tech companies have - how to put this delicately - more interestingly complex tax and value structures. But Apple does not.

The effect of Ireland in Apple’s system is that tax which would, or could, be paid in the UK, Germany, Indonesia and all the rest concentrates in Ireland. Ireland makes no difference at all to the tax paid by Apple on its domestic, US, business - because it’s not involved.

As a result of the changes to the US corporate income tax from the first Trump Administration those profits that pile up in Ireland are indeed now taxable in the US. With the usual insistence that foreign taxes paid reduce the US tax payable. That is, the more Apple reduces taxation paid in the UK, Germany, Indonesia and so on, by that use of Ireland, the more US corporate income tax is due.

It’s entirely possible that the US corporate income tax system should be reformed. Our preference would be abolished but that’s because we’re ideologues. But any reform or management really should start from an acknowledgement of the current reality. Apple’s Irish tax structure makes no difference at all to the amount of tax Apple pays on its North American business. They deliberately set it up so that it wouldn’t too.

As a more general point, one of the reasons that politics so often fails to change the world is that politics so often doesn’t grasp the current state of that world.

Tim Worstall

The Agricultural Weasel Problem

Farmers say that around 70,000 farms will be affected by the restrictions on inheritance tax relief in Rachel Reeves’ Budget. The government and their cheerleaders say it will only be a tiny minority, just a few hundred.

Who is right, and how do they get such widely different ‘facts’? The answer I think is a combination of the difficulty of trying to govern by statistics, a sadly too common lack of understanding of how the tax system works in practice, and a bit of abuse of language, especially a little weasel word that is being loaded (deliberately or otherwise) with more weight than it can support.

The Government Line

HMRC statistics suggest that only around 500 farms a year currently claim the Agricultural Property Relief (APR) exemption from inheritance tax on over £1 million of assets.

Since APR will still be given in full on the first £1 million, they assume that only those 500 will pay the tax once APR is restricted.

And, as has been pointed out by the government’s supporters, possibly not even all of them will have to pay, because some clever tax planning can reduce that number further.

That is the basis of the government’s claim, much repeated by its supporters. At first sight it looks like it has a sound basis in official statistics, but look more closely and it starts to look more dubious.

Generations

The first point is that inheritance tax happens roughly once a generation, so 500 a year means there are around 15,000 farms that can be expected to have to pay the tax.

For them it will be a huge problem. A viable farm needs a lot of land, and land values (on which inheritance tax will now be charged) are very high, but farms make very low profits. The inheritance tax bill can therefore be completely out of proportion to the profits generated by the farm to pay it. And this matters; 85% of farmers own all or some of their land, with purely rented farms only a small minority, so almost all farms will be having to pay inheritance tax on land that has a high value but which they cannot sell without harming the business.

On some calculations therefore, funding each inheritance tax bill could wipe out the entire future profits for that generation. That is unsustainable, and so farms will have to be broken up or sold.

And of course it is the real working family farms that will be hit by this, while the small uncommercial ‘hobby farms’ will mostly be protected by the £1 million exemption.

But 15,000 is still a lot fewer than the farmers’ estimate of 70,000. Where’s the difference?

Out of Date Statistics

One problem of trying to govern by statistics is that they are always out of date.

The government’s ‘500’ claim comes from HMRC’s inheritance tax statistics, which of course are for those farmers who have already died. But if the average farm size is growing (as economic pressures and increased mechanisation mean larger farms are needed to sustain a viable business), that is unlikely to have fed through yet to the older generation who have been dying off and appearing in HMRC’s statistics.

And the statistics (yes, another set of them) do suggest that this has happened; since 2000 the number of farms has fallen by about a third, while the total area farmed has remained fairly constant, in which case the average size of farm has grown substantially. This will mean that a much higher proportion of current farmers will be hit by inheritance tax than would have been the case for those, mostly older, farmers who have died in the last few years.

Complex Relief

Another problem is a lack of understanding (even, it seems, in the Treasury) of just how complicated these inheritance tax reliefs are.

Just because someone has a farm does not mean that it was exempt from inheritance tax. The definition of what qualified for Agricultural Property Relief is so convoluted that a lot of farm assets, and a lot of the value, did not qualify. However there is another inheritance tax relief, Business Relief (‘BPR’) which covers businesses in general, not just farms, and has a different definition of what assets qualify.

Some farm assets qualify for APR but not BPR, some qualify for both, some qualify for BPR but not APR, particularly since farms have been encouraged to diversify. Land used for grazing for a horse livery business, for example, or a barn used for non-free-range chickens, or rooms let for Bed & Breakfast, are common farm business assets that are unlikely to qualify for APR but might, depending on the circumstances, qualify for BPR. And there are complex valuation rules for APR that mean, even where a field qualifies, its full value might not. Also farm equipment does not qualify for APR but might for BPR, an important consideration when a combine harvester can cost £1 million.

On most farmers’ deaths therefore, the inheritance tax return is a hodgepodge of different reliefs – APR, BPR, the residence nil rate band, and others. But the Budget reforms restricted APR and BPR together, leaving just a single £1 million threshold to be shared between the two.

Farms with more than £1 million of assets therefore will not all show up in the statistics as claiming more than £1 million of APR. A farm claiming £900 thousand of APR and £900 thousand of BPR, for example, would not be one of the ‘500’, but at £1.8 million would be well over the new combined threshold and would see nearly half its value hit by a costly inheritance tax bill.

So from those same government statistics:

• The roughly 400 farms a year claiming £500,000 to £1 million of APR are highly likely to be over the £1 million threshold, once BPR is included;

• Of the roughly 400 other farms a year claiming £250,000 to £500,000 of APR, it is likely that many will be over the £1 million threshold once BPR is included, although this will depend on the type of farm (with some more machinery-intensive than others) and location (as to how much of the land value qualifies for APR).

• Even some of the nearly 500 farms a year that claim under £250,000 of APR could actually be over the £1 million threshold, once BPR is included, particularly if they have followed government advice and diversified into related businesses that, although still rural and probably farming-related, do not meet the strict tax definition of ‘agricultural property’.

So the government’s ‘500 farms a year’ could easily be 1,200, at a rough guess. That would be something like 36,000 farms over a generation, which is over half way to the farmers’ estimate of 70,000. But where are the others?

The Weasel Word

I think the other affected farms are being hidden behind that little weasel word, “affected”.

A lot of commentators, and HM Treasury, calculate the number who might have to ‘pay’ the tax, but then switch to referring to that as the number who will be “affected” by it. But the two are not the same.

Even if only 15,000 farms a generation will have to pay inheritance tax (and, as we have seen above, it is likely to be more than that), many more still will be affected by it.

This is because anything handed on while the older generation are still alive isn’t subject to inheritance tax at the time. It only becomes taxable if the donor dies within seven years. So long as ‘grandad’ (or whoever) survives seven years, there is never any inheritance tax, with or without APR, and so those farms won’t show up in the much-quoted HMRC APR statistics.

But even if they still don’t have to pay any inheritance tax under the new rules, they will still be affected by it because of that 7-year rule.

Currently the younger generation doesn’t need to worry about inheritance tax, because even if there is a death in 7 years, most of the value will be exempted by APR. But it won’t be under the new rules. Instead the threat of inheritance tax hangs over the farm for seven years, in case the older generation dies within that time.

So what does the younger generation do, having been given the family farm? Worry for 7 years, knowing that everything you’re working for may be taken off you to pay a tax bill? Take out expensive life insurance that the farm can’t afford? Cut back on essential investment to keep money back to cover the potential tax?

Even if those families still don’t have to pay any inheritance tax under the new rules, they are still affected by it, and a death at the wrong time could flip them into a tax bill that, after the Budget, could lose them their farm, home and livelihood.

Yes, there is all sorts of planning that can be done, and it is interesting to hear government figures suggesting tax planning as a way to mitigate the harshness of their own reforms. Lifetime gifts are common (although they are difficult; thanks to the ‘gift with reservation of benefit’ rules, the older generation will often have to entirely give up their livelihood and home to qualify); husband-and-wife lifetime trust schemes were used in the past and may come back into fashion (but they are fiddly to operate, split up ownership of the farm, and of course rely on being married with a still-living spouse); partnerships can start to pass some of the value to the younger generation while also getting them more involved in running the farm (but that has to be a genuine partnership, and you don’t have to listen to The Archers to see the potential for intergenerational disagreements there); some farms incorporate and hand on shares in tranches (but the additional APR restrictions on farming companies makes that difficult); etc. etc. But tax planning is complicated and there are all sorts of traps that the ill-advised can fall into.

More importantly, all of that comes at a cost - not just professional and legal fees but also changing plans, awkward split ownership structures, and the time and effort to plan, implement and operate complex arrangements.

Who is affected

All of these seriously affect those farms, and their families, even if they still don’t actually have to pay the tax and so aren’t included in the government’s ‘500’ statistic.

For some, the result will be 7 years of stress and worry. For others, 7 years of underinvestment as they save to be able to cover an inheritance tax bill that might fall on them. For others it will be costly legal fees and the strain of operating a complex structure – with the risk of a huge tax bill if you get it wrong.

But in whatever way, all of these will be affected by the Budget’s tax changes, many significantly so. The government, and expert commentators, who should know better, should not be ignoring that.

500 or 70,000?

So how many farms will be affected by the Budget changes? Trying to put some rough figures on it:

• the government’s much-quoted ‘500’ a year is really 15,000 a generation;

• the APR/BPR split can easily take that up to something like 35,000;

• ongoing farm consolidation, making HMRC’s statistics out of date, could add, say, 20% to that, taking it to 42,000 farms that are likely to have to pay the tax;

• then the many others who, through lifetime gifts and tax planning, do not actually pay the tax but are still seriously affected by the costs of doing so and the hoops they have to jump through to escape it; if a third of farms are taking proper tax advice, that takes the total to 63,000 affected farms.

These are only rough figures, but they make the farmers’ estimate of 70,000 affected farms, arrived at from different but respectable data, look very reasonable. Certainly the true figure is much more likely to be around the 70,000 level than it is to be just 500.

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Richard Teather is a chartered accountant who, along with twenty years’ academic experience in tax law and policy, has advised businesses, business organisations and governments around the world.

The opinions expressed here are his own and do not necessarily represent those of any firm or organisation with which he is connected.

This blog post concerns the possible effects of tax reform and policy; it is not and should not be regarded as advice. Tax planning is highly complex and carries many risks, so should not be undertaken without specific, personalised advice.

If there’s going to be a trade war why don’t we be on our side?

Apparently there’s going to be a trade war. In which we’ve got to pick sides:

Britain would side with the European Union over the US if Donald Trump sparked a trade war with China, the Business Secretary has suggested.

Jonathan Reynolds said the scale of the UK’s trading with the bloc meant the Government would be required to “weigh the consequences” of any action that would create an “adverse relationship” with Brussels.

Mr Reynolds’s comments suggest the Government will prioritise appeasing the EU if Britain finds itself in the middle of a heated trade war once Mr Trump re-enters the White House.

Now, yes, this is as reported and one minister only and so on. So take with that correct amount of salt.

It’s possible to think that if there are only two sides why would we go with the wrong one of course. But rather more important. If there is going to be this trade war and we do have to pick a side why not pick our side?

As economist Joan Robinson suggested in her Essays in the Theory of Employment (1947), protectionist retaliation looks like the decision “to dump rocks into our harbors because other nations have rocky coasts.” One’s own government’s trade policy should not depend on the restrictions that foreign countries impose on their own citizens.

It is always useful to remember that, from the viewpoint of a country (this collectivist way of speaking being just a shortcut), imports are the benefits, and exports are the cost, not the other way around.

Our side, here, would be to allow those others to get up to whatever they want and to take the actions which most benefit us. That is, declare unilateral free trade and the rest of you can b’ggr off.

Think on it, think on it properly. Imports, our imports, are the things that we consume. They are those things which Johnny Foreigner can do better, cheaper, in a more timely fashion, even just more fashionably, than we can. Even if they’re subsidised, subsidised illegally even, that’s a transfer from their taxpayers to us in making those things better, cheaper etc. That’s why we buy them, doing so makes us better off than having to put up with wine made by the use of walls and glasses in Scotland. We, for our benefit, therefore do not wish to put barriers in the way of those lovely things that we can gain from Bourdeaux or other groupings of J Foreigners labouring away to make our lives better. We certainly don’t want to tax our own consumption of them. Well, not any more than we tax domestic consumption with a VAT or sin taxes - we don’t want to preferentially tax those imports that is.

Given that we don’t want to do that we shouldn’t.

