UK Modern Industrial Strategy
The UK’s Modern Industrial Strategy
After a period of turbulence for the economy during and since the original consultation process, last week saw the release of the Government’s Modern Industrial Strategy, alongside five individual Sector Plans and the Technology Adoption Review. The Industrial Strategy will be the spearhead of the Government’s growth agenda, bringing together a range of policy interventions to grow the UK PLC economy to put more money in people’s pockets, fund public services and revitalise communities. The Industrial Strategy aims to reposition the State as an active partner in the growth agenda with business.
This briefing note covers the headlines of the Modern Industrial Strategy – a separate note will be issued for the Sector Plans (or the IS-08 acronym), which will cover:
- Advanced Manufacturing
- Clean Energy Industries
- Creative Industries
- Defence
- Digital and Technologies
- Financial Services
- Life Sciences
- Professional and Business Services
Whilst the media headline grabbing element of the launch of the Industrial Strategy has been the expansion of an ‘Industry Supercharger’, reducing energy costs for the UK’s most energy intensive companies, and the increased adoption of AI, overall the Modern Industrial is a comprehensive document covering a broad range of activities of Government and where there may be opportunities and barriers to growth for the country.
Alongside the usual policy levers, the Industrial Strategy also influences other policy areas that could impact on growth including immigration, defence and clean energy transition. Some, if not most, of the interventions designed to support the Industrial Strategy and drive growth are still in development as part of wider machinations within Government. Some interventions require primary legislation, some will be funded in future years or are dependent on other strategies still in development.
The Modern Industrial Strategy has identified that the top 30% of sectors by productivity between 1997 and 2022 accounted for 60% of all productivity growth.
Average earnings within the IS-08 sectors are currently £7,900 earnings above other industries and these sectors are 27.1% more productive. The IS-08 sectors, on their current trajectory, will add £152bn in GVA and create 1.1m new jobs by 2035.
The last UK Industrial Strategy, in 2017 (supported by a Business Productivity Review) had a strong focus on driving improvement in some of the UK’s ‘long tail’ of more unproductive businesses. After being sandwiched by the Levelling Up White Paper, the current iteration is more focussed on making the best even better.
However, overall, the role of productivity as a growth driver appears to be more downplayed, maybe partly as the focus is, in the main, already on productive sectors and productive businesses. There are also wider catalysts for the Industrial Strategy, including building economic resilience in supply chains and materials, energy pricing and a much stronger focus on trade – much more than suggested during the consultation phase!
The Industrial Strategy highlights the UK’s weak recent track record in incubating superstar businesses. The UK’s economic dynamism is also lacking as businesses are expanding more slowly and new jobs created at a slower rate.
“Central to our approach will be the principle that innovation and investment must be rewarded”.
Despite a world class University sector and innovation infrastructure, fewer firms are becoming innovation active. Higher rates of Tech adoption could increase UK GDP by 8% by 2035. Already nearly 18% of businesses have adopted some form of AI, but there are still low levels of uptake of robotics and automation.
The Industrial Strategy brings together a range of innovation driving policies, geared towards the IS-08, coupled with specific interventions in each Sector Plan. Government had already announced an uplift in innovation funding, including some sub-regional investment – the Industrial Strategy and sector plans provide some additional detail. There is pivot of UKRI towards the needs of the IS-08, a proposed change in the criteria for public investment into Research and Developing, including advancing curiosity driven research and support innovative company formation and growth. Alongside announcements in the Budget, Innovation policy is to be supported by a £500m Research and Development Missions Accelerator programme and some devolved investment pots for Mayoral Combined Authorities.
The Industrial Strategy also aims to make the UK the best place in the world to invest in AI and, in line with the AI Opportunities Action Plan, to make the UK an AI maker not taker. The new Sovereign AI Unit will work with British Business Bank to support AI (and wider Tech) adoption within businesses. The headline for localities is the launch of an application process to become an AI Growth Zone, a primarily infrastructure driven intervention.
“The gains from AI innovation alone could add up to £47 billion a year for the UK in productivity gains over the next decade.”
It has also been suggested that better use of data across both the public and private sectors, linked to AI adoption, could support economic growth by between 0.8% and 1.3% per annum. The Industrial Strategy highlights plans to accelerate the digitisation of records, especially related to health and geospatial data.
