Labour’s promised big on growth by backing the City, but successful partnership with business is easier said than done, writes Andrew O’Brien
The first mission of this new mission-driven government is growth. Central to achieving that mission is collaboration with the private sector. According to Labour’s manifesto this is based on “an enduring partnership” with business to “deliver the economic growth we need”.
But this is not the first time that Labour has promised this. In 1997, it promised to “build a new partnership with business to improve the competitiveness of British industry for the 21st century, leading to faster growth”. In 2010, it called for a “renewed partnership between business and government”, through “a new industrial policy” and “stronger infrastructure”. In fact, partnership with business has been the cornerstone of Labour’s policy to the economy arguably since Harold Wilson was leader.
Despite the warm words over the decades, the results have been mixed. This can be most clearly seen in relation to public and private sector investment. In 1997, for every £1 of capital investment by the UK government, the private sector was investing £5. By 2010, this had more than halved to £2.40. Under the previous government, things did not improve considerably and it still hovers around the £3 mark. Getting back to where we were in 1997 would be a significant achievement. However, there remains a significant gap with continental peers who have achieved much larger ratios of government to business investment. In France, for every £1 the government invests in the economy, the private sector invests £5.80. In Germany, the figure is a staggering £7.30.
So why has Britain struggled to see the tangible benefits of partnership compared to other countries? This is the subject of a new paper by Demos, supported by Headland, called Partnership in Practice.
We have identified six themes for why the government has struggled to build effective partnership with business: a lack of a coherent long-term plan for the economy; policy instability; ineffective incentives; cultural immaturity; excessive short-termism in business; and a lack of shared institutions.
Some of these themes are well known, such as policy instability. We are currently in the midst of the sixth revision to the National Planning Policy Framework in six years. Unsurprisingly, the number of housing units approved for building during this period has fallen by nearly 40 per cent. However, others lack attention. For example, repeated reviews have highlighted the short-termism in British corporate governance. This hampers the ability of businesses to take long-term investment decisions and drive up productivity. In opposition, the Prime Minister promised to reform the Companies Act to put “long term value creation” at the heart of corporate decision-making, but we are yet to hear whether this will be taken forward.
Partnership requires change from both government and business. Politicians need to recognise that if they want to get the buy-in of the private sector, then it needs to find ways to share power and create stability. One of the solutions we have proposed is developing ‘policy locks’ overseen by parliament, so that in some areas (e.g. planning or the tax regime) the government commits to not making changes except in emergency situations or if certain economic conditions are not met. On the other side, businesses need to recognise that investment and reform from the state needs to be matched by tangible commitments from the private sector. The United States’ CHIPS Act, in order to stimulate advanced manufacturing, has put conditions on businesses to work in the United States, develop training for the workforce and not undertake any share buybacks or dividends for five years.
We also need to avoid the traps that have befallen previous governments. We have been very good at creating new bodies from the National Economic Development Council to Local Enterprise Partnerships, but we’ve never given them the resources or the commitment that they need to do their work. We need to create independent, shared institutions that leverage investment and engagement from both the private and public sector to succeed using models such as Better Society Capital, which has leveraged billions in social investment. Governments and businesses have also become too dependent on tax cuts or reliefs as a shortcut for partnership. Although tax reliefs and targeted tax cuts can stimulate investment and collaboration, far too often we treat tax reform as a silver bullet that avoids deeper structural reforms and investment.
Over the next few months, Demos and Headland will be convening a Business Partnership Council, to look at the long-term changes that we need to make to create an effective collaboration between the public and private sectors. Delivering this will be a mission in itself, but it is an effort on which all other government priorities depend.
Andrew O’Brien is director of policy and impact at Demos