Identifying and removing the UK’s growth blockers

Good afternoon. As Sir Keir Starmer made clear in his speech today, there is a rising sense of urgency in the government’s demands for faster economic growth and improved efficiency in the public sector.

The positive spin is that after a shaky start to his premiership Starmer is now finding his mojo, his vision suddenly clarified by the looming fiscal squeeze ahead of the March 26 Spring Statement and the implications of Europe having to fund more of its security.

A significant element of the plan to address the growth challenge is the forthcoming Industrial Strategy that was launched last November with a promise to provide “catalytic” support to eight high-growth sectors where the UK has comparative advantage.

What’s been happening since then? Well, this week the Department for Business and Trade published a half-time memo summarising progress so far, and setting out a timetable for the unveiling of eight sectoral plans to get chosen subsectors moving.

Talking shop

The first phase was a massive consultation exercise in which over 3,000 organisations, including businesses, think-tanks, unions and more than 250 sector lobby groups set out what they believed was holding them back. 

The summary sent out by DBT said it received more than 27,000 answers which are now being digested before the department publishes the final plan in June, alongside the Spending Review that will set departmental budgets until the end of this Parliament.

What does it find? In short, that UK industry faces a series of both hard and soft infrastructure challenges that make it challenging to grow businesses, compete internationally and attract talent from abroad. 

On the ‘hard’ side, the respondents spoke of long-standing infrastructure deficits in road and rail, a shortage of grid connections and high energy prices as the biggest barriers to growth — and the need for “strategic efforts to modernise infrastructure”.

“Initial analysis has found that infrastructure (including energy) is the barrier to investment and growth most frequently cited by businesses (21 per cent of all barriers cited), and of particular concern to Clean Energy Industries, Advanced Manufacturing, and Professional & Business Services.”

On the ‘soft’ infrastructure side, the respondents focused on areas such as planning, access to finance, investment promotion, skills shortages, regulations and the frustrations of interacting with Byzantine government structures.

“[For example] a semiconductor fabrication plant taking longer to receive planning approval in the UK than it did to do the start-to-finish build in a competitor country.”

Soft versus hard infrastructure 

In theory, it ought to be easier to address the ‘soft’ constraints more quickly than the hard ones — building reservoirs and installing electricity pylons and substations just takes time, which is I suspect why the Industrial Strategy will focus more on the softer elements.

As the accompanying ‘next steps’ document says: 

“Areas of focus include regulation, skills and access to talent, lending facilities and the role of public finance institutions.”

This is partly because there isn’t much money, so this Industrial Strategy has to be more about the enabling environment for business that Starmer was speaking about today, than the more traditional big-ticket grants to strategic industries.

Even then, money is still an issue in areas like skills (see last week’s piece on mid-year cuts to Further Education college budgets) or indeed improving the performance of UK regulators where “frequent changes in regulations, lack of clarity on policy direction, and complex regulatory frameworks” were cited by business as blockers for investment.

In some novel and fast-emerging areas, such as AI/copyright, uncertainty is inevitable because the effects of the technology are so fast-moving and uncertain that regulation is going to have to shift quite rapidly to keep up.

That makes it even more important to have high-functioning regulators. And as Lord Patrick Vallance told me last week, when announcing the next steps for the government’s new Regulatory Innovation Office, there needs to be more resources (see spending review, above) so that businesses get a better service from regulators.

In that regard, it was pleasing to see Vallance talk about targets for regulators — they need carrots (more people and clearer political direction from government) but also sticks — consequences if they fail to meet targets for processing business applications. 

It’s easy to despair, but the government can improve these kinds of areas with the right tech, better management and investment: it fixed the passport office, for example.

It takes two to tango

In other areas, it takes two to tango. One of the key stats cited by the summary was that “45 per cent of SME respondents” said they found difficulties securing funding and encountered high costs of borrowing compared to international competitors.

The revamping of the British Business Bank is a positive step, but the government can do more to identify businesses that are worthy of investment using, for example, HMRC data and providing what the Scale Up Institute calls “dedicated account management” to grow them.

That also requires British business to develop a deeper risk appetite. As the document notes: “Many SMEs choose to not use debt or equity finance altogether — a high proportion of ventures are funded internally via cash reserves.”