Now note how politics works. If Washington DC, or Brussels, says “We are going to make our own citizenry poorer by denying them access to lovely Marmite” the correct response is not “And we’ll make our citizens poorer by denying access to macademias or merlot.” The correct response is “You do that then, see if we care.”

That is, we do not threaten Mr. Foreigner by throwing rocks in our own harbours. But politics seems to think we do - which is why politics is such a lousy way of running a place of course.

We have, in the past, drawn up a draft trade treaty:

What Johnny Foreigner does about this is up to them. For the only rational trade stance is unilateral free trade. So, that’s what we should do. Whether there’s a trade war or not we should be on our side - free trade and the politics of it can go to b’ggry.

As that final Parthian Shot, who is it that benefits from such restrictions and taxes upon imports? Those who own the domestic producers of the worse and competing products, obviously. We’re really quite adamant that taxing consumers to benefit the local capitalists is not a valid function of political or economic policy.

Tim Worstall

How Industrial Strategy Killed British Industry

“He is … led by an invisible hand to promote an end which was no part of his intention”

Adam Smith, Wealth of Nations, IV:II, p.456 

I: The Return of Industrial Strategy

Industrial strategy is back.

Just weeks ago, the Government published its green paper on Invest 2035: the UK’s modern industrial strategy - “a credible, 10-year plan to deliver the certainty and stability businesses need to invest in the high growth sectors that will drive our growth mission.” Promising to channel support to eight ‘growth-driving’ sectors, and to engage on ‘complex issues’ such as energy prices, infrastructure, and planning, Invest 2035 aims to provide a comprehensive industrial strategy that is both pro-business and pro-worker, ‘open for business’ while also ‘shaping markets’. A tall order indeed. The consultation closes on November 24th, with the industrial strategy itself set to be published in spring 2025.

The Government’s announcement responds to increasingly loud calls to revive Britain’s industrial economy from across the political spectrum. 

In 2012, Liberal Democrat Business Secretary Vince Cable argued that “the government shapes the British economy with its decisions every day…we can have an industrial strategy by default or design.” Giles Wilkes, of the Institute for Government, has likewise argued that “business has been confused, incentives towards long-term investment undermined, and key economic capabilities allowed to wither” by the lack of an industrial strategy. According to manufacturing advocacy body Make UK, “a lack of a proper, planned industrial strategy is the UK’s Achilles heel - if we are to not only tackle our regional inequality, but also compete on a global stage, a national manufacturing plan is required.”

The Labour Party set out its own proposals for an industrial strategy in 2022, entitled Prosperity through partnership: Labour’s industrial strategy. These proposals pledged to create a coordinated, cross-sectoral approach to industrial strategy, to put the industrial strategy council on a statutory footing, and to build a ‘more resilient’ economy.

The idea of an industrial strategy has found increasing purchase amongst Conservative thinkers too. In April 2024, Onward published A Conservative Economy, their case for a new approach to political economy. The report makes the case for a new ‘conservative’ political economy, which “[focuses] on reindustrialisation” in order to “build a more productive, resilient, and fairer economy”. Amongst the recommendations in that paper are calls to use fiscal and regulatory policy to support high and mid-tech manufacturing output, reforms to corporate governance regulations to channel more capital into UK equities and ‘productive output in the real economy’, and greater public investment in renewable energy technology and infrastructure. Rice and Timothy call for new oversight bodies designed to direct public investment into reindustrialisation, with ‘place-based regional economic development’ objectives and greater worker representation in corporate governance. The influence of trust-busting muscular marketeers like Theodore Roosevelt and Joseph Chamberlain looms large in this analysis, which presents itself as a repudiation of the economic consensus of the late twentieth century.

From left to right, the case for a new and more muscular industrial strategy has gained a serious head of steam in recent years - finally culminating in the Government’s Invest 2035 green paper.

And looking at the figures, it’s easy to see why. According to 2023 figures, about 16.9% of the UK’s GDP was produced by the industrial sector. That’s lower than G7 countries like Germany (28.1%), Japan (26.9%), Italy (23.1%), Canada (22.5%), France (18.7%), and the United States (17.7%) - though notably, it is not significantly lower than the French or American figures. It is also lower than other developed economies such as the Netherlands (19.4%), New Zealand (19%), and even Singapore (22.4%).

Figure 1: Percentage increase in GDP contributions from 1990 by sector, ONS

In absolute terms, the UK is the world’s eleventh largest manufacturing economy, behind countries such as South Korea, Mexico, and Brazil. In 2023, it was responsible for about 1.8% of global manufacturing output, lower than the 2.2% that it contributed to world GDP. Our production of substantial consumer goods like cars is even lower; the UK is the world’s 18th largest manufacturer of motor vehicles, behind countries like Indonesia, Iran, and Slovakia. The UK has almost no production capacity for critical modern technologies, such as semiconductors.

Closer to home, the picture isn’t much rosier. Back in 1970, manufacturing made up a full 32% of GDP. Michael Kitson and Jonathan Michie of the Royal Economic Society argue that the stagnation of the British industrial economy began in the early 1970s - between 1973 and 1992, the total increase in manufacturing output in the UK was just 1.3%, compared to 16.5% in France, 32.1% in West Germany, 55.2% in the United States, 68.6% in Italy, and 68.9% in Japan. Between the cycles of 1964-73 and 1979-89, the UK lost 2.5 million manufacturing jobs - one-third of the total, compared to just 10-13% in France and Germany.

And this trend shows little sign of slowing. According to analysis from the trade union GMB, the UK has lost almost 200,000 manufacturing jobs since 2010, constituting nearly 7% of the UK’s total manufacturing jobs. As of September 2023, just 7.1% of British workers were employed in the manufacturing industry, with a further 6.1% employed in construction and building. As of 2022, manufacturing contributes just 9.3% to UK GDP, falling below the wholesale and retail sector (10.4%); this proportion has declined precipitously since 2002, when manufacturing contributed more than 13% of UK GDP. 

For many commentators, these statistics provoke existential dread about the poor state of the British economy. Alongside high-profile cases, such as the end of traditional steelmaking in Port Talbot (September 2024) and the closure of Redcar steel in 2015, there is a pervasive sense in some circles that Britain’s loss of industrial productivity represents a potentially terminal challenge for the UK.

After all, weren’t we once the workshop of the world? Whatever happened to the golden age of British manufacturing, when we were a proper country that built things? In comparison to service sector jobs, perceived by some as vague and insubstantial, careers in industry are widely valued for their tangible nature. This sentiment is perhaps best expressed by commentators such as the Telegraph’s Andrew Orlowski, who recently argued that “industry means prosperity, security, and self-determination”, asking whether British parents would prefer to see their children working “for Renishaw, Dyson, and Airbus - or Bet365?”. 

In the cultural imagination, industrial decline is also tied intimately to the issue of regional economic inequality. The loss of jobs in major 19th and 20th century manufacturing centres, in places such as Lancashire, Yorkshire, and the West Midlands, is often identified as one of the key drivers of the UK’s relatively uneven economic geography. In a rhetorical sense, the ‘levelling-up’ agenda of 2019 to 2024 focused primarily on communities which had been ‘left behind’ by the process of globalisation and subsequent deindustrialisation. The idea of ‘bringing back industrial jobs’ is often used as a proxy phrase for ‘restoring economic prosperity to the regions’ or ‘making the economy less London-centric’.

Of course, not all of the arguments for a more muscular industrial strategy are cultural-historical in character. The UK’s declining industrial capacity presents legitimate security challenges - without the capacity to domestically produce primary industrial goods such as steel, Britain could be left vulnerable to shocks in global markets, and to predatory behaviour from bad-faith actors. Though not strictly an industrial issue, the sudden energy price shock of early 2022 was, in part, a feature of the UK’s relative dependence on energy imports. It is also true that the UK’s economy cannot run on services alone without incurring significant cost and significant risk - British people still need cars for driving, steel for building, and microchips to power their phones and computers. 

At a time when major economic blocs such as the United States, China, and the European Union are retreating from the free trade consensus of the late 20th century, there are considerable risks associated with relying on the import of strategic or essential goods; for advocates of industrial strategy, this is proof positive of the need to onshore domestic production of these goods, regardless of cost. After all, can the costs of subsidising inefficient production of steel today really be outweighed by the cost of losing access to steel tomorrow? Though this essay will examine the global dimension of industrial strategy in further detail, it bears noting at this juncture that these are the strongest arguments in favour of reindustrialisation. It also bears noting that these arguments do not imply a particular process by which the UK should aim to improve the security of its supply of key goods - it is not per se an argument in favour of industrial strategy, and could equally serve as an argument in favour of improving UK competitiveness. The UK does need to think more carefully about its supply chains, but this fact alone does not necessitate or justify an enormous state-led industrial strategy. 

Some proponents of reindustrialisation also argue that industrial jobs are inherently preferable to services-sector careers, believing that industrial jobs are more productive for the ‘real economy’. Pointing to stagnant productivity in the UK over the past few decades, they argue that the concurrent decline in industrial jobs as a share of our economic output is inextricably linked to our malaise.

The data behind these arguments is decidedly mixed. As of 2019, manufacturing jobs were recorded as adding £39.10 to the economy per hour worked - significantly more than jobs in sectors such as education (£29.90), wholesale and retail trade (£26.70), and accommodation/food-service (£17.50). However, it should be noted at this stage that manufacturing jobs were significantly less productive per hour than jobs in real estate (£292.90), financial and insurance activities (£63.90), and IT (£50.40). The most productive industrial jobs were, in fact, in mining (£163.20) and electricity/gas supply (£98.90). According to its proponents, a successful industrial strategy would encourage the UK’s financial sector to reallocate capital more efficiently, pushing investment towards high-productivity industrial jobs rather than to low-productivity services businesses, or other areas of the financial economy.

Figure 2: UK economic structure and sector productivity - manually transferred from ‘The UK Innovation Report 2022’, Cambridge Industrial Innovation Policy, University of Cambridge

If this theory of productivity slowdown were true, we would expect to see a direct link between economic productivity and share of industrial jobs in our international competitors. In fact, there is no such link. The United States is comfortably the most productive G7 economy on a GDP per hour basis ($98), but its economy is sixth in the G7, in terms of proportional industrial employment. The UK is more productive than Italy, Canada, and Japan, despite having a lower proportion of industrial jobs. Labour productivity growth in the UK has not been significantly more sluggish than in other G7 countries, across a thirty or forty year timescale. Evidently, the Western productivity puzzle is about more than deindustrialisation.

Figure 3: GDP per hour worked (Productivity), OECD

Industrial strategy advocates also argue that, since industrial jobs are tied to production of tangible goods, they are inherently more secure or resilient - though it seems difficult to square this argument with the experience of mass industrial job losses in the 20th century. As this essay will subsequently demonstrate, industrial jobs are highly time-specific, and are disproportionately exposed to technological change.

Though the detailed prescriptions offered by advocates of industrial strategy vary widely, there are a number of core recommendations which unify these disparate calls. Most advocates of industrial strategy argue that, with or without a formal strategy, the UK Government’s policies will shape the fortunes of industrial businesses - and so a structured approach is preferable, affording more oversight and control to Government. Most argue that investment to the UK is both too low, and inefficiently distributed, generally as a result of uncertainty around government policy. Most argue that Britain should work to identify and promote industries in which it has some degree of competitive advantage, aiming to dominate or monopolise strategic parts of the global manufacturing supply chain. Most argue that industrial businesses and education providers are insufficiently aligned, meaning that the UK’s workforce is simply incapable of performing the kind of labour needed to sustain an industrial economy. Most argue that fixing all of these problems requires more state spending and more state intervention in the market. 

Credit: Boris Johnson, Climate Ambition Summit 2020. Photo: Freddie Mitchell / No 10 Downing Street / Flickr / CC BY-NC-ND 2.0

Increasingly, proponents also argue that the process of achieving ‘net zero’ provides a ready-made pretext for reindustrialisation in the UK, arguing that a ‘net zero’ which relies upon imports from polluters such as China and India will necessarily be self-defeating. As such, the UK should, we are told, embrace the reindustrialisation possibilities presented by ‘net zero’s’ enormous infrastructural requirements, creating a raft of new ‘green’ jobs in the process. This is the logic which underpinned the ‘Green Industrial Revolution’ rhetoric of the Johnson Government, which pledged to create 250,000 ‘green jobs’ by investing in the UK’s domestic production capacity of goods such as wind turbines, solar panels, and electric vehicles.

II: UK Industrial Policy (2017-)

It is against this backdrop that the Government launched its consultation for Invest 2035: the UK’s modern industrial strategy. 