To support the AI and Tech sector, the Government will invest £54m to attract world-leading AI researchers and technical talent and £25m for a new Turing AI ‘Global Fellowship’ specifically aimed at attracting overseas researchers.
Access to finance for growth and scale up is harder to access in the UK than the USA and UK institutional investors invest proportionately less in UK businesses and equities. Government is prioritising increasing business investment, including securing a greater share of internationally mobile capital.
The Modern Industrial Strategy must spur domestic businesses to scale up and anchor supply chains that create wider opportunities for SMEs to participate in. This will include approaches to co-investment with industry and de-risk and incentivise business and private investment.
Government aims to stimulate investment in the UK market by mobilising the National Wealth Fund to work alongside the British Business Bank and UK Export Finance to provide more capital for growing UK businesses, especially in the IS-08. There is also planned reform in the capital and pension markets to encourage more domestic investments.
There will be a new Business Growth Service launched this summer, featuring a single online platform and a link to Government support and advice, including support in recruitment and access to DWP programmes. The aim is to make it easier for industry to navigate Government and to speed up decision making. Government will also launch a concierge service through the Office for Investment.
In terms of economic resilience, the strategy also highlights the importance of a range of foundational industries, such as steel, carbon fibre, chemicals, and ports, logistics and freight, that are critical to underpinning resilient growth. Government has stated it will give a steer to the National Wealth Fund to direct investment into areas such as ports and Research and Development into composites. Government has also identified the need to train more skilled construction workers, embed modern methods of construction secure domestic steel and scrap supply into Government infrastructure projects.
The Industrial Strategy has been aligned with energy policy to provide clean and reliable energy at a cost that makes UK industry competitive whilst meeting Net Zero ambitions. This will be led by an expanded Industry Supercharger for the most energy intensive companies. Those eligible industries and businesses will be exempt from paying the costs of the Renewables Obligation, Feed-in Tariffs and the Capacity Market. There will also be action to accelerate grid connection dates for major projects, in some cases even by years. A new ‘Connections Accelerator Service’ will provide support connecting to the grid for demand led projects, including prioritising those that will create high-quality jobs and bring the greatest economic value.
There will also be support for businesses in terms of upgrading their cyber security and later in 2025 there will be the production of a Critical Minerals Strategy and a Circular Economy Strategy.
Building on indicative trade deals with the USA, India and the EU are plans to further increase trade through technology adoption, international co-operation and expanding export guarantees. This has been encapsulated in the production of a UK Trade Strategy.
Another key theme of the Industrial Strategy is the move to agile regulation, with the aim of reducing costs of regulation to businesses by 25%, starting by merging a number of regulators. Initial reform will be focussed on frontier industries and IS-08 and will cover areas such as the roll out of zero emissions vehicles, banking, bringing medical products to market and heat pump installation.
Government plan to reduce planning constraints on business and infrastructure, through a revision National Planning Policy Framework and the now published 10-year Infrastructure Strategy. These will reduce regulation but also increase long term investment certainty.
Under these processes, Gigafactories, Laboratories and Data Centres will be allowed to opt in as Nationally Significant Infrastructure Projects. The plan also covers planned transport investments. There is also a proposed reduction in consultation requirements for the pre-application period for major infrastructure projects, streamlined evidence and review processes, reduced decision making at the Secretary of State level and funding to support planning capacity within Local Authorities.
Alongside the Modern Industrial Strategy, an Industrial Strategy Zones Action Plan was also launched, which provides a framework for Enterprise Zones, Investment Zones and Freeports to plug into the Industrial Strategy.
The Industrial Strategy saw the launch of three new funds, the £600m Strategic Sites Accelerator Fund to attract investment into Investment Zones, Freeports and new AI Growth Zones. There is also the £500m Local Innovation Partnerships Fund, which provides support for local authorities and partners to invest in facilities and innovation and a £500m Mayoral Recyclable Growth Fund, a revolving capital mechanism for Mayoral Strategic Authorities to offer grants/loans to unlock key sites. These funds will support the delivery of 10 year Local Growth Plans.
There are also plans to boost connections between and within City Regions such as the Growth Corridor across northern City Regions and the Oxford-Cambridge Growth Corridor.
