From bystander to builder: government guidance will be essential for industry to thrive 

In a world where seismic economic shocks can be triggered by a tweet, governments cannot afford to be bystanders. The wild swings of the FTSE indicate that markets alone cannot solve this. National governments need to take a strategic, coordinating role - guiding the economy in the national interest. Industrial strategy is an essential tool the government should wield in their response to a more volatile world. 

The government needs to play a strategic role and focus efforts 

Before the election, chancellor Rachel Reeves set out her vision of modern supply side economics - ‘Securonomics’ - recognising that a new era of instability called for a new way of managing the economy.  Reeves’ Securonomics pamphlet and her Mais lecture were ahead of their time in acknowledging that addressing economic insecurity, including through industrial strategy, is essential.  

The right industrial strategy will be vital to economic security. The evidence is clear: countries winning the race in the global industrial transition - the US, China, Australia - have only done so with an active state. They are adopting a more interventionist stance, determining where their nation’s comparative advantage lies.  

The right government policies can secure investment for strategic industries, helping them to adapt and insulate the economy from shocks. This is not about picking winners; it is about building the platform on which winners can emerge and compete. Economic transitions of this magnitude need governments to play a shaping role. This means the government making strategic choices and avoiding the temptation to be all things to all people. In a fiscally constrained environment, strategic focus will be essential. 

 The government’s Industrial Policy green paper marked a shift from the sclerotic chopping and changing of the last 15 years and set a defining role for government as “strategic and coordinating”. It set out the UK's key strengths in future facing industries like clean power and advanced manufacturing, and their contribution to national growth and regional development. A promising start. The White Paper and Spending Review in June will be the test of whether the vision is turned into reality. 

Strong business support for the state as a partner 

IPPR has worked closely with the UK’s financial services sector to identify their role in industrial strategy. Major businesses and City investors continue to  call for the government to put the right environment and support in place - the CBI recently said to seize green growth opportunities, business needs the state as a partner. The government can help to create long-term certainty and provide initial investment where markets alone will not act. 

The private sector will now be looking to whether policy tools in the forthcoming White Paper and funding through the Spending Review are concrete enough to affect their investment decisions. Businesses will want to see that government is credibly able to navigate the trade-offs inherent in selecting priority areas and not see more muddling through.  

Sectors of strategic interest 

Picking the right sectors is crucial. There are clear spillovers between three areas in particular: defence, digital and clean manufacturing. These sectors are all crucial to the UK’s resilience, share vital supply chains, and offer significant market and growth potential in the near term.   

• Defence: Britain and Europe’s need to re-arm and increase defence spending in the coming years presents a significant opportunity to revitalise the UK’s defence sector and to capture a bigger share of its economic benefits. EU member states expect to spend an additional EUR 100 billion by 2027. The International Institute for Strategic Studies state that “European defence spending jumped by 11.7 per cent in real terms to reach USD457 billion, with 2024 marking the tenth consecutive year of growth”. In the UK, leveraging increasing Ministry of Defence procurement could deliver stable, well-paid jobs, while dual use technology development would support wider economic growth. The UK defence sector has a strong base to grow from and UK SME’s stand to gain from the right government approach. Bain & Company calculate that each £1 billion spent on defence generates £2.2 billion in economic value for the UK and supports 15,000 jobs. In 2023, UK defence export orders reached a record £14.5 billion, up 49 per cent in nominal terms from 2022.
• Digital: Developing a homegrown digital technology industry is also a good bet for the UK – this can provide spillover innovation and productivity enhancement across the economy and sectors that the government wants to shape. IPPR has conducted the first analysis of the state of the UK’s AI industry, building a first-of-its-kind database analysing 3,256 firms. We identify ‘AI deployment gaps’ and how to fill them – a solid foundation for the industrial strategy.
• Clean manufacturing: Clean industries are the growth industries of the future. IPPR and others have shown, there is no route to global competitiveness and long-term economic success without green manufacturing. 

Why clean manufacturing is the right economic choice 

Clean manufacturing is a clear UK comparative advantage – investors, business, think tanks and leading experts  back it too. The business models that make money now have a rapidly shortening time horizon. Volkswagen’s net income fell over 30 per cent last year, BYD’s grew by over 70 per cent. The CBI estimate that accelerating green growth green could deliver a £37-57 billion boost to GDP by 2030, equivalent to between 1.6 per cent and 2.4 per cent of GDP. Decarbonisation means a huge acceleration in demand for clean and electrified products. China, India and Brazil, for example, have rapidly increased the supply of those goods and services, growing their share of the global market. IPPR's analysis of data from the Institute of Economic Affairs shows looming bottlenecks in international ‘clean’ production, implying shortages and rising prices – not only would increasing domestic production help avoid these, there's a clear expected export market to satisfy too.  