Invest 2035 promises an “ambitious and targeted” industrial strategy, designed to drive growth by “enabling the UK’s world-leading sectors to adapt and grow, seizing opportunities to lead in new sectors with high-quality, well-paid jobs.” The green paper concedes outright that the Government will seek to shape the type of growth being pursued, and that the industrial strategy will also be used to “support net zero, regional growth, and economic security and resilience”, committing to both “long-term stability” and “reducing barriers to investment in the UK.”

It would be imprudent to rule on the success of the UK’s new industrial strategy at this early stage, but the terms of reference set out in the green paper should provoke concern.

Invest 2035 promises to focus on eight growth-driving sectors: advanced manufacturing, clean energy industries, creative industries, defence, digital and technologies, financial services, life sciences, and professional/business services. This is a curiously broad remit; few industrial strategies incorporate both financial services and advanced manufacturing. Its German equivalent, ‘A modern industrial strategy’ instead simply focuses on the country’s largest industrial sectors, as measured by turnover - automotive, mechanical engineering, metal processing, chemicals, electrical goods, and food processing. 

Alongside Invest 2035’s focus on regional growth and net zero, there is a considerable risk that the resultant industrial strategy is unfocused and overly broad, shaped by political objectives as much as by sober economic analysis. It is nevertheless encouraging to see the green paper engage directly with planning and energy costs, as well as the importance of the private sector in shaping sustainable industrial growth. If it is to succeed, Invest 2035 should focus primarily on addressing the core economic barriers to industrial growth - explored later in this essay - remaining agnostic as to broader political objectives.

Those calling for a new industrial strategy might be surprised to learn that the UK has actually had an industrial strategy since 2017. In November 2017, Business Secretary Greg Clark unveiled ‘Industrial Strategy: building a Britain fit for the future’, a comprehensive industrial strategy designed to “drive growth across the United Kingdom, using major new investments in infrastructure and research to drive prosperity - creating more high-skilled, high-paid jobs and opportunities.”

Industrial Strategy 2017 pledged to make the UK “the world’s most innovative nation by 2030”, with £725 million of investment committed to the ‘Industrial Strategy Challenge Fund’, in order to address existential global trends. The plan identified four ‘Grand Challenges’; global trends which, it argued, would shape the future of the UK economy. These were, in no particular order, (i) the rise of artificial intelligence, (ii) the global shift to ‘clean growth’, (iii) the UK’s ageing society, and (iv) changing patterns in the way that people, goods, and services move. 

It also committed to a series of ‘Sector Deals’ - ‘strategic, long-term’ partnerships between the government and industrial actors on sector-specific issues, “backed by private sector co-investment.” To take just a single example, the Government launched its Aerospace Sector Deal in 2019, designed to support the UK’s civil aerospace industry. The deal involved a £125 million subsidy for the industry via the Industrial Strategy Challenge Fund, the expansion of the National Aerospace Technology Exploitation Programme (with joint funding from both public and private sector), support for UK SMEs in the aerospace supply chain, and closer relationships between the aerospace industry and education providers, to ensure a pipeline of skilled labour for the industry in the years to come. Similar deals were struck on Artificial Intelligence (with the government document being co-signed by US-based tech firm, Facebook), the automotive industry, construction, creative industries, life sciences, the nuclear sector, offshore wind, rail, and tourism. 

It promised to create a National Retraining Scheme - later integrated into the £2.5 billion National Skills Fund of the Johnson Government - designed to help people re-skill, alongside a £406 million investment into maths, digital, and technical education. Additional subsidies were pledged for the National Productivity Investment Fund, with plans to support electric vehicles, improve full-fibre broadband, and to create a new ‘transforming cities’ subsidy, designed to provide £1.7 billion of subsidies for intra-city transport.

Industrial Strategy 2017 is broadly in-keeping with most of the recommendations made by prominent industrial strategy advocates. It saw the Government identify high-growth-potential sectors, and design funding mechanisms designed to reflect their sector-specific needs. It involved creating closer links between education providers and industrial businesses. It saw the Government commit to long-term planning on supply chains, while working to drive R&D investment towards productive areas of the industrial economy. It provided a mixture of infrastructure investment, ‘skills’ investment, and direct capital investment, most of which was targeted at SMEs and gated behind competitive bidding rounds. At the time, the strategy was heralded as an example of how a more muscular state could shape the British economy post-Brexit.

And yet, seven years on, it would be difficult to argue that the UK has experienced an industrial renaissance since 2017. The broader political context around this must be acknowledged - the 2017-19 Parliament was dominated by discussions of the UK’s protracted exit from the European Union. Nevertheless, even as many of the key provisions of the strategy were implemented, the UK’s industrial economy continued to stagnate and decline. 

In its election-winning 2019 manifesto, the Conservative Party pledged to “focus our efforts on areas where the UK can generate a commanding lead in the industries of the future - life sciences, clean energy, space, design, computing, robotics and artificial intelligence”, with reform of the Government R&D budget, support for the automotive industry, and investment in ‘skills’. Industrial Strategy 2017 was not mentioned.

By February 2020, a report from the Industrial Strategy Council accused the Government of neglecting the strategy - though the same report also acknowledged that the £45 billion in funding allocated to implementing Industrial Strategy 2017 was equivalent to 2 percent of GDP.

In November 2020, the ‘clean growth’ elements of Industrial Strategy 2017 were supplemented by Boris Johnson’s aforementioned £12 billion ‘Green Industrial Revolution’ plan, which promised to create 250,000 high-quality industrial jobs, “particularly in the Midlands, North East, and North Wales”, with investment into new renewable technologies. 

And in March 2021, Industrial Strategy 2017 was folded into the Government’s ‘Build Back Better’ plan, which aimed to support economic growth “through significant investment in infrastructure, skills, and innovation”. Build Back Better was founded on much of the same logic as Industrial Strategy 2017, aiming to stimulate the economy through investment in skills and training, a new £375 million Future Fund, and two new schemes for SMEs. The biggest departure from the earlier strategy was Build Back Better’s emphasis on infrastructure investment, with promises of capital spending plans worth £100 billion. Like Industrial Strategy 2017 before it, Build Back Better promised to use this renewed industrial strategy to “level up the whole of the UK”, “support the transition to Net Zero”, and “support our vision for Global Britain”, putting these political objectives at the heart of an ostensibly economic strategy. The Build Back Better includes the UK’s decarbonisation strategy - ‘Build Back Greener’, which itself pledges billions in subsidies for ‘green industries’.

Once again, external events frustrated the implementation of this plan - namely the Covid-19 pandemic and subsequent lockdowns.

Credit: Prime Minister Rishi Sunak meets Secretary of State for Business, Energy and Industrial Strategy Grant Shapps, 2022. Photo: UK Government/ No 10 Downing Street / Wikimedia/ CC BY 2.0

In May 2023, the Sunak Government launched its National Semiconductor Strategy, which promised to grow the UK’s domestic semiconductor sector, safeguard the UK against supply chain disruption, and protect the UK against security risks associated with semiconductor technologies. The language should, by now, be familiar - ‘research and development’, ‘investing in skills’, ‘support for SMEs’. In November 2023, the Government followed the National Semiconductor Strategy with its Advanced Manufacturing Plan, pledging over £4.5 billion “in targeted funding to back the long-term future of the UK’s world-leading manufacturing industries - automotive, aerospace, clean energy and life sciences.” Presumably, the policies which comprise these two strategies will either be incorporated into Invest 2035, revised, or scrapped entirely.

Clearly then, the terms of references laid out in Invest 2035 are nothing new. This litany of part-implemented half-measures is by no means exclusive to the post-Brexit years, either. In fact, half-baked attempts to inject industrial jobs back into the British economy have been a feature of political life since the previous Labour Government (1997-2010).

In early 2010, Harvard’s Dani Rodrik declared that ‘industrial policy is back’, citing then-Prime Minister Gordon Brown’s openness to industrial strategy as “a vehicle for creating high-skill jobs”. In November 2012, then-Prime Minister David Cameron called for a “modern industrial strategy”; by September 2013, the Coalition Government was boasting that it had committed over £4 billion to industrial strategy, most of which was allocated through bidding rounds or invested in ‘skills’.

Time and time again, the same ideas have resurfaced, often prompted by lobbying from established businesses who stand to benefit from renewed political interest in providing material support to industry.

Previous industrial strategies have largely failed because they have asked the wrong questions; rather than trying to create an environment in which industry can flourish organically, they have tried to synthesise a Potemkin version of the imagined industrial landscapes of the early 20th century. They have been driven more by political considerations than by economic rationale. The scope of these strategies has consistently failed to encompass the root causes of the UK’s industrial decline, while the solutions offered have taken insufficient account of changing economic dynamics, both globally and domestically. 

Too often, the Government has tried to pick winners (and losers) and direct capital, making short-term investments in individual enterprises rather than long-term investments in the UK’s business landscape. Certain core issues - energy costs, planning, regulation - have been largely ignored, in favour of a misguided economic orthodoxy which argues that successful industrial development simply requires more capital investment, whether public or private. Decisions have been unduly shaped by second-order political priorities, such as regional inequality or climate policy, and by poorly-understood buzzwords, such as ‘skills’ and ‘data’. All too often, rent-seeking for established industrial businesses has driven funding allocation. 

It is an unassailable truth that the UK’s industrial economy has declined over the past few decades - but attempts to grapple with the core drivers of this decline have been few and far between. This failure has partly been driven by pervasive cultural-political narratives about industry. Too often, politicians have believed that reindustrialisation is a silver bullet, a straightforward way to address flagging productivity growth in the regions and win thousands of new voters in one fell swoop. For Conservatives in particular, industrial strategy and reindustrialisation prevent an attractive means to winning back disaffected voters in ‘Red Wall’ areas, many of whom are believed to distrust the Party due to Margaret Thatcher’s perceived role in 20th century deindustrialisation. According to 2019 polling conducted by YouGov, 34 percent of Britons believe that ‘overseeing the decline of mining and manufacturing’ was amongst Thatcher’s worst failings as Prime Minister.

Figure 4: Margaret Thatcher’s Greatest Failures, YouGov, May 3, 2019.

In fact, a sober consideration of Britain’s real industrial history demonstrates that attempts to direct industrial growth have typically failed miserably; our industrial economy has been at its strongest when it has been allowed to flourish organically, without reference to second-order political objectives. Despite what some commentators would have you believe, industrial strategy is not the remedy to Britain’s industrial decline - in fact, it almost certainly accelerated the process of decline in the first place.

III: A Brief History of British Industry

According to the prevailing cultural narrative, British deindustrialisation was set in train by Margaret Thatcher and her Conservative government (1979-1990). The narrative proceeds as follows: Thatcher’s Government withdrew support for flagship British manufacturers such as British Steel and British Leyland, and went to war with trade unionists who nobly tried to protect Britain’s industrial jobs. In some quarters, there is a belief that Thatcher and her government sought to reorder the British economy around the services industry for ideological reasons; in others, there is a belief that this process was largely a feature of globalisation and free trade, pursued fervently in the late 20th century and now regretted in the 21st.

Amongst most good-faith commentators, there is a broad acceptance that the status quo of the 1970s was unacceptable - but this acceptance is accompanied by a countervailing belief that the process of 20th century deindustrialisation was too deep, too sudden, and too harsh, damaging communities and unfairly punishing individuals employed in subsidised industries. Whoever is telling the story, the popular cultural understanding is that industrial decline was a deliberate policy aim, pursued in the late 20th century, and driven by a preference - whether pragmatic or ideological - for a more services-heavy economy.

In fact, the history of British industrial decline is far more complicated. 

Far from beginning in the late 20th century, Britain’s relative industrial decline arguably began in the late 19th. After the boom years of the mid-19th century, Britain’s annual GDP per capita growth slumped to little more than one percent between 1873 and 1899, slowing to 0.84 percent up to 1914. Total factor productivity growth fell by two thirds between 1871 and 1914. This broader economic slowdown was accompanied by creeping anxiety about the risk of falling behind the United States and Germany, particularly where heavy industry was concerned.

Figure 5: US and Great British GDP per Capita (2011 International Dollars), Maddison Project 2022 Data Set

In 1903, the English economist Alfred Marshall wrote that “sixty years ago, England had leadership in most branches of industry. It was inevitable that she should cede much to the great land [the United States] which attracts alert minds of all nations to sharpen their incentive and resourceful faculties by impact on one another. It was not inevitable that she should yield a little of it to that land of great industrial traditions which yoked science in the service of man with unrivalled energy [Germany]. It was not inevitable that she should lose so much of it as she has done.”

