Why transitioning to a green economy can kick-start a revival in UK manufacturing

Rishi Sunak claims his economic “plan” is delivering results, and with lower inflation, he might have a point. However, a more profound and concerning issue looms over the economy: the reluctance of investors to back British businesses. Pension funds are seeking returns elsewhere, venture capital is hesitant, and the London Stock Exchange appears weak.

We don’t have to accept this status quo. The UK has well-established strengths, including the rule of law, renowned research universities, and a rich cultural appeal. It’s time to leverage these advantages to reinvigorate the economy.

Britain isn’t alone in Europe in struggling to compete with the dynamic capital markets and generous government subsidies of the US. While the Prime Minister correctly highlights Britain’s scientific and technological prowess, this potential is not being effectively integrated into a broader economic strategy.

A significant issue is Sunak’s reluctance to support innovation through regulatory reform and government intervention to mitigate investment risks. This isn’t just about business taxation; it’s about providing investors with confidence in the government’s long-term and consistent policy direction.

One area of uncertainty is the government’s commitment to net zero targets and renewable energy. Sunak may see electoral gain in downplaying these policies, but this discourages potential investors in decarbonizing power generation, heat, and transport. This hesitation drives businesses and investors to look to Europe, Asia, and the US, where investment signals are stronger.

These countries recognize that stability alone isn’t enough to attract private sector investment. A free and competitive market is essential but not the sole basis for economic success.

This understanding is central to a new analysis by the Institute for Public Policy Research, focusing on the transition to green energy. While some argue Britain’s future lies solely in advanced services, the IPPR advocates for using the energy transition to foster advanced manufacturing as a government policy goal.

The UK already has manufacturing strengths and competitive advantages in green products — it’s the eighth largest green product exporter globally. Expanding manufacturing in wind energy, green transport, and heat pumps can capitalize on these strengths.

Aligning the UK’s university and research strengths with an educated, flexible labor market, entrepreneurial spirit, and a regulatory bias towards innovation can maximize these opportunities. While it’s too late to build a solar panel industry, developing grid-level storage capacity to enhance solar power economics is still possible. The UK’s robust science base offers similar opportunities, requiring supportive government policies.

We can’t fully capitalize on our strengths without nurturing both manufacturing and services. The decline of a third of the UK’s manufacturing capacity since the 1990s wasn’t inevitable. The IPPR study shows that productivity growth in manufacturing outpaced services fivefold between 1997 and 2021, and manufacturing accounts for two-thirds of private sector research and development in the UK.

The Conservatives, by retreating from green ambitions, prioritize politics over economics. However, the Labour party acknowledges the need for active government support for advanced manufacturing. The challenge lies in how to provide this support and rebalance regional economies, a key Labour objective.

As a former business secretary, I know that discussing industrial policy is easier than designing sector-specific interventions. Conditions for innovation in healthcare differ from those in the energy transition or defense industry. Government action must span financial support, regulation, planning, and competition policy.

Fostering new manufacturing growth won’t be simple or easy. Renewal is possible if we align with the new markets created by the green transition, the defining challenge of our age.