Thanks Peter. I am grateful to Progress for the chance to make this speech. And to Kitty and Michael for agreeing to respond.

As Progress is hosting a series of policy review discussions it may be useful to set out how the Business and Enterprise Review is developing.

By early Autumn we will set out our assessment of the challenges facing the UK economy; an agenda for the more detailed policy work to follow.

This is not simple.

The Business brief is incredibly wide: from consumer protection to business start ups; labour law to competition policy, and from what’s left of regional policy to what’s left of industrial policy. So we didn’t rush to set up detailed working groups too early. They would have been predictable, dictated by old agendas, and coming up with old ideas. We wanted to talk, listen and understand the challenges our country faces.

Because the business review, together with our wider economic policy, is central to our re-election.

Across Europe the centre-left has suffered defeat after defeat; former support has swung to populist parties, nationalist parties or the greens – that may sound familiar!

The old reason for voting social democrat – getting a good deal for workers in a market economy by restraining the private sector – became harder as wealth creation stuttered. The replacement strategies – adopting liberal economic policies; investing in supply side measures like skills; and redistributing the tax receipts have run their course of effectiveness.

The result is the three challenges Ed Miliband has set out.

The squeezed middle -that large group of people working on low and middle incomes who feel that the rewards of hard work, paying taxes and playing by the rules are too little, in contrast to both those who enjoy stellar salaries not matched by results, and those who claim benefits too easily.

The British promise – the nagging and deep seated fear that our children will not enjoy better lives than we have done because we cannot pay our way in the world.

Strong communities – recognising the myriad ways, including changing workplaces and working lives, we sense our communities with strong social institutions and common bonds are being eroded.

Our election demands credible responses to those challenges; and that means an economy the looks and feels very different to today’s. Stronger in more sectors. Globally competitive to pay our way in the world; offering fair rewards and creating shared prosperity; underpinning not undermining a strong society.

I want today’s best companies to become the norm: building for the long term, forward thinking, innovative, investing in their workforce, creating rewarding jobs as well as rewarding those jobs fairly. Seeing their success as part of a broader, national success story. Understanding that the real purpose of a good company is much richer than profit alone.

And because work offers more, the burden on the state to compensate for a failing labour market is reduced.

That’s the political challenge for the business review.

Of course the Coalition deficit reduction strategy is too far, too fast, putting growth at risk. And of course, there is a case for short term measures, like a bank tax this year, to fund investment in youth jobs, the regions and housing.

But the long term growth we need will be private sector growth.

Private companies succeeding in competitive markets. Including success in the increasingly competitive global markets, where other countries are investing today in moving up the value chain.
You can hear similar aspirations from the Tory-led Coalition.

But we have a huge difference in our understanding of the role of government in creating the environment in which private companies can succeed; in which innovative companies can be started and can grow; in ensuring that, as we tackle problems, the businesses which provide the solutions can sell their innovation to the world.

While the Conservative-Liberal notion is that support for market-led growth means that the ideal state is one in which government does as little as possible, in truth, markets are inevitably and unavoidably shaped by what governments do, and by what government doesn’t do.

As a government we came late to the idea of an active industrial policy. We paid a price in an economy too heavily dependent on financial services; too vulnerable to the global crisis.

But in the last few years we began to identify some key industries which needed a defined framework. We worked with business to define long-term objectives, to create infrastructure, to meet objectives and to attract investment.

So we established the national composites centre to maintain a lead in a key technology for aerospace.

We developed a developed technology neutral low carbon policy for the motor industry through the Automotive Council.

We created a string framework for renewable energy including off shore wind and photo-voltaics

We began to flesh out a broader vision of what the UK economy should look like in the future.

The Tory-led Coalition is engaged in a badly managed retreat from government activism, scrapping RDAs, slashing regional investment, launch aid and business investment grants.

Sure, a plethora of Labour legacy initiatives remain in place, but the strategy is in disarray.

The National Composites Centre exists but without the commitment to a forward looking aerospace programme.

The Defence Industrial Strategy – which gave defence contractors certainty about future military and technological demands – has been abandoned as Fox buys off the shelf, and BIS shows no great interest in what these companies should now do.

The Automotive Council continues, but the RDAs which could have helped make a reality of the ambition to strengthen supply chain companies no longer exist.

In March, David Cameron stood with Bombardier UK Chairman, Colin Walton, and he said: “I am bringing the Cabinet to Derby today with one purpose-to do everything we can to help businesses in the region create the jobs and growth on which the future of our economy depends.”

The decision to award the £1.5b contract for new Thamelink Trains to Siemens means Bombardier is set to review its activities in Britain, putting at risk the jobs of its 3,000 permanent and temporary staff, plus countless more in the supply chain.

The economic impact on Derby of losing the contract was not even part of the government’s assessment.

What is needed is a long-term capital plan to create certainty for UK companies and give them the best chance of succeeding in the future, instead of a stop-start programme of occasional announcements, that leaves manufactures unable to plan ahead; longer, larger contracts or supply arrangements, more common designs across different types of trains.