Marshall, like many of his contemporaries, believed that Britain’s relative industrial decline in the late 19th century was the result of entrepreneurial failure - the sons of manufacturers had simply failed to innovate in the way that their fathers once had. Others, such as John Maynard Keynes, argued that capital markets had allocated resources inefficiently, investing excessively overseas. In 1913, 32 percent of British wealth was invested in overseas assets, particularly in the railway and utility bonds of emerging markets like the United States and Argentina. More recent economic historians, such as David Landes, have concluded that British education was at fault - unlike the United States and Germany, the story goes, British education was elitist, conformist, and insufficiently adaptable.

Failure to innovate, inefficient capital investment, insufficient investment in skills - sound familiar? The explanations offered for Victorian Britain’s relative industrial decline mirror exactly those advanced by contemporary writers reflecting on the failure of British industry to renew itself in the wake of late 20th century deindustrialisation. 

In fact, these arguments have been roundly debunked. Writing in 1970’s ‘Did Victorian Britain Fail?’, the economic historian Deridre McCloskey hit back at the declinists. She demonstrated that financiers had no strong bias towards foreign investment (when taking into consideration dividends and returns), and that British firms did make efficient technical choices, with a competitive domestic market forcing out firms which failed to innovate. British education, meanwhile, was becoming more progressive and forward-facing rather than less, at the time of relative industrial decline; the Education Acts of 1870 and 1880 closed the primary education gap with the United States, and surpassed that of Germany. Britain had a flourishing system of apprenticeships and an expanding system of technical education.

So why did British industry lag behind the Germans and Americans? According to McCloskey, the answer was simple - by the early 20th century, industrial production was shifting to a system of vertically and horizontally integrated mass production, which suited the unique material endowments of the United States. Unlike Britain, the US had abundant natural resources and space, with reserves of petroleum, coal, iron, and copper which far outstripped those found in Britain. Even when accounting for Britain’s access to goods produced within the Empire, American production of these goods had outstripped British production by the end of the 19th century - and in any case, access to imported Imperial goods drove up production costs. However, despite the size and resources available to industrial businesses in the United States, the labour pool was relatively small, meaning that firms spent heavily on labour costs. 

Analysis from economic historian Gavin Wright identified that, by 1913, the US had a comparative advantage in resource-heavy manufacturing; it was the world’s biggest producer of natural gas, petroleum, copper, phosphate, coal, and iron by this time, and its production of secondary and tertiary goods was reliant upon extensive, often inefficient, use of these deep reserves. Wright argues that the combination of abundant natural resources and a large, growing domestic market made the United States uniquely well-suited to the mass production culture of the early 20th century.

Britain, meanwhile, had fewer natural resources and a more elastic supply of skilled workers; her industry specialised around skill-intensive sectors reliant on the flexible production of customised outputs, such as shipbuilding, which relied upon high levels of experience, training, and expertise. With the largest and most cutting-edge industrial firms now overseas, British firms were slower to incorporate new technologies, and the positive effects of agglomeration declined. 

The Great Depression was particularly punishing for British heavy industry. According to H.W. Richardson’s The Economic Significance of the Depression in Britain, Britain’s world trade fell by half between 1929 and 1933, while heavy industry fell by a third. From the beginning of 1929 until the end of 1930, unemployment had more than doubled, from 1 million to 2.5 million. 

But the effect of the depression was uneven. The flagship industrial areas of the late Victorian era were hit hardest; in 1933, 30 percent of Glaswegians were unemployed, due to a severe decline in the city’s shipbuilding industry. Stephen Constantine’s Social Conditions in Britain: 1918-1939 estimates an unemployment rate of more than 25 percent in coal-producing areas of South Wales.

The production of export-oriented goods like coal, textiles, and steel fell steeply; in 1935, coal production in Lancashire was 43 percent less than it had been in 1913. In South Wales, this decline was 38 percent, in County Durham 27 percent, and in Scotland 26 percent. Between 1929 and 1932, ship production in the north-east of England declined by 90 percent; this, in turn, impacted supply industries such as coal and steel. 

This severe industrial decline also provoked population decline, with cities across the north of England falling backwards from their early 20th century peaks. Liverpool’s population reached its zenith at the census of 1931, with 846,302 people living in the city. By 1961, the city’s population had fallen to 745,000. Changing population dynamics were prompted by a decline in demand for industrial labour, and government policy which aimed to clear the worst of the slums which had emerged in the urban areas of Victorian Britain.

The South and the Midlands, even in areas which relied upon industry, fared better. Industrial expansion in these areas focused on new developing industries, such as household electrical products and automobiles. The relatively strong performance of industry in these areas was also powered by a house-building boom which expanded the size of the available labour force in London and the south-east; the number of houses built by the private sector rose from 133,000 in 1931-32 to 293,000 in 1934-35, remaining steady until the Second World War.

Constantine estimates that, between 1932 and 1937, nearly half of all new factories that opened in Britain were in the Greater London area, as a result of both the city’s growing population and its increasing specialisation in robust, emergent industries. Cities with an established automotive manufacturing industry, such as Birmingham, Coventry, and Oxford, fared better than their northern counterparts, where production focused on more traditional industrial goods.

The Second World War prompted a complete reordering of the British industrial economy, around the needs of the wartime economy. In the post-war period, conceptions of British industry changed. In light of changes to the shape of the global economy, there was an acceptance in most quarters that British heavy industry and manufacturing should focus on quality rather than quantity. While Britain might not be able to compete with the sheer scale of American production, it had the capacity to produce high-quality, skill-intensive products in emergent industries. Combined with the formidable capital reserves of the City, and Britain’s prowess in other services industries such as shipping, British industry looked set for a modest revival.

Credit: Clement Attlee, 1945. Photo: Presumably Yousuf Karsh/ Wikimedia Commons/ Public domain

However, the acceptance of this new reality was complicated by politics, and particularly by the post-war Labour governments of Clement Attlee and Harold Wilson. The interventionist industrial strategies pursued by post-war Labour governments frustrated this revival. Instead, enormous resources were expended on sustaining failing, uncompetitive industries, and directing new development towards traditional industrial areas at the expense of emergent industrial centres.

To this end, the example of Birmingham is instructive; policy developments around the city’s mid-20th century growth tell the story of post-war British industrial policy in microcosm. As with other industrial centres mentioned previously in this essay, Birmingham grew rapidly, from just 8,000 people in 1700 to over a million in 1931. It was described by Harper’s Magazine in the 1890s as “the best-governed city in the world”, and by guidebooks of the 1930s as “the cradle of England’s industrial greatness.” Between 1923 and 1937, the city’s formal working population grew nearly twice as fast as the country as a whole, powered almost entirely by domestic migration.

The Greater Birmingham region was central to the Industrial Revolution, playing host to many of the period’s key innovations, including Watt and Boulton’s commercial steam engine. Between 1911 and 1954, the West Midlands grew its real output per person faster than any other region. Between 1954 and 1964, services businesses around Birmingham grew faster than in any other part of the country while in 1961, West Midlands households earned more on average than those in any other British region, including London and the South East.

Even as other industrial centres, in the North of England, South Wales, and Scotland, fell into decline, Birmingham remained strong. The city’s enduring success was partly driven by its adaptability, and its embrace of new industries. It was also driven by the city’s well-developed infrastructure, which included strong rail links to the rest of the country, and a developed network of canals.

Nearby cities in the Midlands fared similarly. A 1936 report from the League of Nations identified Leicester as the second-richest city in Europe, thanks to its diversified industrial base and lack of dependence on primary industries. Coventry was the fastest growing city anywhere in Britain from 1950 to 1965; in the 1930s, nearly two-fifths of its residents were from other parts of the country. In 1953, the city had an unemployment rate of just 0.8 percent. 

Yet the Attlee Government saw the success of the Midlands as damaging to other regions. In 1945, it passed the Distribution of Industry Act, which aimed to push industrial development away from ‘congested’ areas in the Midlands, East Anglia, and the South East, and towards declining ‘development areas’ in the North, Wales, and Scotland. The Government took charge of the management of industrial estates, and required that the site for any factory of a certain size should be decided on by the Board of Trade. 

Speaking in the debate on the Act, Walter Higgs (Conservative MP for Birmingham West) offered the following foresighted commentary: “We have recently had the experience of the aluminium industry being artificially diverted from the Midlands by the Board of Trade. It originally gravitated there because the machinery and the skill were there to produce what was wanted; diversion adds to the cost of production…the Bill may not have any detrimental effect immediately on such industries as we have in Birmingham and in the Midlands. That may come many years ahead. But we are probably sowing the seed for making them derelict areas in the future.”

In 1946, the Government commissioned the West Midlands Plan, which attempted to constrain Birmingham’s growth - local government was obliged to achieve a population target of 990,000, lower than the city’s actual 1951 population of 1,113,000. The Government was not only deliberately constraining the development of heavy industry in the city, but it was actively pursuing policies designed to make Birmingham shrink. 

In 1947, the Town and Country Planning Act created the ‘Industrial Development Certificates’ system. Companies were required to obtain an IDC if they wanted to expand any industrial plant beyond 5,000sq ft in size; this gave central government further control over where industry could and could not be built. It in essence nationalised new growth in the economy. All of these controls made it difficult to regenerate businesses, or to add new ones; the Midlands economy became less diverse, focusing heavily on the motor industry - in turn leaving it vulnerable to the economic downturn of the early 1980s.

Credit: The home of Fox's Glacier Mints, 2015. Photo: John Welford/ Wikimedia Commons/ CC BY-SA 2.0

High-profile cases of Westminster refusing to permit the development of new factories in the Midlands were many and varied. In 1960, the Board of Trade refused Fox’s Confectionery permission for a new glacier mints factory in Leicester; the firm had been based in Leicester since 1880, and aimed to replace its existing factory, which faced demolition due to the Government’s plans to construct a ring road. Justifying the decision to Parliament, John Rodgers MP, the Parliamentary Secretary to the Board of Trade, argued that the planned move “could well take place elsewhere” and that potential expansion in Leicester “might tip the balance in favour of this city from Fox’s other factory in Belfast.”

Rodgers also conceded that, by 1960, the Government received very few requests for IDCs in London and Birmingham, “as it is well known by now that these will not be granted, not even extensions, save in the most exceptional circumstances.” He concluded that “wild statements by the Leicester Chamber of Commerce that Board of Trade policy will soon turn Leicester into a distressed area are ridiculous.”

It is perhaps worth reiterating that Leicester was recorded as the second-richest city in Europe, in 1936. Today, its unemployment rate is nearly double the national average (6.7 percent versus 3.4 percent), gross disposable household income is 28.5 percent lower than the national average and gross median weekly pay is 19.7 percent lower than the national average. Fox’s finally closed their operations in Leicester in 2019.

A 1981 study concluded that the Certificates had failed to work as intended. Of the certificate applications refused by the Board of Trade, only 18 percent relocated to a ‘development area’. Half of the refused projects were just reduced in size to avoid IDC control, while 31 percent of refusals led to closure, reorganisation, or abandonment. For every job successfully relocated by the IDC scheme, several more were destroyed or prevented.

In 1964, Harold Wilson’s Labour government declared Birmingham’s continued growth “threatening”, and restricted the development of new office space in the city for almost two decades, through the Control of Office Development (Designation of Areas) Order 1965. In 1975, plans for the West Midlands Green Belt were finalised, stifling the city’s housing growth. After decades of success in Birmingham, successive governments had made it harder to build new factories, new housing, and new offices in Birmingham.

As a result, the city was more vulnerable than it would otherwise have been to global economic shocks. As the city’s economy began to struggle, the proposed solutions from the Labour Party’s leadership all involved spending more public money to keep the broken system operating without reform. In many circles, the economic liberalisation of the Thatcher years is blamed for Birmingham’s economic downturn in the 1980s - but this liberalisation process was made necessary by decades of policy which was designed to control or restrict industrial growth, propping up failing industries and preventing the emergence of new, organic industrial centres elsewhere in the country. Had businesses in the West Midlands been allowed to grow organically, adapting to changing conditions and maintaining the diversification that the region had enjoyed in the 1930s, Birmingham and its surrounding areas would have been more capable of responding to these processes of change. Instead, industrial strategy directed capital, labour, and growth elsewhere, motivated by political, cultural, and ideological drivers, thus leaving local economies dependent on subsidy and vulnerable to changing conditions.

Political anxiety about the deindustrialisation of the late 19th century prompted state intervention in the economy of the early 20th century, which made the eventual deindustrialisation of the late 20th century nearly inevitable. The fact that many of the same arguments about ‘bringing back jobs’ to old industrial centres are being made today should be a serious cause for concern; this is the core instinct which ultimately caused the deep decline of promising new industrial centres in the 20th century.