Even setting aside the climate benefits, themselves vital to economic security, there remain real and immediate benefits from an industrial strategy that supports firms to transition their business models:  

• Economic renewal: Clean manufacturing investment (both public and private) stands to benefit areas outside London and the Southeast the most.  
• Global competitiveness: While the UK initially led the energy transition, the European Union, Australia and countries across Asia are pulling ahead.
• National security and resilience: Developing domestic supply chains for crucial energy and manufacturing sectors hedges against rising geopolitical tension, with many of the inputs for clean energy shared with modern defence and digital manufacturing.  

The UK needs to be specific about its clean comparative advantages  

IPPR’s flagship pathfinding analysis shows that the UK has strategic opportunities to ride the wave of decarbonisation. Of all the green products we identified, the UK is already competitive in producing one third - with support that number can grow. Three priority sectors have potential for future advantage: 

• Green transport (Electric vehicles, rail, zero-carbon aviation, bicycles): The UK has a significant base of manufacturing capacity, including in the North East, Midlands and South West, but needs to grow and specialise.
• Offshore wind: The UK is a global leader in deployment but lags in manufacturing high-value components. We make great cables and blades but need to move up the value chain to generators and computing.  
• Heat pumps: With rising demand for low-carbon heat, there is a time-sensitive opportunity to transition existing capacity and expertise. But incumbent boiler manufacturers have been unwilling or unable to adapt. 

Scaling these industries requires support from government and faces hurdles where targeted policy will be crucial.  

Making the vision a reality; it’s time for carrots and sticks 

A big part of the government’s role in shaping the industrial trajectory is putting the right concrete policies in place to ensure companies can overcome the hurdles of transition and scale up. There are three clear priorities to address: consumer incentives, smart public investment and supportive infrastructure - all measures that can accelerate the UK’s industrial growth. We identify concrete policies to overcome the barriers currently faced by green manufacturing firms:   

1. Support consumer adoption where future demand is uncertain: 

• Reduce the cost of personal or business borrowing through loans or guarantees for EVs and heat pumps, targeting grant support to specific groups or vulnerable households to ensure fairness.

2. Deliver smart, catalytic, public investment to get projects off the ground

• Use the National Wealth Fund to provide incentives, loan guarantees, and co-investment in: heat pump manufacturing, battery giga-factories and offshore wind manufacturing up the value chain. This does not require new tax revenue or policy change, just targeting of existing borrowing capacity, enabled by the chancellor’s existing change to fiscal rules in the autumn budget.
• Use science funding (via UK Research and Innovation and the Advanced Research and Invention Agency) to keep the UK at the cutting edge of aerospace technology, ensuring the next generation of low-carbon aircraft use British-made components. 

3. Connect new infrastructure to growth priorities 

• Accelerate the rollout of EV charging infrastructure and grid upgrades to reduce charging anxiety
• Invest in ports and interconnectors to support offshore wind manufacturing, exports and deployment 

Navigating trade-offs 

Choices are inherent in any strategy. The industrial strategy should not seek to set out the answers to all trade-offs, but it should provide clarity to the private sector on how crucial trade-offs will be addressed. For example: 

• Targeting fiscal space: A bad strategy would spread limited funding across broad areas, rather than focussing it on big but realistic bets. For example, underpinning new clean manufacturing joint ventures left stranded by the Trump administration.  
• Jobs of the future: A bad strategy would spend its money on propping up outdated industries and business models. If the focus is on protecting the status quo we won’t make the transitions required to create future industries. We need to support workers in transitioning, not give them false hope.  
• Where to start? The industrial strategy is a long-term project. Re-learning how to do this in government will take time. The government needs to be clear on what it will prioritise in the short-term and what it will turn to later. Given defence and clean energy are the most pressing needs and clearest opportunities, starting there would make sense.  

A bright future – with the right choices  

A clean industrial strategy can be the beating heart of the government’s plan for growth. 

The British public back clean industries because they back good economic sense. They want the UK to be a country that makes things again. They want to drive electric and fly cleaner - if these options are practical and affordable. Business can adapt and thrive. But they need a government that is willing to roll up its sleeves and partner with them, not sit on the sidelines.  

The UK has the foundations to succeed. From Sunderland to Derby, Solihull to Broughton, and from the South West to the North East, the government can make Britain the best place in the world to build the clean technologies that will define the 21st century.   

All eyes are on June.