Image: Spencer CooperThe government’s new industrial strategy has been revealed to a fanfare of publicity, but does it really amount to much?
It’s an odd thing. There is a commonly held view that the government does not create wealth, the private sector does.
The reality is that the two have a symbiotic relationship. If the government does not create wealth, explain the Internet, created by the government owned ARPANET, designed to create a network impervious to nuclear attack.
Some things need government. Explain how it is that innovation often occurs in war time, at a time of massive government spending.
There is something else that the government can do, and that is nudge demand. A growing economy needs growing demand, and sometimes, for example in an age of growing inequality or ageing of the population, saving is too high, and demand is below potential output.
Other times, in a period of innovation, productive potential greatly exceeds demand and the government may need to address the balance with stimulus either funded by borrowing or by central banks printing money.
The latest industrial strategy, which is not really that different from plans announced by George Osborne and Gordon Brown when they were chancellors, is meant to be a plan to get the UK out of economic malaise.
“The government has committed to investing a further £725 million over the next 3 years in the Industrial Strategy Challenge Fund (ISCF)” says the official press release. It added: “The government has previously committed £1 billion to the first wave of Industrial Strategy Challenge Fund projects, including investing £246 million in next generation battery technology and £86 million in robotics hubs across the UK.”
It’s better than nothing, but look at the sums involved.
The Office of Budget Responsibility has predicted that cumulative growth in UK productivity will be 4.4 per cent over the next five years. The annual average, before the 2008 crisis, was 2.5 per cent. That means that the potential for growth in GDP over the five year period from this year, assuming no change in the working population is 4.4 per cent of annual GDP, which is roughly two trillion pounds, making potential growth of £88 billion. Under the 2.5 per cent per year growth rate over five years, total growth would be £260 billion. That’s the scale of the problem.
The government can borrow money over ten years at an interest rate of 1.253 per cent.
In the midst of a revolution in technology that could transform the economy, the government should and could, do more.