These are the issues that Maria Eagle is wrestling with in Labour’s transport review.

The Government let it happen. We must make this a turning point in industrial policy.

No longer should good jobs and skills be lost because our government doesn’t have the procurement policies, the industrial policies or the leadership to enable UK companies win orders in fair competition.

Given that Vince Cable repeatedly called for the abolition of the old Department of Trade and Industry, it’s perhaps no surprise that he is leading a weak department which shows no sign of understanding the potential power of intelligent government activism to shape the economy.

In a recent speech to IPPR North I set out the many ways in which government shapes markets for better or for worse, and not just through investment and grants.

Government can create market certainty, or uncertainty.

Certainty – about nuclear policy for example – unlocks investment in technology, capacity and skills.

Pricing policy in energy determines which technologies attract investment, and determines the opportunities for domestic companies to develop new and internationally competitive strengths in green technologies.

Competition policy sets the balance between the innovative insurgent company and the established market leaders.

Higher education and research policy can determine the short, medium and long term areas of technological competitiveness.

Government procurement may favour established companies and technologies or those of the future.

Government regulation can create new markets, as the 3G standard for mobile phones did for the European mobile phone industry.

The challenge is to understand and make best and conscious use of these market shaping mechanisms.

Of course we can’t predict the future. But Governments and business together can anticipate some of the key challenges, and the capabilities, the technologies and the resilience which gives us the best chance of success.

We can expect markets that are likely to be:

Greener – as businesses play their role in meeting international climate change obligations, and more sustainable as resource shortages demand more efficient use.

More hi-tech – as new technologies are developed and exploited. For those dependent on them, low-tech industries will create wealth for a limited period only.

Increasingly digital – as the full potential of Web 2.0 is better understood, and there is rapid development towards versions of Webs 3 and 4.0 – Tim Berners-Lee’s “semantic web” of machines understanding the meaning of digital content, or an “internet of things” where everyday objects can talk to each other.

More globalised – with greater access to developing markets just a click away, not just for global corporations, but also for SMEs. Markets will be much bigger as global incomes rise, and much smaller too, with millions of niche markets.

As Lord Battacharyya recently warned, in the expanding global marketplace, “the rewards for being first mover and the penalties for being slow will grow exponentially.”

Despite publishing a growth plan which is already being re-written, there is no sense that this government even aspires to create, with business, a credible vision of our future economy. No vision for the low carbon economy, advanced manufacturing, life sciences, business services, the digital and creative and educational sectors – sectors in which, with financial services, we can aim to compete in tough global markets.

That vision, backed by active government policies, is central to growth and reshaping our economy.
It’s obvious really.

People invest to make money.

Everyone prefers a safe bet.

Risky money is more expensive money.

Uncertainty about public policy; confusion about what Britain’s economy will look like in the future; fear that policy will change arbitrarily and unpredictably: all these deter investment or make it more expensive.

Countries with clear public policy, clear economic goals, and reliable policy are attractive places to invest. So investment is either more expensive here; or goes elsewhere.

Not just to different companies in different countries; but within subsidiaries of global companies able to chose where in the world to be.

Where certainty is needed, there is confusion. Where leadership is called for, none is given.

As former CBI Director General Sir Richard Lambert pointed out last week, UK companies have built up cash surpluses equivalent to 6 per cent of GDP. But in the absence of a coherent and compelling government vision for growth, it lacks the confidence to invest it.

He lambasted the “lack of clarity on strategy”, the “contradictory signals”, the “planning delays and red tape”. These were “inhibitors” to investment in key sectors.

He said that the government should be giving clear priority to sectors such as aerospace, financial services, and pharmaceuticals where the UK has a competitive advantage and “which depend in part for their success on Whitehall policies. The Government should make it clear that over the long term it stands ready to do whatever it takes to sustain the UK’s position in these areas.”

This is not, fundamentally, about money. It’s about clear direction. Industry priorities. Strategic action. Certainty. About willing the means as well as the ends.

It’s not just capital investment that hangs on this vision.

Without a story of future opportunities, how can we inspire and motive our children and influence their choice of study or training? It’s making the vision a reality which can renew the British promise.

If the Tory Coalition won’t or deliver that vision, then we must.

But then be in no doubt: we will have to change the way we did Government.

It may be obvious that confidence and certainty attract investment.

But business tells us that the words confidence, certainty and government do not always sit easily together.

The government machine makes little effort even to understand the costs of uncertainty.

Uncertainty over Heathrow third runway delayed investment for years. Only now can BA be confident that they should invest in Madrid instead.

Drugs companies get mixed messages; hugely supported in research but finding the NHS an often hostile or difficult partner.

It’s subtle. Changing investment incentives to improve them may actually deter investment – because it reminds investors that policies can change.