Government has committed to securing an 80% employment rate with the Get Britain Working outcomes. The Industrial Strategy and the IS-08 will have a key role to play in achieving this target. Whilst growth sectors can create jobs, the workforce needs to be skilled and ready for green jobs, increasingly digitally focused jobs and be able to operate in an environment of increasing AI usage. Upskilling the current (and future) workforce is a critical supply side intervention and skills shortages are already impacting on economic growth, with 10% of businesses reporting at least one vacancy in an area of skills shortages. Skills shortages will also hamper businesses in their efforts to adopt new technology.
There are clearly challenges and potentially contradictions in driving economic dynamism and technology adoption, vis-à-vis increasing opportunities for UK workers, opening the door to overseas talent, increasing the employment rate and supporting those currently inactive in the labour market back to work. As we learnt at the last CEDOS Lunch and Learn session, AI alone has the potential to increase unemployment by 290,000 or up to 1.5m depending on how disruptive the technology proves to be and its pace of adoption.
Skills have become a much bigger element of the final Modern Industrial Strategy than intimated within the consultation documents. In recent years there have been falls in apprenticeships, lower participation in adult further education and fewer employers investment in training, currently estimated to be only 10% of businesses. Policy responses include providing more places on 16-19 education, including addressing staff shortages in the FE sector, expanding Technical Excellence Colleges beyond the current focus on construction and utilising the Growth and Skills Levy to fund short courses in digital technology, engineering and AI.
Previous labour market announcements including the reformed Jobs and Careers Service and the Youth Guarantee Pilots, which will be further aligned to delivering IS-08 priorities. There will also be changes to the issue of visas against the Temporary Shortage List, which will consider the requirements of the IS-08.
The Industrial Strategy, coupled with individual Sector Plans, may also bring forward specific employment and skills measures pertinent to each sector (such as the current package for construction or the TechFirst technology skills package for schools).
The Industrial Strategy highlights the importance of Universities in delivering the Industrial Strategy, but has limited policy measures for the delivery of Higher Education apart from the change to the Lifelong Learning Entitlement from January 2027. There may be more detail on the skills aspects related to the Industrial Strategy when the Post-16 Education and Skills White Paper is published.
The long term nature of the Strategy and wider policy environment, a Business Taxation roadmap and long term Government investment plans should make it easier for companies to do business in the UK and make long term investments. The higher tempo and significance of recent spending reviews and budgets however, have not helped create a stable policy environment and rates of growth (or a lack of it) and fiscal and monetary change could be intertwined for some time to come.
Government have already identified success metrics for the Industrial Strategy and across each individual IS-08 sector. These will be based on the following:
- Business investment,
- Gross Value Added,
- Productivity Growth,
- Trade Exports,
- Labour Market Outcomes (such as employment and wages), and
- The number of new, large, ‘homegrown’ businesses.
Presuming that these will cascade across Local Growth Plans, some of these metrics will be harder to accurately measure at a sub-regional level and some will have more relevance to some sectors and geographies than others.
The Industrial Strategy states stronger regional growth is critical for competitiveness, which has been one of the major long standing economic challenges for the UK. The strategy will be ‘targeting places and clusters that support these sectors’. Regional growth in the Modern Industrial Strategy is largely based on enhancing the role of city-regions. Coupled with the choice of sectors, there is a clear major urban bias to the Strategy that somewhat overlooks the need to drive growth in rural and semi-rural parts of the UK. Hopefully the Green Book review and creation of place-based business cases will help build the argument for investment across the wider geographies of the UK and create a more level playing field for securing some of the announced investment.
Delivery at a local level, through Local Growth Plans, could help to focus the Industrial Strategy into localities and provide a framework to grow key sectors. Limited guidance for Local Growth Plans, which at this stage will only be statutory for Mayoral Strategic Authorities, have recently been produced and focus on consultation and developing regional investment pipelines. The interaction between the Modern Industrial Strategy, its range of interventions and the wider English geography is still unclear.
Overall, the Industrial Strategy provided no major additional clues on the Government’s devolution approach. New investment and programmes such as the Mayoral Recyclable Growth Fund, a 10 year capital settlement for Mayoral City Regions and High Street and Growth Incubators show Mayoral Strategic Authorities are the delivery mechanism of choice for the Industrial Strategy.