The Budget showed a lack of industrial ambition
Christian Stensrud, 10 March 2017
The Budget was meant to boost the UK’s economic resilience, thereby strengthening the prime minister’s hand in the upcoming Brexit negotiation, and get the UK match-fit for its global role post-Brexit by investing in infrastructure, innovation and skills.
The most effective way of achieving these goals would be via a new and fairly comprehensive industrial strategy. Indeed, the government has been extremely vocal about developing such a strategy, proposing in January’s green paper a multitude of potential measures to help businesses, including assisting more firms to access the finance they need to grow, using public procurement to boost UK supply chains, and helping businesses export more. As a result, many businesses eagerly awaited the chancellor’s budget.
What the chancellor, Philip Hammond, delivered was disappointing. The biggest measure, from an industrial policy standpoint, was £500 million to back the introduction of new T-level technical qualifications. Other measures included £270 million for disruptive technologies such as biotech; £200 million to help leverage private investment into full-fibre broadband networks; and £16 million for a new 5G mobile technology hub. This is a far cry from the recent government rhetoric regarding industrial policy and ignored many of the key measures outlined in the green paper.
Not surprisingly, industry leaders criticised the Budget for its lack of ambition, voicing concerns at a missed opportunity to support the prime minister’s industrial strategy. According to the Institute of Directors, it was a ‘nothing to see here Budget’, claiming there was little in the way of incentives for businesses to invest today when uncertainty over Brexit is putting projects on hold. The Society of Motor Manufacturers and Traders criticised the lack of funding for supply-chain development, and the director of UK Steel lamented the lack of concrete policy to address the longstanding disadvantages the sector faces.
Industry leaders are right to feel aggrieved because the chancellor had the ability to allocate much more. Based on OBR forecasts, the chancellor has the ability to spend an extra £24 billion and still hit his target for structural borrowing in 2020/21.
Whilst Hammond is aware of the wriggle room, he would rather put aside such funds to deal with any unexpected challenges after Article 50 has been triggered. Indeed, it’s been estimated that £60 billion will be put into a ‘Brexit war-chest’ for that possibility.
In theory, this is a wise strategy because it gives the UK more resources to deal with the possibility of no deal being reached with the EU. Such a fund could be used to fund cuts in corporation taxes, making the UK a more competitive place to do business, or to build competitive domestic supply chains for automakers, enticing more car manufacturers to the UK.
However, there are issues that need to be dealt with now if the UK economy is to be as strong as possible during the Brexit negotiation. One of the biggest issues is the forecast moderation in GDP growth during the first half of this year and subsequent slowdown in 2018, as rising inflation squeezes household budgets and consumer spending. The UK needs to become less dependent on consumption immediately, and one way to do this is by boosting exports. Recent Civitas research has shown how the government can help more small and medium-sized enterprises export, and many of the proposed measures could be implemented at little cost to the exchequer. With the Budget’s aim of boosting economic resilience, it’s puzzling that the chancellor paid no attention to export performance.
Another issue is addressing the UK’s poor performance with regards to productivity. Whilst Hammond did declare £270 million for disruptive technologies, which could help some productive industries, this is far from the level required. Indeed, the government needs to immediately ramp up measures to address productivity if the economy is to be as strong as possible during and after the Brexit negotiation. This is because many of the required measures take some time to actually boost productivity. One example is investment in innovation. Measures such as increased public procurement of innovative technologies, increased access to steady capital for innovative firms, and more government support for organizations that assist innovation, such as the UK’s Small Business Research Initiative, are all valid measures. But no measures of note were announced in the Budget.
Whilst Hammond’s idea of building a Brexit contingency fund is wise, he has allocated too much towards it and too little to businesses. Given the government’s current consultation on industrial strategy ends in April, there is hope that the chancellor may address these concerns in his first Autumn Budget. If the chancellor wants to make the economy as resilient as possible for the Brexit negotiations, then he should announce funding for more industrial policies aimed at addressing the UK’s over-reliance on consumption and ongoing productivity problem.