The anger of the oil and gas industry at George Osborne’s budget raid is not just it’s immediate, narrow impact but the fear that if dramatic policy changes can be made without consultation once, they can be again. Suddenly the North Sea is a much more dangerous place to invest.

In fact, the Tory led coalition is providing a master class in deterring investment through uncertainty.

Decarbonising the UK energy sector alone will require investment of more than £200 billion. To encourage this scale of investment in new low carbon electricity generation requires policy certainty.
Government Labour established a legal framework for the transition to a low carbon-economy, through the world leading Climate Change Act.

As Climate Charge Secretary, Ed Miliband used the legal framework to mandate an 80% cut overall in carbon emissions by 2050. “From 2009” he said, “carbon budgets will take their place alongside financial budgets, and become pivotal to policy decisions within the UK.”

Through the legal framework and credible mechanisms for marking progress, Labour created policy certainty. It encouraged investment, and helped energy intensive industries towards a lower carbon future.

In 2009 the UK was ranked 5th globally in low-carbon technology investment and development.

Since the election, we have slipped to 13th. The Pew Environment Group ranking blamed the fall on “a sharp decline in offshore wind energy investments and uncertainty surrounding [government] policy”.

Ed introduced feed in tariffs to encourage households and businesses to install renewable energy sources. The Coalition cut the money available then dramatically changed the policy to make solar photo-voltaic installations generating above 50kW largely unviable.

The Renewable Energy Association described this as a “horrendous strategic mistake”.

From January 2009 to December 2010 employment in the Solar PV industry rose from 3,000 to 10,000.
Without the February review, this number was expected to grow to 30,000 during 2012.

Now investors are backing off. Senior lenders – West LB, RBS, the Cooperative Bank, Rabobank – are now unwilling to lend capital to UK solar power projects. Triplepoint has shelved its interest in solar projects, including its planned £100m Solar Income Fund until there is “greater clarity” over policy.
Matrix has suspended its clean energy fund. LCI has shelved investment plans for large solar photovoltaic projects. Tridos Bank is reconsidering solar farm investments. County Council pension investors looking to back renewables have had to put their money elsewhere.

In 2006 Ruth Kelly announced that all new homes would have to source their energy from carbon-neutral sources. This simple regulation created whole new markets – in architecture, building technology, skill training, renewable energy generation and building management.

The innovation it stimulated has made UK firms in this sector world leaders.

Just yesterday, Vanke – one of the largest houses builder in China – agreed a £100m investment deal with green building experts BRE for an innovation park in Beijing to showcase British design, materials, construction products and technologies for sustainable homes.

The March budget cut the target by a third.

Chief Executive of the green building council Paul King called it a “shocking weakening of the
government’s green agenda which would remove a valuable stimulus for low carbon growth”.

It undermined “a remarkable consensus between industry and NGOs” and would result in a “loss of confidence leading to lower investment, less innovation, fewer green jobs and fewer carbon reductions.”

The cancellation of the Severn Barrage has caused an industry hiatus. Wave and tidal technology is at a crucial stage – about where wind was a decade or so ago. The UK is at the forefront in developing potentially world leading technologies.

In government we supported this through the Marine Renewable Deployment Fund and Marine Renewable Proving Fund. Now this investment risks being undermined, and the future rewards and jobs going elsewhere.

The floor price for carbon has been changed from being a smart tax to encourage lower carbon technology to a straight forward tax-grab, raising £1.4 billion in 2015/16.

But in the absence of any clear plan to help energy intensive industries like steel and the process industries it may simply export emissions as industry leaves our shores.

The transition to a low carbon economy will be central to any vision of Britain’s future; sustainability and jobs at home; environmental justice abroad; paying our way in the world.

Instead, the coalition has made it an object lesson in deterring investment and damaging growth

Why:

Because cutting the deficit too far too fast means giving a priority to cutting investment incentives and destroying confidence.

Because short term politics on petrol prices was more important to George Osborne that long term investment in the North Sea.

Because the Tories and LibDems think reducing regulation always encourages growth when sudden change actually punishes investors.

Because if you don’t believe in the active role of government in shaping markets, encouraging innovation, and supporting business success, then you won’t make best or conscious use of the tools that you have.

But we must recognise the implications for our policy review.

For all that business is queuing up to criticise the Coalition, they are by no means confident that we are consistently better.

We were not immune from the sudden politically determined policy change; or the political but investment deterring delay in decision-making.

We did not use all the tools at our disposal well.

We could not claim to have put creating a climate for confident investment at the heart of all our decision-making.

The main criticism of an activist approach to business policy is not the principle, but the fear it would be done badly and make things worse.

It will require fundamental changes to the way government works. The current Whitehall machinery is not fit for purpose in a modern economy.

It has too little understanding of the business implications of its decision making.

It can be too slow to decide.

Too wedded to dogma.

Too weak to ensure that ministers understand the implications of decisions they are about to take.
While better policy is important to the policy review, no less important is a long, hard look – with business – at how government can be redesigned to meet the needs of business.

 

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