Brexit and the Industrial Strategy: counter-productive

The government’s Industrial Strategy was published amid much fanfare in November last year. It was a better-late-than-never response to one of the most pressing issues facing the UK economy: poor productivity growth. In 2013, UK workers produced on average between 27% and 31% less per hour than workers in France and Germany. The government’s Industrial Strategy hopes to address the UK’s productivity gap.

But a closer look at the strategy reveals an EU-shaped hole. In each of the five foundations of productivity addressed in the report – ideas, people, infrastructure, business environment and places – we learn more about the advantages of staying in the EU than the purported opportunities outside it. Far from a clear-eyed vision of a bright future outside the EU, the Industrial Strategy is more effective at underlining exactly what we have got to lose.

Places

One of the main aims of the Industrial Strategy is to take “greater account of disparities in productivity and economic opportunity between different places”. But leaving the EU with no replacement set up for the European Regional Development Fund (ERDF) will do precisely the opposite.

ERDF helps counteract funding imbalances within European member countries. Yorkshire and the Humber is set to receive 796 million euros in European Structural and Investment Funds (a combination of ERDF and other EU funding) between 2014 and 2020. Much of this goes directly into funding innovation, research, digitisation and supporting SMEs – all of which drive up productivity.

Indeed, ERDF plays a starring role in the Industrial Strategy. The Smart Islands programme on the Isles of Scilly (page 146), a case study for the sort of ‘smart’ infrastructure needed to support local growth, received 80% of its initial funding from ERDF. The University of Sheffield’s Advanced Manufacturing Research Centre, singled out as a beacon for knowledge intensive economic clusters in the government’s strategy (page 227), is part-financed by ERDF, as is Huddersfield University’s 3M Buckley Innovation Centre (page 81).

ERDF is not intended to supplant the government’s regional funding, but compensate for its blind spots. But the North is one rather large blind spot for this current government, particularly with 92% of staff at the Department for Business, Energy and Industrial Strategy based in London. The Tories have said they will replace ERDF with the a Shared Prosperity Fund but they have yet to give any detail as to how this might work after 2020.

If the Tories aren’t far more proactive in replacing these funding streams, productivity problems in the north will only get worse.

Infrastructure

You cannot look to raise productivity in places without also investing in infrastructure. Large-scale infrastructure projects in areas like transport are often championed as a solution to solving the productivity gap, but under the Tories the UK has struggled with chronic under-investment.

The European Investment Bank (EIB) is the single largest source of early-stage capital across Europe. The bank is able to provide loans and long-term project funding at very low interest rates because its own borrowing is underwritten by the governments of all 28 EU Member States.

Before Brexit, the UK was the main recipient of EU venture funding across all of Europe. Over the past ten years, UK projects have benefited from more than £52 billion in EIB loans.

The positive impact of the EIB in the UK is no more keenly felt than by Transport for London. After the EIB granted a new loan to support Crossrail, then Mayor of London Boris Johnson remarked:

“Our good friends at the EIB have provided us with a billion more reasons to proceed with the unstoppable force that is Crossrail… one of the largest loans ever secured for a transport project…”

Boris Johnson helpfully illustrates the folly of extricating ourselves from the EIB. Transport for London features as a case study in the government’s Industrial Strategy (p158), and yet the government has failed to mention whether it will compensate for the potential loss of the EIB’s financing in the future. Already EIB deals with UK venture capital and private equity groups have fallen by two-thirds after the Brexit vote, and loans are likely to dry up further still if we continue to sever our close ties with the continent.

Business environment

But it is in the chapter on business environment where the government is really hoisted by its own petard. Quoting Andy Haldane, chief economist at the Bank of England, the report argues that the UK needs to address its ‘long tail’ of underperforming smaller businesses if it wants to increase productivity.

The strategy persuasively champions international trade as the key to unlocking the UK’s productivity puzzle. It notes that businesses that export pay higher wages and “account for 60 per cent of the UK’s annual productivity growth” (p174).

But without being in a customs union with the EU, the UK will put up unnecessary barriers to trade that will hamper the ability of businesses to export and import.

The report rightly notes that “smaller businesses…can suffer disproportionately from heavy-handed regulation and bureaucratic excess”, but then the government proposes to saddle these same small businesses with:

  • customs declarations
  • rules of origin certificates
  • container checks
  • new warehouse space
  • staff overtime
  • training programmes to deal with this extra red tape

The government has previously calculated that rules of origin certificates alone cost between 4% and 15% of the value of trade. Such costs might be manageable for a multinational company but are enough to derail the business models of those smaller, growing enterprises.

