The Economy

Lord Bhattacharyya Excerpts

Thursday 28th April 2016 Lords Chamber

[Lord Bhattacharyya (Lab)]

My Lords, I thank the noble Lord, Lord O’Neill, for securing this vital debate and declare my interest as chairman of WMG at the University of Warwick. I also pay tribute to the noble Lord, Lord O’Neill—or rather to Lord Peston; the Minister is still alive. We used to have great discussions on the role of manufacturing industry and how it declined.

Economic policy debates often focus on the crisis of the moment. There is an entirely reasonable demand for an equally immediate response to each threat to jobs, communities and businesses. Yet, when we examine the causes of the crisis, we discover that they are complex and often a result of our own previous decisions on supporting, taxing and regulating our industries. This was the case during the financial crisis, when our history as a trading nation, our reliance on financial services for tax revenues and a boom in global markets all combined to create overconfident, underinformed finance houses. These convinced both Governments and themselves of their perfect wisdom; therefore, both prudential regulation and commercial risk management became deeply unpopular. We saw where that led.

Equally, to understand the challenges of the British steel industry you must begin with the legacy of decades of underinvestment in capital, skills and product research, then consider the impact of high energy prices and business rates. The Government have acted on the immediate crisis caused by a glut in supply, although we can debate the extent of the support on offer. I am hopeful that we will still be able to find a solution to prevent the further decline of the steel industry. Having brought the company to this country, we should somehow or other find a solution. Yet the truth is that many of the root causes of the current decline could have been dealt with well before the sharp fall in global steel prices. This would have required a forward-looking industrial policy that created a level playing field for domestic steel makers against overseas competition, achieved competitive energy costs and supported local investment in plants, infrastructure and product innovation. The lack of such a strategy made us comparatively weaker when an era of global oversupply and artificially low prices arrived.

To change this familiar story we must understand that decisions on whether to invest in plant and where to conduct technology research are complex, involving factors as varied as land use, skills, the science base, planning and infrastructure. To encourage investment, therefore, we need integrated local collaboration which brings all this together to create an ecosystem of innovation, skills and investment. That is how inward investment is done. One reason why inward investment has slowed down is that there is a lot of anxiety outside that we have lost that—and Brexit has a lot to do with it.

It is no good government just putting money into equipping centres if there is no industrial pull or no room for businesses to grow locally. This requires a strong dialogue between industry, universities, government and councils. We have seen this approach work in Coventry’s recently announced “Smart Motor City” plan, which has £500 million of private business investment. It will expand the local skills base, attract new firms to the area and support local businesses and jobs. That is just the start. It will attract further inward investment in the near future, and we anticipate that it will lead to £3 billion of investment over the next three years. Therefore, a forward-looking industrial strategy both delivers a fairly regulated market today, and drives collaboration to support the investments that will underpin growth tomorrow.

Sadly, the final element, despite many White Papers and consultations, is our long-term failure to deliver a comprehensive industrial innovation strategy, nationally or locally. However, we should consider the Innovation Report. Research published this month shows that higher business innovation spending is central to long-term growth. The IMF has examined global private sector innovation and concludes that in economies like ours, increasing business R&D could lift GDP in the long term by 5%. Yet despite this clear link between commercial R&D and long-term growth, British business investment in innovation has declined from 1.3% of GDP in 1990 to just over 1% today. Businesses in Japan and Germany invest two to three times as much in innovation as businesses in the UK. Indeed, the only significant increase in private UK R&D spending in recent years has come from overseas companies. When this has happened, the results are impressive.

Take JLR as an example. Within five years, it now has 42,000 employees and more than 200,000 indirectly employed employees. It spends £3.8 billion on R&D each year, and you can see what happens if you do that. Britain does not have a problem when it comes to innovation; it is just that the Government do not do much about it. However, the motor industry, combined with Innovate UK’s support for collaborative research in, for example, lithium-ion batteries, has attracted enormous private sector investment from overseas investors and the UK supply chain. Where co-ordinating small sums of money triggers a train reaction, the results are clear: record levels of production and thousands of new jobs.

So why is this sector the exception, not the rule? To be fair, there have been many steps in the right direction. Under Labour, R&D tax credits and investment in scientific research were positive. Vince Cable’s industrial bank was an admirable attempt to address the gaps in industrial financing. The apprenticeship levy and support for entrepreneurs stressed by current Ministers are praiseworthy. But these steps have been piecemeal and provisional; we need a comprehensive approach.

First, we need to increase dramatically business innovation spending. This is especially true for small businesses, which face real constraints on financing innovation. Social benefits from private R&D are as large as the commercial benefit. That is why the IMF argues that we should effectively double the value of the R&D tax credit. Alongside tax-based support, we should expand grant and loan support to improve the quality and breadth of private sector R&D. It is crucial that this work be done in collaboration with academic researchers, as our strong scientific research base will stimulate private sector innovation and give it rigour. In Britain, we have a world-class scientific research community, yet the US, Korea and Japan invest two to three times as much as the UK in public sector applied science, which has created a private sector that invests multiples of our spend in commercial innovation.

Through bodies such as Innovate UK and industry groups such as the Automotive Council, as well as knowledge transfer networks, the Government must use our strength in science to develop a private sector committed to growth through innovation, investment and collaboration—in other words, a real industrial strategy. That would help increase our national wealth, spread prosperity more widely and help build a broad-based sustainable economy.