‘Labour will turn Tory economics on its head, even within its fiscal rules’

At last month’s Global Investment Summit, held in the grounds of Hampton Court Palace, Rishi Sunak, sat alongside the CEO of Blackstone Stephen Schwarzman, said: “I don’t think subsidy races are sensible. I’m a free market person, I believe in a free economy.”

To say the government’s approach to investment and growth is a little confused is an understatement. Sunak’s statement came less than 24 hours after the government had announced significant government interventions in the free market and £4.5bn of subsidies via an advanced manufacturing plan and a UK battery strategy. These were sneaked out on a Sunday with little fanfare, a sure sign that they didn’t fit with No 10’s core messages.

Sunak’s vibe is very much a Silicon Valley tech bro who’s read Why Government is the Problem but not The Entrepreneurial State. He advocates for unfettered free markets whilst his Chancellor claims to be making 110 government interventions to grow the economy.

Clear dividing lines between Labour and the Tories on the economy

If you scratch the surface, there are real dividing lines between Labour and the government on economic policy. Superficially, both Sunak and Keir Starmer claim to want growth. Jeremy Hunt and Rachel Reeves together want to see higher investment and productivity. 

But there the similarities end. The autumn statement was really a return to Conservative economic policies of old, a reversion to the ideas of a pre-Theresa May, pre-Boris Johnson era. The Chancellor’s speech had an old idea at its core: to boost growth, the state needs to get out of the way. His programme was one of cutting public sector investment in real terms, whilst giving unconditional, economy-wide investment incentives to the largest corporations. Yes, there were some forward-dated cheques for manufacturing and key sectors, but they’re in the next spending review period, and not new money anyway.

If you asked the PM or the Chancellor, I reckon they both think that government spending can “crowd out” the private sector. The opposite is true of Starmer, Reeves, Jonny Reynolds and Ed Miliband. They’re clear that a Labour government would use “catalytic” public investment to “crowd in” business investment and steer that with the active hand of the state via industrial strategy.

Government should take a “market shaping” approach

But… what is industrial strategy anyway? This is a question we recently set out to answer at the Institute for Public Policy Research (IPPR) where I work. We start with a simple idea: the free market that many claim to love doesn’t exist and never did.

The “market” is created by governments, and states shape markets every day, whether they intend to or not. As economist philosopher Karl Polanyi wrote almost a century ago: “The road to the free market was opened and kept open by an enormous increase in continuous, centrally organised and controlled interventionism.”

States invest in the market, building roads and rails, ports and sewers. States might govern markets by building things like our legal system. They often buy things in the market too – in the UK the government buying stuff makes up 14% of our GDP. The distinction between “the state” and “free markets” is meaningless.

However, it’s one thing to realise that government shapes almost every market in the economy. It’s another entirely to actually do something with that ability (or to want to). After all, even Kwasi Kwarteng was quoted in 2019 as saying: “There’s nothing [better] to convert someone from being a radical free marketer to seeing the virtues of government action than making them an energy minister.”

What is needed – and what I believe Labour is proposing – is a shift in the role of government. At the moment, governments are constrained to only really intervene when there is a clear “market failure” – for example, laws to improve health and safety in the workplace that wasn’t otherwise incentivised by the profit motive.

The alternative to this is a “market shaping” approach where governments grasp their ability to nudge, influence, cajole, steer and even make markets and to do so in a strategic way. This opens up a rich “toolkit” of different policies that policymakers can pick from and (critically) it’s a toolkit much broader than just subsidies for firms. This is about more than just government spending, but reform, regulation and institutions too.

Four categories of market-shaping policies

We break market-shaping into four categories of policies. Firstly, there’s production – policies to reduce the cost or risk of bringing a product to market or how it does so. For example, this would include existing government support for science and innovation, boosting the supply of tech products into production.

Secondly, there’s purchasing – policies that affect the price goods sell for or how they are bought. An example here would be the way the government supported the creation of the AstraZeneca Covid-19 vaccine by pledging to buy millions of doses of a successful jab, removing uncertainty for the company and guaranteeing them a market at the other end of the invention.

Thirdly, there’s how governments govern markets. The state is able to identify priority areas for the nation and coordinate plans, boosting expectations of future areas of growth among businesses and increasing investment.

Lastly, there are the wider economic conditions and landscape that often only the state can affect. Everything from skills provision, major infrastructure like railways and ports and trade deals with our economic partners. These foundations need to be stable before an economy can flourish.

Labour in power must use every tool to shape and make markets

Labour’s plans on industrial strategy – front and centre in Starmer’s speech at the Resolution Foundation conference earlier this month – have received surprisingly little coverage in the press.

In my view, this is for two reasons: journalists don’t really know what industrial strategy is, and Labour hasn’t really told them yet either. As a consequence, what coverage these plans have received tends to fall back on tired (what the Financial Times recently called outdated) tropes of “picking winners” or “subsidy races”. These don’t reflect a modern approach to shaping markets. 

Businesses no longer oppose this state intervention – they’re asking for it! IPPR’s plans were welcomed by RenewablesUK and MakeUK, as well as former CEO of Siemens UK Juergen Maier. The market-shaping framework has been used by everyone from Mariana Mazzucato to the Confederation of British Industry.

The UK has spent too long chopping and changing between lightweight strategies. We’ve had 11 economic strategies and seven Business Secretaries in the past 13 years. As the FT has said, a serious industrial strategy is “the crucial thing missing” from the UK’s investment policies. Even where the government makes interventions to support businesses, it avoids labelling this an industrial strategy.

This is a gap that Labour can step into. A long-term industrial strategy is a business-friendly policy that’s also core to transforming the economy. If they win the next election, Labour should get serious about using every tool to shape and make markets for investment and growth, but also for decarbonisation, for ‘levelling up’ and for the prosperity of all.