Government has to help itself

Three other key areas of friction cited by businesses — improved trading relations with the EU, improved access to talent visas and better trade promotion — are also in the government’s hands.

In all these areas the government talks a better game than it plays: the EU reset is timid, not transformative; UK talent visas are wildly expensive by international standards (France just slashed theirs to £194!) and businesses still say the “concierge” service offered by UK trade promotion is poor and is now facing cuts.

This is not to be churlish but to say that a really bold government can take steps to fix these things if it is prepared to make arguments to the public (on visas, on Europe) and invest in strategic priorities, not cut them.

In drawing up an industrial strategy the government is at least trying to devise a plan to address business concerns — its planning reforms to halve the time it takes to get approval for infrastructure projects is one good example.

Joining the dots

Among businesses I talk to, whether the government has the capacity and focus can deliver on these ambitions is a more open question. The first challenge is getting Whitehall departments to pull together.

Businesses are fed up, the memo says, of having to “go round the houses” on the same subject. The Industrial Strategy Council should help, in theory, but it’s notable that DBT only leads on two of the eight high-growth sectors, and as — this week’s NAO report found — is struggling to join the dots in Whitehall. Endless Departmental “restructuring” doesn’t help.

The second challenge is more profound, which is that frequently cited in all the areas above, according to the memo, was the question over “uncertainty about government policy, including long-term commitment to policies”.

The Industrial Strategy is itself testament to this. Several sit gathering dust on shelves in Whitehall. Even within political parties. Such things tend to come and go, even within political parties: Theresa May had one, but then Boris Johnson binned it.

And that points to a more profound confidence trick that Labour needs to pull off with both UK business and international investors, which is convincing them that the UK polity is still capable of “looking through” political cycles to deliver a consistent business environment.

The Industrial Strategy is billed as a 10-year plan. Even though Starmer has a 170-seat majority, it’s not clear, thanks to his government’s wobbly start, that this will be a two-term, decade-long government that can see such plans through. 

It’s still not too late, but fixing this is an important precursor to convincing business that a decade of policy churn is really coming to an end.

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Britain in numbers

This week’s chart tells a story about the challenges facing the UK’s asylum processing system, which Home Office data last week showed is facing applications at an all-time high.

Overall figures showed 956,000 residence visas were granted in 2024 — down by one-third from levels in 2023 and 2022 — but over the same period, a record 108,000 people claimed asylum, up 18 per cent on 2023 and higher than the previous peak of 103,000 in 2002.

One concerning subset of that data picked out by my colleague Amy Borrett is that the number of asylum seekers being housed in hotels is starting to rise again — still far below its 2023 peak, but creeping back up.

As we saw during last summer’s riots, when hotels housing asylum seekers were attacked by angry mobs, such data can be quickly weaponised via social media.

It is, as the Refugee Council’s chief executive Enver Solomon tells me, “a symptom of policy failure” in which people seeking safety are placed in costly unsuitable accommodation in a way that leads to “avoidable local tensions”.

Solomon adds that the rise in applications is only part of the story, and blames the previous Conservative government for allowing the asylum decision process to grind to a halt, creating a backlog that means outstanding cases outstrip available Home Office accommodation.

He argues there is “a better and more cost effective approach” which revolves around speedier processing and more humane treatment for those waiting:

“An orderly, fair and compassionate asylum system would decide quickly who is a refugee and who has no right to stay in the UK, meaning that people don’t ever have to spend too long in the asylum system. 

“While people are in the system, they should be allowed to find jobs and live in stable housing in the community to give them the best chance of standing on their own two feet, and rebuilding decent lives.”

Given existing housing shortages and the government’s fear of spurring ‘demand’ for asylum, that feels very unlikely.

Labour has pledged to tackle the backlog, which according to the Migration Observatory in Oxford stood at around 97,000 applications at the end of September 2024, with the backlog increasing again in the third quarter of 2024. 

So Labour failed to reduce the backlog in its first three months in office, but the Migration Advisory Committee, which provides ministers with detailed advice on the topic, says decisions are now picking up. “If so, it should become visible in the statistics during 2025.” We shall see.

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