The Government Doubles Down On The UKs Superpower In Services

15th October 2024

The Government has provided the outlines of its new industrial strategy in a Green Paper released today. The strategy largely doubles down on the UK's established role as a global services leader. This is welcome. For too long, the UK's strengths in services have either been misunderstood (e.g. that it's just about banking, when in fact they are much broader) or overlooked by politicians keen to don a hard hat and hi-viz jacket. The offices of an accountancy firm or architecture practice might not be very photogenic, but they are as central to our economic success as Samsung is to South Korea's.

Making a list of things you like and want more of is the easy part though. Delivering on the strategy will require money, detailed administrative action and a lot of patience.

Services with a smile
Like all ‘new' strategies, today's Green Paper draws on the greatest hits from previous iterations. And the Business Secretary Jonathan Reynolds has publicly admitted to being a fan of Greg Clarke's 2017 industrial strategy. This is no bad thing. The Government's Green Paper identifies eight priority sectors: advanced manufacturing; clean energy industries; creative industries; defence; digital and technologies; financial services; life sciences; and professional and business services. This list of sectors bears an uncanny resemblance to the one that Peter Mandelson, the last Labour Business Secretary, produced back in 2009:

Table 1: Spot the difference - growth sectors in the industrial strategies of 2009 and 2024

2024
Advanced Manufacturing
Clean Energy Industries
Creative Industries
Defence
Digital and Technologies
Financial Services
Life Sciences
Professional and Business Services

2009
Advanced Manufacturing
Low carbon
Ultra low carbon vehicles
Creative Industries
Digital Britain
Professional and financial services
Life sciences and pharmaceuticals
Engineering construction
Ageing society

This return to a focus on particular sectors is a distinct departure from the thematic, ‘horizontal' approach in the previous Government's 2017 Industrial Strategy and the 2021 ‘Build Back Better' strategy. Those strategies focused on more things like innovation and skills which could boost any part of the economy, rather than picking sectors. That being said, looking across the past 15 years of industrial strategy , most of the 12 Business Secretaries over the last 16 years have agreed on a lot.

Why Services Matter
At the core of the new strategy is the recognition that services are the backbone of the British economy and - increasingly - the source of the UK’s comparative advantage in world markets. The UK is the world’s second-largest exporter of services, behind only the United States. Building on these strengths offers a clear pathway to sustained economic growth, particularly in a volatile global trade environment where traditional manufacturing exports face challenges: global trade in services is expected to rise faster than trade in goods over the next decade; and Brexit has hit UK goods exports harder than services. This is why the UK saw services exports rising by 17 per cent in 2024 compared to the year to August 2019, while goods exports have fallen by 15 per cent in the same period.

The UK is the most specialised in services of any major economy. This is nothing to be ashamed of. Services specialists tend to be richer than manufacturers. Moreover, looking across the other services specialists - like the USA, France, Ireland and Singapore - shows that a strength in services can not only make you rich but can be combined with very different levels of inequality, taxation and regulation.

The UK also has important pockets of high-value manufacturing in particular industries and places, but they are never going to be big enough to drive productivity and exports by themselves: manufacturing is around one-tenth of total GVA, compared to a quarter (25.6 per cent) produced by the four service sectors in the Government’s list.

Services are made in cities
Another important shift in this new industrial strategy is its city focus. The new strategy recognises that services industries - especially professional and business services, digital technologies, and financial services - tend to be concentrated in major cities. Since 1998, the share of the local economy comprised of tradable services has risen by 7.6 percentage points in core cities, and 1.1 percentage points in other cities, compared to falls of 0.7 percentage points in small towns and 1.1 percentage points in villages.

While the relatively urban geography of the UK is an opportunity, Britain’s regional inequalities are stubborn. Currently London accounts for two-thirds of the UK’s trade surplus in services, leaving the UK’s second cities with a mountain to climb. As shown in Figure 2, their productivity lies a long way further behind the capital than their counterparts in France and Germany. These cities will require major investments to close the gap. And, in a tight fiscal environment, the Government will need to be targeted in its approach.

Now for the hard bit
The challenge now is translating the Green Paper into concrete policy. Saying you want more of a good thing is one thing - saying how you will get it and, relatedly, what you will have less of, is quite another.

The upcoming Budget will tell us more about the resources available to support investment and growth. But industrial strategy is about more than tax and spend. Putting houses in the right places is key to connecting people with jobs in growing sectors and attracting talent, while better-connected public transport is needed ensure that growing service sector hubs are accessible and functional. Furthermore, greater provision of level 4 skills (such as higher apprenticeships and technical qualifications) will be needed to meet the demands of these priority sectors and foster a workforce that is equipped for the future. Brexit means that trading is harder for the UK than it used to be, and the Government’s red lines mean this is unlikely to change much. But the repatriation of trade policy affords the Government another instrument to favour some instruments over another.

The Green Paper is a promising start. But the Government will need to take a stand on the sectors it wants to deprioritise or shrink, and this is a tough message to deliver. The strategy will need more staying power than its short-lived predecessors. Relatedly, and crucially, the Chancellor and Business Secretary will need to sign the rest of the Government up to push the strategy forward across education, transport, net zero and even health and defence. All this needs to be done in a tight fiscal environment, and with no immediate prospect of the UK joining the very large trading bloc on its doorstep. So as with all strategies, the proof will be in the delivery.

See more at
https://www.resolutionfoundation.org/comment/the-government-doubles-down-on-the-uks-superpower-in-services/