Many of the areas which suffered industrial decline in the late 20th century were already in decline by the 1920s and 30s; their economies had been artificially propped up by the Distribution of Industry Act and other measures, making their eventual decline harsher than it might otherwise have been. Without the Government’s artificial support for specific industries, local economies would undoubtedly have adapted and changed, as in the case of the Midlands. Instead, old industries were incentivised to continue producing inefficiently, while muscular trade unions resisted any attempt to change the status quo. Even if new industry had not emerged organically in traditional industrial hubs, a sufficiently flexible housing market would have enabled people to relocate to areas of new, organic industrial growth in the Midlands, South East, and East Anglia. The type and size of our industrial economy would undoubtedly have changed, but it would certainly have been more robust than it is today.

This attitude towards industry, which aimed to preserve the industrial economy of the late 19th century in amber despite changing global circumstances, was also reflected in the Government’s approach to nationalisation of key industries.

Photo: Birth of a Gun - the Production of a 25 Pounder Field Gun, 1942. Credit: Ministry of Information Photo Division Photographer, Jack Smith/ Wikimedia Commons/ Public domain

As mentioned previously, British mass production of steel was already in decline by the time of the Great Depression. Through the Iron & Steel Act 1949, the British steel industry was nationalised, with the Iron and Steel Corporation of Great Britain becoming the sole shareholder of eighty iron and steel companies. Companies which were not acquired by the Corporation were required to apply for a licence if they wished to produce more than 5,000 tons of product. This first attempt at nationalisation was reversed by the Conservative government of Winston Churchill (1951-55), with the government’s shares in all but one of the eighty firms reprivatised. 

Under Harold Wilson, British steelmaking was again nationalised, in July 1967. At the time of its formation, the British Steel Corporation comprised about ninety percent of the UK’s steelmaking capacity, employed around 268,500. Keeping employment high was one of the major aims of BSC; since the Corporation was a major employer in many of the ‘development areas’ earmarked for industrial development, the Wilson Government decided to keep many mills operating at a loss. Between 1975 and 1979, BSC did not turn a profit once; in the 1977-78 financial year, its losses amounted to £443 million - the equivalent of £2.53 billion in 2024. BSC was beset by plants operating below capacity, inefficient practices, outdated machinery, and price controls.

The same dynamics played out in terms of coal production (managed by the National Coal Board between 1946 and 1987), shipbuilding (managed by British Shipbuilders between 1977 and 1989), the automotive industry (part-managed by British Leyland between 1975 and 1986), and other such trades. The primary aim of these nationalised industries was to keep employment relatively high in areas which relied upon industries born out of the early Victorian wave of industrialisation, even if this meant providing expansive government subsidies to inefficient, loss-making factories. When the development of new industry elsewhere threatened to damage the long-term sustainability of these old enterprises, successive governments worked to divert that organic growth towards old industrial centres which had fallen fallow in the early 20th century. Had British industry been allowed to innovate, adapt, and compete, it might more readily have weathered the economic turbulence of the 20th century, reconstituting and strengthening itself.

The industrial strategy of the 20th century did not save British industry; it damned it. This should not come as a surprise. After all, Britain’s industrial heyday was not powered by an overbearing state. Instead, it was cheap energy, light-touch regulation, and the mobilisation of private capital that laid the foundations for early industrial growth. 

It would be ill-advised at this stage to embark on a comprehensive analysis of why the Industrial Revolution of the 18th and 19th centuries began in Britain; doing so would require multifaceted study of numerous historical factors, which is well beyond the scope of this essay. Nevertheless, it is useful to consider some of the major drivers behind British industrialisation; understanding the foundations of British industry can enable us to think more intelligently about how to build its future.

The Industrial Revolution in Britain was a response, in part, to the economic and social conditions of the 17th and 18th centuries. Though estimates differ, almost all historians agree that Britain’s population was growing rapidly by the early 18th century. In England, population had actually fallen in the preceding centuries - from around 4.8 million in 1348 to 4.1 million in 1600, according to Broadberry et al’s analysis of English Medieval Population (2010). This had risen to 5.18 million by 1695, growing to 6.2 million by 1751, and eventually to 8.21 million in 1791.

This population wasn’t just growing; more importantly, it was urbanising. According to E.A. Wrigley, the urban population of England expanded rapidly between the 17th century and the 19th, both in absolute terms and in terms of the proportion of the population which lived in cities or towns of more than 5,000 people. In 1670, just 13.5 percent of the population lived in such settlements, growing to 17 percent in 1700, 21 percent in 1750, 27.5 percent in 1801, and 43.5 percent in 1851. 

Figure 6: Towns and populations between 1680-1830. Population data from Langton (2001), geo-coded by Satchel et al (2017). Found in Alvarez-Palau et al (2020) (Preliminary draft).

The factors driving this urbanisation were many and varied. The ‘British Agricultural Revolution’ was one contributing factor - from the mid 17th century until the 19th, British agriculture became significantly more efficient, thanks to a number of innovations such as Norfolk four-course crop rotation, the gradual process of Enclosure, and access to improved technology, such as the heavy mould-board iron plough, acquired via trade. In 1600, the total arable land in use in England amounted to some 8.87 million acres; by 1800, it had increased to 11.52 million acres, an increase of 23 percent. Over the same period, wheat yields increased by 70 percent, rye yields increased by 57 percent, and oat yields increased by 117 percent. The efficiencies made in agricultural production reduced the demand for agricultural labour, pushing people away from the rural economy and into cities. Those who did not urbanise found employment in ‘cottage industries’, an expanding sector of the economy focused on low-level production of simple secondary goods, such as cloth.

By this time, England - later Britain - was also one of the world’s foremost trading powers; entrepreneurs and adventurers had expanded the reach of British commerce across the globe. The downstream job creation of this trade - in trades such as dock-working and shipping - drew both capital and labour to port cities like London; it also provided a route through which the produce of the ‘cottage industries’ could be exported. Growing urban markets made it easier for merchants to sell their goods domestically, thus expanding their capital reserves. 

When the process of industrialisation began in earnest, this urbanisation loop was self-fulfilling; as more people migrated to the cities, the cities could sustain more factories and mills, and thus more people migrated to the cities.

Credit: Sketch showing a steam engine designed by Boulton & Watt, England, 1784. Photo: Robert Henry Thurston/ Wikimedia Commons/ Public Domain

All of these economic and social factors created a high-wage economy; by 1725, real wages in London had surpassed those in Amsterdam, previously the most obvious example of a high-wage economy in Northern Europe. As a result, businesses and merchants invested in productivity-enhancing technologies which could reduce their demand for labour. In the 1740s, Scottish inventor Andrew Gordon produced the first electrostatic motors. In 1765, James Hargreaves invented the ‘spinning jenny’, a multi-spindle spinning frame which allowed more threads and yarns to be produced by fewer textile workers. The Watt steam engine was conceived around the same time, and was first produced in around 1776. Crompton’s spinning mule was invented in 1779, and Andrew Meikle’s threshing machine designed in 1786. All of these innovations were born in high-wage, high-capital Britain, and were designed to reduce demand for labour, or else improve productivity. French engineer Emile Levassor once estimated that the horsepower produced by a Watt steam engine was equivalent to that delivered by 21 manual workers; by 1870, steam power in Britain was delivering the horsepower equivalent of 43 million manual workers.

Even with these favourable foundations, which provided both means and incentive to industrialise, Britain’s industrial economy was not an inevitability; similar socioeconomic conditions existed in the Low Countries. The secret to Britain’s success was cheap energy, which ensured that industrial production costs remained low. 

In particular, the availability of coal in Britain drove rapid industrial expansion, particularly in the production of primary goods such as iron. Iron production stood at around 2,500 tonnes per annum in the 1770s, growing to 28,000 tonnes per annum by the 1750s, 180,000 tonnes per annum in 1800 and 2.5 million tonnes per annum in 1850. This remarkable expansion was powered almost entirely by coal. From 1700-1709, about 50 percent of Britain’s annual per head energy consumption was powered by coal; by 1800, this had risen to 79 percent. In absolute terms, energy consumption per capita rose by 77 percent over this period.

Figure 7: Annual energy consumption per head in England and Wales, 1561-1859, Wrigley (2013)

According to estimates produced by E.A. Wrigley, had Britain’s iron industry instead been powered by a higher-cost, lower-yield fuel such as charcoal, iron production in 1850 could only have amounted to 1.25 million tonnes per annum at best, around half of the actual figure at that time. Cheap energy allowed British industry to grow despite high wages, and powered the productivity-enhancing technologies which allowed industrial output to expand rapidly. 

A combination of high wages, cheap energy, available capital, and rapid urbanisation created an environment in which industry thrived. Capital investment in cost-saving mechanisation and productivity-enhancing technologies was made possible by the merchant wealth of Britain’s expanding overseas trade. 

Capital and cheap energy were substituted for labour, while the expansion of the commercial economy also increased demand for literacy and numeracy amongst the population, generating a skilled workforce capable of performing labour which was two or three steps abstracted from primary production. By the late 18th century, Britain was significantly more industrialised than its peers; in the late 1780s, over 20,000 ‘spinning jennies’ were in use in England, while just 900 were in use in France. Attempts to replace the success of British industry in countries with higher energy costs - such as France - failed miserably, with government-sponsored ironworks in Burgundy proving commercially infeasible due to the relatively high cost of coal.

In comparison to countries such as France, where the state aimed to lead the development of industry, successive governments largely took a laissez-faire approach to this process of industrial growth. The role of the state in industrialisation was as a facilitator, working with the private sector to make the national economic environment more conducive to the success of our industrial economy - including through the construction of major infrastructure projects. Monetary policy and interest rates also contributed towards efficient capital allocation - between 1694 and 1800, interest rates never exceeded 6 percent, nor did they dip below 3 percent, providing a predictable financial landscape for savers and borrowers. In the mid-18th century, British interest rates remained consistently lower than those in France, Spain, Portugal, and the Ottoman Empire, though they tended to be higher than those in the Netherlands.

Figure 8: Adapted from ‘Map 1: The British railway network by the end of 1836 and 1837’ & ‘Map 10: The British railway network by the end of 1901 and 1911’: Found in Shaw-Taylor and You (2018)

In 1846, Parliament authorised 9,500 miles of railway, through 263 Acts of Parliament. These railways were not constructed by the state, but by the private sector - companies need only submit a request to Parliament which outlined the route of the proposed railway. A total of 6,220 miles of railway line were built as a result of projects authorised between 1844 and 1846 - by comparison, the total length of the modern UK railway network is around 11,000 miles. By way of reference, the High Speed 2 line between London and Birmingham comprises some 140 miles.

Around a third of the lines approved in 1846 were not built; in late 1845, the Bank of England increased interest rates, leading many speculators to re-invest in bonds. Capital investment flowed away from railways, leaving many companies without funding. Larger companies, such as the Great Western Railway and the Midland Railway began to buy up these failed lines, creating the basis for Britain’s pre-Grouping Act railway network. Over just a few short years, Parliament had enabled private companies to deliver thousands of miles of new railway lines, connecting major urban centres and fuelling the process of industrialisation. 

Crucially, governments also did not try to direct industry towards established centres of economic activity - in fact, Britain’s economic geography changed at an incredible pace in the 18th, 19th, and 20th centuries. 

According to W.G. Hoskins’ Local History in England, in 1662, Norwich was England’s second largest city, with York in third, and Bristol in fourth. A striking number of the country’s largest settlements were in the country’s low-lying east, with Great Yarmouth recorded as the eighth-largest settlement in the country. By the census of 1861, this picture was entirely different - London had grown from some 350,000 people to a mega-city of 2.8 million. Liverpool, Manchester, Birmingham, and Leeds rounded out the top five settlements by population. Boasting a population of more than half a million in 1881, Liverpool had been home to just 80,000 people in 1801, and about 6,000 people in 1700.

Credit: Cyril Street, Consett, 2007. Photo: Pauline Eccles/ Wikimedia Commons/ CC BY-SA 2.0 

Many of these communities emerged rapidly, and in response to particular economic moments. The town of Consett, in County Durham, is a useful microcosm of the development of British industrial communities.

In 1841, Consett was a village community of just 145 people; the town’s population peaked in the 1960s, reaching approximately 39,000. In 2021, it had a population of 29,885. Consett’s population boom was driven by natural resource extraction. The Derwent Valley, in which Consett is set, is home to coking coal and blackband iron ore, with limestone nearby; together, these three ingredients constituted the basis of blast furnace steel production. The Consett Iron Company was established in 1864, a successor to the Derwent Iron Company of 1840; for the next one hundred and forty years, steel dominated Consett’s economy. In 1896, a railway line to the town was opened by the North Eastern Railway, a private company.