2.5 million jobs would be at risk if the UK were to leave without any trade arrangement with the EU. One in seven European companies with British supplies have already moved part or all of their supply chain out of the UK. No wonder, then, that Andy Haldane, the same Bank of England economist quoted in the Industrial Strategy, has warned of a sharp Brexit slowdown for the economy.

Ideas

Investment into research and development (R&D) is at the heart of every strategy to increase productivity. Technological innovation leads to the growth of so-called frontier firms. These companies drive up Gross Value Added per person (one of the key measures of productivity), but have yet to hit the same levels of productivity growth as before the financial crisis.

Horizon 2020, the EU’s pioneering Research and Innovation programme, is one of the biggest funders of R&D in the UK. The UK participated in more EU funded research and innovation projects than any other country between 2014 and 2016. But despite vague assurances that the UK wants to participate in the successor to Horizon 2020, the government has yet to put forward any cast-iron guarantees.

It has also failed to outline how the UK will be able to continue with frictionless cross-border collaboration if it leaves the single market. The Danish company Novo Nordisk recently invested £155 million in a diabetes research centre in Oxford (page 195). The Dutch-German company QIAGEN’s has partnered with Health Innovation Manchester in a move that will bring 800 new skilled jobs to the region (page 195). Indeed, the Industrial Strategy notes that “half of all UK research publications in 2014 were internationally co-authored” (page 63).

This collaboration will not stop entirely after Brexit, and it would be overblown to say as much. But in industries with links to R&D, such as pharmaceuticals and tech, small competitive edges make all the difference. It is inevitable that any reduction in the UK’s access to the single market, restriction on cross-border data sharing or loss of funding from programmes such as Horizon 2020 would curtail efforts to make the UK a world leader in R&D.

People

The final foundation of productivity in the report is people. The UK has to contend with an ageing population and a skills shortage among those of working age. The way to do so is not to pull up the drawbridge to our nearest neighbours.

Freedom of movement was a contentious issue during the referendum campaign but studies have shown that migrants complement the skills of UK workers. Restricting the ability of EU citizens to work in the UK will only damage the productivity of its workforce.

Take the example of the tech sector, a fulcrum of the Industrial Strategy. The tech sector is predicted to have more than 160,000 vacancies in the UK by 2020. Migrants help to plug that gap: TechUK estimate that the 180,000 EU born-workers in the digital sector contribute almost £2.5 billion in direct taxes each year and £19 billion in Gross Value Added. Without them, firms would close or scale down, shedding British jobs too.

But it’s not just high skilled migrants helping the digital and tech sectors. Intel has said that restricting the numbers of low-skilled migrants in the UK would “have a significant detrimental impact” on their business operations. It warned that restrictions would force them to consider outsourcing operations abroad or moving departments to other European countries.

And migrants help upskill British citizens as well. Secondary education teachers in the STEM subjects are on the immigration shortage occupation list. The UK needs to address this shortage if it wants to improve the skills of its young people but discouraging EEA teachers from coming across to the UK through a restrictive migration scheme would only make doing so harder.

Conclusion

Right across the board, the five foundations of the UK government’s Industrial Strategy come unstuck by Brexit.

Productivity is the key to raising wages and living standards for UK workers, but will be badly hampered by leaving the customs union. Innovation drives industry, but harsh restrictions on migration would limit the ability of universities and businesses to work with the best and brightest talent across Europe. Regional imbalances cause many parts of the UK to lag behind London, but won’t be addressed if Whitehall repatriates the policies once shaped by local MEPs.         

The more Brexit threatens to derail plans to improve the UK’s productivity, the more voters will ask whether leaving the customs union, internal market and the EU is really worth it.

 

One Comment

  1. Yes, our isolationist direction of travel is comprehensively obstructive to increased productivity and economic wellbeing. It is the same inverted logic that underpins the PM’s rebirthing of the red bus lie, made necrotic flesh with her announcement that – helped by the Brexit ‘dividend’ – the NHS can receive a large funding boost.

    Brexit DIVIDEND? The ONS forecast model adopted by government and treasury assumes a public finance DOWNGRADE of £15 BN after Brexit. Old dogs, old tricks, old lies … all diminishing the life chances and happiness of our children, so that the likes of Rees-Mogg and Philip May can add inches to their money mountains.

    Brexit is for the few, not the many. Someone has the wrong end of the telescope.

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