As in other areas where industry was focused on the production of primary goods, Consett was hit hard by the Great Depression; across County Durham, more than 30 percent of the workforce was unemployed in the early 1930s. Palmers’ Shipbuilding and Iron Company, which operated in nearby Jarrow and which relied on Consett steel, collapsed in 1933. Under the post-war Attlee governments, coal and iron production was nationalised, preventing any process of innovation and adaptation. According to Tony Kearney’s A Social History of Consett, the Consett steel works employed 6,000 workers at their peak in the 1960s; when British Steel Company was privatised, and began to rationalise its production, unemployment in the town jumped to some 35 percent, with 3,000 to 4,000 jobs lost as a result of closures. 

Britain’s industrialisation changed the country’s economic geography, and governments made little effort to direct the population towards established centres of economic activity. People migrated internally to where the jobs were - and houses were constructed to accommodate them. It was only during and following the process of deindustrialisation that we developed our existing presumption towards maintaining communities at their current size - there is a widespread culturally-ingrained anxiety about shifting economic geography, which is often focused on communities which were themselves the product of the changing economic landscape of the past hundred years.

This lesson should be borne in mind when shaping our modern approach to industry - we should not expect the industrial hubs of the 21st century to be in the same places as those of the 19th or 20th centuries. Our economy must be sufficiently flexible to allow labour to migrate to emergent centres of economic activity - particularly if, as recommended in our recent ‘Selecting The Best’ paper, the UK is also to reduce its dependence on overseas labour. That means creating a housing system which can respond quickly and flexibly to changes in demand - and it also means accepting that changing economic geography is a natural and healthy process. We should be relaxed about the idea that certain communities will grow while others will shrink; niches will change, and regional identities will adapt. The British state should not aim to sustain the size or shape of communities as they were in 1950, or even as they were in 2000; we should be comfortable with a process of natural and organic change, one which allows people to seek prosperity where it emerges naturally, rather than trying to engage in the Sisyphean process of subsidising growth where growth cannot naturally emerge. By embracing this process of organic change, we improve life for all involved - individuals and families are enabled to make decisions about their own lifestyles, communities more accurately reflect underlying material realities, and our economy becomes more efficient and more productive, providing more high-quality, high-wage employment.

Credit: The Museum of Science and Industry Power Hall, 2016. Picture: David Dixon/ CC BY-SA 2.0/ Geograph Britain and Ireland

Nor should we expect to be able to replicate the scale or style of Britain’s 19th and 20th century industrial prowess. Britain is not, and cannot be, the only industrialised nation on Earth, and nor can it draw automatically on the vast resources of overseas colonies in order to power industrial output in the metropole. As with the United States in the late 19th century, and again with China in the late 20th century, the mass production capacity of emergent economies such as India and Indonesia will further dilute the ability of British industry to compete in terms of quantity. Nevertheless, as in the early 20th century, it is possible for Britain to carve out a position as a source of high-quality, skill-intensive advanced manufacturing - but to do so, it must remain at the cutting edge of technical innovation, and reduce barriers to entry for firms looking to experiment with new methods and products.

Those who argue that British deindustrialisation was the product of liberalism are historically illiterate  - British industrialisation was the product of relative economic liberalism, and deindustrialisation was largely the result of changing global economic dynamics, worsened by failed state intervention. For decades, inefficient - or obsolete - industries were kept alive by expensive subsidies which stifled productivity growth. The state’s efforts to allocate capital and resources ‘more effectively’ actually resulted in the decline of major industrial centres, such as Birmingham. 

Then as now, a successful British industrial economy relies on the provision of cheap energy and the reliable supply of resource inputs - today, many of these inputs will need to be secured from abroad. Then as now, we must make it easy for our industrial economy to adapt, grow, and innovate, through light-touch regulation and liberal planning rules. Then as now, a successful British industrial economy should not aim to compete with mass production centres such as China and the United States; instead, it should aim to promote a high-quality, skill-intensive industrial economy, which focuses on quality rather than quantity. 

Government attempts to ‘pick winners’ and drive growth to particular areas for political expediency are unlikely to succeed; instead, policy should aim to create the conditions for industrial organic regrowth, and celebrate the emergence of this growth wherever it arises. As a country, our housing market should be sufficiently elastic as to allow emergent industries to benefit from the workforce that it needs, enabling people to move to growth areas - even if this means a reduction in the population of more traditional industrial hubs.

These fundamental historical lessons should be the building blocks of a 21st century approach to industry. Though the means of achieving these conditions are now different, the same basic conditions are necessary to power sustainable industrial growth today.

IV: Lessons From Abroad

But perhaps we ought not to be bound by our own history.  

After all, proponents of industrial strategy often point to overseas successes as proof that a more muscular state is necessary to drive growth in the industrial sector. Examples such as Germany, South Korea, and Singapore are often held up as shining examples of how governments can lead industrial development, providing high-quality jobs and robust economic growth in the process. It would be remiss not to consider the most high-profile and oft-referenced cases of successful industrial strategy abroad, in order to address the strongest arguments advanced by the pro-industrial strategy crowd.

In reality, the picture is not so straightforward. Discussions of successful industrial strategy generally display a high degree of ‘survivorship bias’ - in other words, conversation tends to focus on the few examples in which state policy appears to have enhanced industrial output, rather than on the many examples in which state policy stifled or failed to stimulate material improvements to industry. Few discussions on industrial strategy account for cases such as the Brazilian shipbuilding industry, which has been heavily coordinated by central government since its inception, and which has repeatedly failed to maintain commercial viability. Likewise in countries such as India, industrial strategy failed to stimulate competitive and profitable industry for decades, as explored in works such as Vivek Chibber’s Locked In Place.

Nor do industrial strategy advocates typically give sufficient weight to non-British examples of successful market-led industrial growth. Following the end of communism in 1989, Poland’s industrial economy has become more efficient and competitive in the absence of state direction. In the 1980s, some 30 percent of Polish steel remained in steel plants as waste. While German manufacturing has shrunk from 20.3 percent of economic output to 18.5 percent between 2012 and 2022, Polish manufacturing has grown from 16.7 percent of GDP to 17.7 percent, with output increasing from $101 billion in 2019 to $122 billion in 2022. The country is the second-largest battery producer in the world, after China. Polish industrial growth has not been powered by state-led industrial strategy, but by the rigours and flexibility of a market economy. Government support for industry has largely been focused on the construction of infrastructure, both transport and energy - though in the latter case, government policy involved undue reliance on Russian gas, supply of which has been interrupted since the Russian invasion of Ukraine in February 2022.

Often, advocates of a more interventionist industrial strategy point to Western European countries, such as France or Germany, as an example of how Britain might have deindustrialised more gently in the 1980s; oft-cited is the figure that, while one-third of manufacturing jobs in Britain were lost during the deindustrialisation of the 1980s, this figure stands at between 10 and 13 percent in countries such as Germany and France. This argument for ‘sympathetic deindustrialisation’ ignores the crucial context of Britain’s post-war political settlement - while industry elsewhere in Europe was forced to compete on international markets with produce from the United States and, eventually, China, British industry was shielded from competition by the interventionist industrial policies of successive post-war governments. The German post-war economic miracle, during which the country emerged as a leading manufacturer of goods such as automobiles, was powered by a completely different economic doctrine, one which embraced elements of economic liberalism. 

Credit: Ludwig Erhard with his book, 1957. Photo: Adrian Doris/ Bundesarchiv, B 145 Bild-F004204-0003 /Wikimedia Commons/ CC-BY-SA 3.0, CC BY-SA 3.0 DE 

Under Minister of Economics Ludwig Erhard, corporation tax was reformed from a variable rate of 35 to 65 percent, to a flat rate of 50 percent. On income tax, Erhard reduced the marginal tax rate for an average earner from 85 percent to just 18 percent, and abolished all price controls across the economy. Despite the fact that the Allies had deliberately dismantled West German capacity to produce coal and steel, the German industrial economy rebounded, with Marshall Plan aid redirected to infrastructure rather than subsidy. Erhard’s market interventions were focused on ensuring that Germany’s market economy worked on its own terms; the role of the state was as umpire, but not as player. 

It is worthwhile reflecting on the fact that, despite Germany’s oft-vaunted position as the industrial heart of the European economy, the country’s manufacturing sector has suffered considerably in recent years. Notwithstanding significant investment from the German government in reinvigorating the country’s industrial base, industrial production in the country has fallen since 2021, particularly in energy-intensive industries such as chemical production, metalworking, and paper manufacturing. This decline cannot be blamed on economic liberalism; it would be difficult to argue that German industry had become significantly less-subsidised and less-regulated in previous decades. In November 2020, for example, the German government provided a 3 billion Euro subsidy for the country’s car industry, designed to protect at-risk jobs. In 2019, Economy Minister Peter Altmaier announced plans to provide ‘special support’ for ‘strategic industries’ such as cars, machine engineering, medical devices, green technologies, and aerospace. National Industrial Strategy 2030 called for a ‘new role of the state’, explicitly justifying state aid for industry and arguing for relaxation of EU rules around nationalisation and partial-nationalisation of companies. Despite these steps, German industrial output remains below its pre-Pandemic levels; advocates of industrial strategy should not look to post-war Germany as an example of successful industrial strategy.

The strongest examples provided are those from the post-war ‘Asian Tiger’ economies - Taiwan, South Korea, and Singapore. In 2021, Choi and Levchenko concluded that South Korea was the standout case for “when industrial policy worked”, arguing that activist industrial policy appears to have succeeded in the country, with heavy temporary subsidies having a statistically significant effect on both overall industrial output and exports. Choi and Levchenko focus on the Heavy and Chemical Industry (HCI) Drive between 1973 and 1979, arguing that policies such as the Foreign Capital Inducement Act (FCIA) were successful in allocating foreign credit to HCI businesses. FCIA strictly regulated the direct financial transactions between Korean firms and foreign firms, strictly regulating the ability of domestic firms to borrow from abroad. Once firms were granted permission to borrow, the Korean government guaranteed the loan, allowing specific firms to borrow at more favourable interest rates. According to Choi and Levchenko’s analysis, a firm receiving subsidy between 1973 and 1979 had a 919 percent larger sales growth between 1982 and 2009, amounting to an 8.6 percent higher annual growth rate.

Even if we concede that industrial policy proved successful in East Asia’s 20th century industrialisation, we need not accept that such policies would work in Britain, circa 2024. For one, approaches to the distinction between public and private sector differ considerably between East Asia and the West; we must also bear in mind that, when these policies were designed, the Asian Tiger economies were undergoing a process of initial development and industrialisation. Upon initiating the HCI Drive, South Korea’s GDP per capita stood at $406, roughly equivalent to modern day Afghanistan. Upon the launch of its ‘Second Industrial Revolution’ plan in 1979, Singapore’s GDP per capita stood at $3,900, roughly equivalent to modern day Bolivia. We should not assume that these policies would be similarly effective in a developed country with established patterns of economic activity and capital flow. 

However, we need not make this concession. Most other analysts agree that the policy was successful on its own terms, driving foreign capital towards specific firms in specific parts of the country. However, there are numerous downsides associated with this approach. Research conducted by Munseob Lee identified that misallocation of capital and labour within targeted industries and regions fell significantly following the reversal of the HCI Drive in 1979, but that misallocation still remained above its pre-policy level; Korean industrial policy increased the size of chosen sectors, but at the expense of a rise in concentration within those sectors. Large business groups, known as chaebols, and their cross-subsidisation practices, were the main culprits behind this misallocation; in other words, large companies used subsidies inefficiently to maintain their own position, at the expense of the economy as  a whole. As a result, total factor productivity of targeted industries and regions did not increase significantly, even if the overall size of the industrial economy in this respect did. This is a symptom of low allocative efficiency, and is part-and-parcel of many industrial strategies. Indeed - Ludwig von Mises and Friedrich Hayek proved that allocative inefficiency was core to the Socialist Calculation missions set up by the Soviet Union, an off-shoot of the same economic planning put forward by modern proponents.

Credit: Ministry of Trade, Industry and Energy(South Korea), 2014. Photo: Minseong Kim/ Wikimedia Commons/ CC BY-SA 4.0

Post-HCI Drive, successive Korean governments have worked to prop up the country’s smaller firms through interventions such as a reduced tax rate, more generous investment tax credits, and bespoke small business support programs. The preference for small firms over continued support for chaebols is largely political in character, an attempt to correct course in the wake of the HCI Drive - but analysis indicates that this reallocation of subsidy has had a negative impact on productivity growth in the country. Productivity growth in Korea from 2010 to 2019 was less than half the rate seen from 2001 to 2010; according to analysis conducted by the Asian Development Bank, small Korean firms with five to forty-nine workers were just 22 percent as productive as firms with over 200 workers. Korean industrial policy has moved from a position in which considerable subsidy kick-started short-term growth amongst a small number of large companies, to a position in which subsidy for small companies is damaging productivity growth across the economy. 

Even in the best case scenario, in which a government expends enormous resources to support specific firms in appropriate sectors and regions, industrial growth is made less efficient and less sustainable by significant state intervention. Similar dynamics are at play in Singapore, oft-cited as an example of how central planning can drive industrial development. In his seminal research on this subject, ‘What can industrial policy do? Evidence from Singapore’, ASI Fellow Dr Bryan Cheang concludes that Singapore’s state-heavy development has limited the adaptive potential of Singapore’s economy, and damaged industrial innovation. In his analysis, Cheang demonstrates that Singapore’s total factor productivity growth since the institution of the 1979 ‘Second Industrial Revolution’ plan lagged behind competitors such as Hong Kong, in part due to a policy of central wage-setting. South Korea and Singapore are the ‘best-case’ scenarios for state-led industrial strategy - and still, both case studies are associated with significant downsides.

It is impossible to know which sectors of Korean industry would have flourished with a more laissez-faire approach, and it is further impossible to know whether more competitive challengers might have improved upon the model of established corporations. We should not assume that the British state would be as effective as the Korean state of the 1970s at choosing regions and industries most suitable for subsidy and investment; we should also not assume that these policies would be successful in a developed economy such as Britain, given that they were designed for a developing economy with less entrenched patterns of economic activity. It is worth noting, for posterity, that year-on-year industrial production in South Korea fell by 8 percent between July 2022 and July 2023, a slowdown which has continued into 2024.

V: Building A Modern Industrial Economy

None of this is to say that the UK cannot, or should not, become an economy with greater industrial output, both in absolute terms and in relative terms. If policymakers wish to achieve this, they should start by understanding the root causes of industrial growth and decline; their efforts should be focused on laying the foundations for a successful industrial economy, rather than on trying to create such an economy whole-cloth.

These efforts should be informed by an empirical analysis of the history of British industry - but this analysis must focus on the real history of industry in Britain and elsewhere, rather than on the imagined history which often dominates our collective cultural imagination.

Credit: An aerial view of the old city centre of Oxford, England, 2009. Photo: SirMetal/ Wikimedia Commons/ Public Domain

The UK has a number of natural advantages which, if allowed to flourish, make the country well-suited to industrial growth. In large parts of the country, settlement patterns and infrastructure are designed to support a productive industrial economy. The country has high-quality research institutions, particularly in the ‘golden triangle’ of Oxford, Cambridge, and London. London itself has deep reserves of both financial and human capital, which can aid in the growth and management of new industrial enterprises; compared with our European neighbours, we remain a relatively attractive destination for foreign direct investment and, post-Brexit, could choose to exercise a degree of regulatory flexibility and adaptability which would prove difficult for states beholden to EU regulation. The UK also has a small but significant number of high-profile industrial successes, such as Rolls-Royce, Airbus, Dyson, and Renishaw.

So what, in practice, should the UK do to improve its industrial economy?

In the first instance, the UK should not try to ape the strategies pursued by the United States, China, or the European Union. In terms of both scale and composition, these economies are not useful points of comparison. The sheer size of these markets means that governments can afford to bear the short-to-medium-term costs of protectionism; at the same time, the diversity of resources and local economic specialisms accessible in these economic blocs makes it easier to design vertically-integrated industrial systems. The UK, by comparison, has neither the domestic market scale nor the access to resources needed to copy Washington, Beijing, or Brussels. Even a highly successful UK industrial economy would rely on specialisation and the import of certain input resources from abroad; it is not possible to pursue a policy of inefficient, protectionist autarky in a country such as the UK. If the story of late 19th century deindustrialisation is to teach us anything, it must teach us that Britain is not an economy designed for industrial mass production - but, as occurred in the case of automotive and electronic manufacturing growth in the early 20th century, it can maintain an industrial economy of some scale by adapting, specialising, and innovating.

Another key barrier to imitating these comprehensive industrial strategies is cost. At a time when fiscal headroom is tight, the UK should not try to imitate the kind of big-ticket investments seen elsewhere - the American CHIPS and Science Act, designed to onshore semiconductor supply chains, involved an upfront investment of $53 billion. The Inflation Reduction Act, much of which focuses on industrial protectionism, contains $500 billion in subsidy and tax relief commitments. 

Fortunately, if policymakers are serious about supporting organic, private-sector led industrial growth in the UK, most of the policies needed to do so are cost-free. Those policies which are not cost-free are generally growth-generating; in other words, they provide a significant return on investment, for a relatively modest fee.

Any attempt to increase the UK’s industrial output must first address the fact that the UK has the highest industrial energy prices in the developed world. Over the past five years, the cost of energy for industrial businesses has increased by 124 percent; British industrial energy costs are about 50 percent higher than in France and Germany, and around four times higher than in the United States. Total costs for steel producers are 33 percent higher in Britain than in Germany, and about 52 percent higher than in France. For an energy-intensive industry such as steel production, energy costs are one of the key determinants of price and competitiveness - and, as in the case of French ironmaking in the 1780s, British steelmaking is failing to remain competitive thanks to higher costs. It should come as no surprise, therefore, that traditional steelmaking in Port Talbot came to an end in September 2024. Looking ahead, the UK should expect to be left behind in cutting-edge fields such as artificial intelligence, if it cannot address these sky-high energy costs; energy demand for the physical infrastructure which underpins AI, such as data centres, is poised to grow rapidly in coming years, with National Grid predicting that data centre power usage will increase six-fold over the next decade. If it cannot provide cheap energy for businesses, the UK will be left behind.

Figure 9: UK Industrial Fuel Price since 1996

Figure 10: UK position in International Energy Agency rankings (out of 31)

Just as the industrial growth of the 18th and 19th centuries was powered by cheap energy, so must a modern British industrial economy be. Reaching this position will require a complex and multifaceted process of revising our energy policy - revisiting plans to decarbonise the economy (which provide a direct disincentive to industrial growth), allowing much faster modernisation of our outdated grid infrastructure, and removing blockers to domestic production. In the long-term, there is a strong case for supporting the expansion of nuclear-energy in the UK, which would allow for consistent domestic production of energy, with relatively low post-construction costs and relatively low space requirements. 

In the short-term, ending the Government’s recently-imposed freeze on new North Sea oil and gas licences, and lifting restrictions on shale-gas fracking, would allow for an injection of cheap energy into our ailing industrial economy; with an expedited process of review and approval, fracking could begin within six to nine months of the publication of a new UK industrial strategy, providing an immediate injection of low-cost energy for the UK economy.

In the same vein, there can be no sustainable British industrial growth without reform of our planning system; indeed, a large part of unpicking the UK’s high energy prices would involve a revision of planning laws which allowed for energy infrastructure to be built more quickly. Indeed, one of the main reasons for the high-construction costs associated with nuclear energy in Britain are the cumbersome planning permission and regulatory compliance burdens imposed by the state. Even in the past decade, this burden has risen significantly; Sizewell C’s planning application was more than four times as long as Hinkley Point C’s, despite the two projects constituting a similar size and scale. The page count for Sizewell’s environmental impact assessment was also significantly longer than Hinkley’s; 44,260 pages compared to 31,401. This is by no means an inevitability; nuclear construction costs in South Korea are approximately 21 percent of those in Britain. 

Planning is not merely about energy infrastructure, though. Planning delays and other compliance costs are a major cost sink for transport infrastructure projects, such as railways, roads, and urban transit systems, which could help to connect new industrial centres to one another. Planning restrictions often prevent the construction of new factories altogether, or drive up costs by gating permission behind reviews, surveys, and compliance reports. Planning restrictions also prevent labour mobility, stopping the UK’s economic geography from adapting to new market signals - and thus preventing the kind of shifts in population dynamic which made industrialisation possible in the first place.

This latter point is critical to the process of 21st century reindustrialisation, if such a process is to take place. Given the falling fertility rates and shrinking populations that most Western countries expect to see in the coming decades, it seems extremely unlikely that a 21st century industrial revival will be powered by a population boom similar to that which drove the industrialisation of the 18th and 19th centuries. However, two factors are worthy of consideration in this regard.

First, a more flexible housing market would allow our existing population to organically move to those areas in which industrial jobs are available, recreating one of the key features of industrialisation which is common to all historical examples. The population might not grow, but it could certainly concentrate itself in a manner conducive to industrialisation. Secondly, a shrinking workforce - particularly in a low-migration environment - is likely to drive up wages, as the supply of labour shrinks relative to the demand for labour. As in the 18th and 19th centuries, high wages could serve as a catalyst for investment into new technologies and innovations which improve workforce productivity and reduce the overall demand for labour across the economy - whether through the expansion of high-end advanced manufacturing, the proliferation of mechanisation in the services sector, or increased use of artificial intelligence.

Figure 11: Total Fertility Rate (1938-2022), ONS

Planning rules should be reviewed altogether, stripping compliance requirements to the bare minimum - particularly for new energy infrastructure, new transport infrastructure, and new commercial or industrial space. Current planning rules are de facto a form of state planning and form the basis of an invisible and destructive industrial strategy focussed on degrowth. Similarly, the British regulatory system requires significant reform, in order to enable and encourage investment in innovative new technologies; if it wants to succeed as an industrial economy, the UK must be an attractive place to trial and test new productivity-enhancing and labour-reducing technologies. In the short-term, ministers should work to directly intervene against regulatory decisions which stifle innovation or slow the process of technology adoption; in the long-term, the Government should undertake a review of the UK’s broader regulatory infrastructure, bringing more power ‘in-house’ to Departments and scrapping arms-length bodies with a record of stifling innovation. For those looking to understand why private investment in the British economy has been so sluggish in recent decades, look no further than a sclerotic planning system which creates costs and delays, and a conservative regulatory environment which forces innovative technologies to undergo expensive and cumbersome compliance processes. 

Thus far, none of the recommendations made involve any direct spending implications for Government - and yet collectively, they would set the stage for an organic revitalisation of British industry. Where the government does choose to allocate capital, it should focus on improving the UK’s attractiveness as a business and investment destination, instead of choosing particular businesses to support. Physical infrastructure is the most obvious example of growth-creating investment - particularly in terms of transport, but also in terms of broadband. These investments should be led by demand rather than trying to create it, focusing on areas where population growth is already happening and identifying projects with a high return-on-investment, calculated by reference to the second-order growth effects of any given project.

By comparison, grant schemes which aim to ‘pick winners’ by investing in particular businesses are a remarkably inefficient long-term investment. The information problem for governments which aim to identify sectors suitable for subsidy is well-documented; for every South Korean-style success, there are ten Brazilian or Indian-style failures. Even if the government is successful in directing its subsidies towards industrial businesses which are commercially viable, it risks creating a class of businesses which depend upon subsidy, or which do not need subsidy but nevertheless seek it. In a system of sufficiently cheap energy, sufficiently light regulation and sufficiently relaxed planning rules, we should be comfortable with the idea that industrial businesses will succeed or fail based on their merits; we should not aim to predict the industries in which the UK might excel. 

However, this does not preclude the potential for close collaboration between the Government and the UK’s leading industrial businesses. There is also a strong case for closer public-private collaboration on major infrastructure projects, particularly those with upstream national security implications - yet, when deciding which businesses to collaborate with, the Government should not be shy about choosing businesses with a proven record of success. Instead of spending time on expensive, lengthy, and opaque tendering processes, thinly spreading millions of pounds across a large number of small businesses, the process of determining which businesses are most suitable for partnership should be informed primarily or exclusively by market signals. 

Credit: Royal Navy off-shore patrol ship HMS Trent arriving in Ukraine to assist with maritime training, 2021. Photo: Ministry of Defence/ Wikimedia Commons/ OGL v1.0OGL v1.0

Thus far, this essay’s prescriptions have focused primarily on necessary domestic reforms. Naturally, a larger industrial economy has implications for the UK’s foreign, trade, and defence policy, too. Successful industrial economies rely upon diverse resource inputs; many of the resource inputs are not found natively in the UK. There are no active copper or lithium mines in Britain; both of these minerals are critical to modern manufacturing. While the United States, China, and the European Union can afford to increase material input costs through protectionist trade wars, Britain cannot - certainly not without retreating into a position of inefficient subsistence production.

If we are to accept that the UK cannot adopt another policy of self-destructive autarky, then we must also accept that the UK must become far more muscular in the protection of its interests overseas. For an economy that is dependent upon imports from states, even other friendly states, protecting the continued flow of international trade is a must; that means keeping key sea trade lanes open with a larger military presence, working in tandem with other states which stand to lose from interruptions to global trade. Fortunately, Britain is not alone in its position as a medium-sized economy that stands to lose from supply chain disruptions - countries such as Japan, Australia, Canada, Malaysia, Singapore, and the United Arab Emirates face similar long-term challenges. Enhanced defence and security cooperation with other medium-sized economies, as well as bespoke deals for mineral access rights, are undoubtedly a downstream implication of any economic policy which aims to expand the relative size of Britain’s industrial economy. In its relations with the United States, China, and the European Union, Britain should aim to maintain maximal market access wherever possible, in line with the interests of British consumers and carefully balancing the benefits of trade with these markets against countervailing considerations related to security and domestic practices. 

And in pursuing all of these policies, the Government should ensure that its aims are primarily economic in character; industrial policy should be broadly agnostic as to second-order political objectives. There is a considerable difference between policies which make the UK an attractive place for industrial businesses, and policies which aim to direct the development of that industry, in the name of resilience, regional equality, or the green agenda. Diluting the former with the aims of the latter, however noble, will undoubtedly frustrate the desired outcome - an increase in the number of high-quality industrial businesses operating in the UK. Likewise, the Government should eschew any calls to embed climate or equality objectives into industrial policymaking; once again, inclusion of these second-order objectives will detract from the success of any policy designed to expand the UK’s industrial economy.

Whether or not we choose to call these policies ‘industrial strategy’ is largely an academic distinction; the core arguments and assumptions nevertheless hold true. The state should not play a heavily directive role in the creation or distribution of an industrial economy - but should also not pursue policy which is actively hostile to the development or re-development of such an economy. 

This means getting the basics right first - delivering cheap energy, relaxing planning rules, and ensuring that our regulatory environment is conducive to innovation. Now, as in the 18th and 19th centuries, we should be relaxed about where industrial growth happens, and create a housing market in which labour dynamics are flexible; we should not subsidise inefficient industries in inappropriate places for short-term political gain. The state should work with business rather than against it, and should be wary of calls to ‘pick winners’, which often originate most loudly from businesses which believe that they would benefit from such subsidies. We must be alive to changes in the global economy, and robustly defend our supply chains, working with international partners who similarly stand to lose from American, European, and Chinese protectionism.

In short, if the UK is to have an industrial strategy, it must be informed by our history - but by real history, rather than rose-tinted nostalgia. Our history is one dominated by the failure of industrial strategies. We are best not to have one at all.

Consolidation from Consolidation

‘The UK has been regulating for risk, but not regulating for growth’, post-2008 financial regulations have ‘gone too far’, said the Labour Chancellor. Yes, indeed. 

It seems the government is not totally committed to economic masochism. On City regulation at least - a sector responsible for 10% of tax receipts and employing 1.1 million people - it is moving in the right direction. Vowing to rip up red tape and build on existing Mansion House reforms is a welcome relief from the policy churn present elsewhere in government. 

The consolidation of the UK’s 86 local government pension schemes, comprising assets of £354 billion, into 8 ‘mega-funds’ is a good move for British pensioners and British growth. Bigger, agglomerated funds will be able to invest in a wider range of assets, benefit from lower per unit costs and attract top management talent. Importantly, pooled pension pots will have the necessary scale to invest more in infrastructure. This is demonstrated by Canada’s single fund for public sector pensions, the Canada Pension Plan Investment Board, which invests 4 times more in infrastructure than the UK’s defined contribution schemes. 

Given the UK’s significant infrastructural deficit, such investment is sorely needed. EY estimates that private sector investment in infrastructure would need to double over the next 15 years in order to meet a projected £1.6 trillion funding shortfall by 2040. This is vital for the UK’s social, energy, and defence objectives as well as increasing labour mobility and reaping the resulting productivity gains. 

Loosened fiscal rules means more taxpayer money for infrastructure, but also more crowding out (gilt yields climbed from 3.75% to 4.41% between mid-September and Budget day) and a heightened risk of government waste. Look no further than the previous governments attempts to revive battery manufacturing in Northumberland. Despite a significant injection of government funds, the BritishVolt factory in Northumberland collapsed into administration with the majority of its 232 staff made redundant. Private sector investment, in a free market, is clearly preferable.  

But reorganising pension funds won’t lead to more investment in infrastructure unless infrastructure is actually ‘investable’. The UK doesn’t exactly have a brilliant record of delivering infrastructure in a timely or cost-efficient way. Remember HS2? 

The projected cost of the Phase One Line from London to the West Midlands increased from £30bn to £59.7bn in 2022/23 (accounting for inflation!) and is still under construction. Supply side reforms to the planning system are a big part of the answer, enabling meaningful returns to be realised from such investments. 

To her credit, the Chancellor has (for now) avoided the temptation to mix objectives: seeking both to maximise pensioner returns and compel domestic investment. The attraction is undeniable – numerous delistings and long-term LSE stagnation has left the entire FTSE 100 smaller than a single American company, Apple, meanwhile just 4.4% of UK pension assets are held in our own equities (compared to a 10.1% global average). More investment here would obviously be welcome, but compulsion is no substitute for competitiveness. Given the state pension could become financially unsustainable in just 10 years (as our paper Up in Flames: The State Pension by 2035 highlights), it’s important that funds are seeking to maximise returns, without being constrained by geography. 

The government meanwhile could set about dismantling the many self-imposed disincentives on inward investment. 

Funds plucky enough to buy British equities are hit with a 0.5% stamp duty levy, in contrast to a 0.3% fee on French equities, a 0% fee on Japanese equities, or the miniscule 0.002% transaction cost on American shares. More broadly, overhaul of the obscene levels of tax and regulatory burdens facing UK companies might make them attractive for overseas and domestic investors again. Needless to say, the Chancellor’s budget, hiking costs for businesses on hiring workers, raising capital gains tax, went the other way.

Culturally, there is much need to redress the increasingly risk averse culture among British investors, which leans towards old legacy industries such as oil and mining at the expense of dynamic tech and AI firms. Funds have also shifted to low-risk debt instruments, with the portion of Defined Benefit pension plans invested in bonds having more than doubled since 1997 and now comprising the majority of their £1.4tn asset portfolios. The small size of existing funds also limits their ability to invest in high return venture capital and life sciences.  

Figure 1: The increase in bonds as a percentage of British pension scheme holdings 1997 to 2021 (Jeremy Hunt’s ‘Mansion House reforms’ seek to channel pension savings into unlisted firms- The Financial Times) 

In an era of ‘predictable volatility’, where market volatility is the norm, the renewed emphasis by politicians and regulators on sector (not regulation) growth is a prerequisite to ensure the City remains globally competitive. The government’s querying of FCA proposals to more aggressively ‘name and shame’ firms investigated for misconduct, plans to ease the financial services redress regime and the shortening of the deferral period by 3-years for bankers bonuses, suggests this is not merely rhetorical. The FCA, with its new ‘mandate for growth’, is also considering adjustments to bank capital requirements for smaller lenders to increase contestability and boost investment. 

16-years on from the financial crisis, a growth-oriented agenda may at last triumph over ideological bank-bashing by the left. Awareness that in a post-Brexit context, with the benefits of passporting and free movement consigned to history, financial services deregulation isn’t just ideal but essential, does not seem to have eluded even them.

Thames Water cannot be solved until December 19th

Thames Water, as we all know, is in something of a financial pickle. This does not worry us despite our involvement in water privatisation. More accurately, this does not worry us because of our involvement in water privatisation. That one group of capitalists fail at running a firm is not a problem with capitalism and markets - it’s the point. It’s exactly that those who run something incorrectly lose their money which produces the incentives to not run things wrongly.

Now, whether or not they have in fact run Thames Water wrongly is another and entirely different conversation. It’s possible to point out that expectations have risen rather more swiftly than reality can keep up with and so on. But leave all of that aside. The utility itself will exist even if the current corporate shell disappears and that’s exactly how capitalism and markets do work.

However, a point that we’ve not seen anyone else make. Which might mean we’re wrong about this of course - being the only head above the parapet is not always the sensible thing to be doing. But we’d strongly suggest - to the point of insistence - that Thames Water as a problem cannot be solved until December 19th. For:

2024 price review

We are currently working on the 2024 price review (PR24). This will set price controls for water and sewerage companies for 2025 to 2030.

We consulted on the way we set price controls by publishing our draft methodology in July 2022 and we announced our final methodology in December 2022. We published our draft determinations on 11 July. The for the consultation on draft determinations closed on 28 August 2024 and we expect to announce our final determinations on 19 December 2024.

That’s from OfWat, the regulator.

Until prices, therefore cashflows, for the next 5 year period are known there is no possibility of even examining, let alone solving, the financial structure. Therefore no solution is possible until that publication date. Everything said before that date is pure vapidity.

Which does give us an interesting insight into Thames Water’s problems, no? Capitalism and markets might well be able to solve this problem if it weren’t for having to wait for the bureaucracy….

For example, this in a press release from the GMB union:

“Thames needs committed long term investment just to keep operating, never mind stop the leaks and cut the sewage spills.

“Then it must be held to account and deliver for customers, with its skilled workforce central to the turnaround

“If that investment isn’t forthcoming then the Government must act fast and put Thames into special administration.

“Ministers can’t sit back and watch the car crash.”

Everyone’s got to wait until Dec 19th. It’s the bureaucracy, see?

Tim Worstall

Forcing pensions to invest in Britain is a foul, lousy, idea

We seem to be getting financial repression coming back:

Emma Reynolds, UK pensions minister, has left the door open to forcing pension schemes to invest more in British assets if reforms fail to drive savings into domestic infrastructure and companies. 

We’ve long suspected that this was going to be the other shoe dropping of that consolidation of all those 86 small pensions funds. Fewer, larger, are easier to force into governmentally preferred actions.

Reynolds said that while ministers had not taken steps to force pension funds to invest in British assets, it could reconsider “mandation” if the measures did not boost pension investment in the UK.  

“We’re not talking about it for now, but let’s see where we get to,” Reynolds said, in an interview with the Financial Times. “Investment in pensions is, as you know, very generously provided for in terms of tax relief.”

Reynolds added that a decision to take further measures to push a higher allocation to the UK would be “left to the second bit” of the pensions investment review. 

As we all know all economics is either footnotes to Adam Smith or wrong. Here’s we’ve one of those undesirables, a footnote which is wrong.

For Smith did point out that invisible hand thing:

A capital employed in the home-trade… necessarily puts into motion a greater quantity of domestic industry, and gives revenue and employment to a greater number of the inhabitants of the country…. Upon equal, or only nearly equal profits, therefore, every individual naturally inclines to employ his capital in the manner in which it is likely to afford the greatest support to domestic industry, and to give revenue and employment to the greatest number of people of his own country….

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it…

At which point the unperceptive will demand more being invested at home because lovely, lovely, invisible hand. Or, of course, those looking for an excuse to spend - sorry, “invest” - the money of others will use it as an excuse.

Which is to footnote Smith the wrong way around. He’s describing what people already do. Even though the profits of the foreign trade are higher some just do still invest at home. That is, we’ve already got home bias in our investing activities.

As most of portfolio theory goes on to explain. Vastly - and it is vastly - too little of British capital is invested abroad. Sensible diversification would have investment allocation at something like, roughly at least, proportionately to each foreign market as a percentage of the global market. No one at all comes anywhere near this, foreign or domestic, but everyone should.

For the sake of the pensions to be paid in the future to those current savers hugely more should be invested in foreign, not at home. For that’s both what modern economics tells us and also the point Smith was making - we already have a significant domestic bias and we shouldn’t.

But they’re already talking about “mandation”. Which will, no doubt, come with insistence upon “investing” in MiliEd’s green schemes, diversity and possibly the recycling of rubber boats collected from the shores of Kent.

The actual way to increase investment in the UK is the other way around. Instead of forcing people into it tempt them. Make investing here something people want to do. Because the returns from a freer and faster growing economy are such that it will increase the pensions that can be paid in the future. At which point, of course, we might even get some of that foreign pension money coming in to overcome their own domestic bias.

We know that capitalists are profit hungry. They’ll invest in any old thing if they sniff that profit. So, if we desire investment we should have a system which promises decent profits. Make Britain a capitalistically interesting place to invest and see how the money rolls in.

Tim Worstall