Industrial Strategy — House of Lords, 2018-01-08
Topic: Macroeconomics
Thomas Lyttelton (Labour, Centre-left): My Lords, at this late stage in the evening, I will try to speak briefly, with other noble Lords having already made many interesting contributions in response to the "compendium", as the noble Lord, Lord Maude, has called the White Paper. I start by drawing the attention of the House to my entry in the register of interests "Every government has an industrial strategy however it is articulated", wrote Anna Valero and Richard Davies of the LSE in a recent paper. On that basis, perhaps even the nine different strategies that my noble friend Lady Young has counted are an underestimate. But the articulation of a strategy is important and, as the noble Lord, Lord Wrigglesworth, said, over the years—from Sajid Javid back to Nicholas Ridley, who in the Thatcher Government saw his role as Secretary of State to abolish the Department of Trade and Industry—there have been periods of industrial policy minimalism. So we should perhaps welcome the recognition by the current Prime Minister of an articulated industrial strategy. However, to adapt Dr Johnson, I feel churlishly that a Conservative industrial strategy is like the dog walking on its hind legs: it is not done well but you are surprised to find it done at all As the co-founder 30 years ago this year of the Social Market Foundation, I was heartened by the advocacy of the social market by the noble Lord, Lord Howell. Indeed, the noble Lord, Lord Wrigglesworth, invoked the Social Democratic Party, for which the social market economy was a central policy. It seems that the noble Lord, the Secretary of State, the noble Lord, Lord Horam, and I have all drunk together from that cup. In a social market, the Government’s duty is to intervene when there is market failure—but only then, whether that failure is on the one hand the abuse of oligopolistic power, or on the other hand underinvestment On the terms of the White Paper, I would like to talk principally about ideas and the business environment, and in particular the importance of venture capital. Last week, the Secretary of State for Transport talked about his confidence that the UK could be a world leader in autonomous vehicles, based on technological excellence and regulatory liberalism, if not laxness. If Mr Grayling is still Secretary of State, he seems to have been a victim earlier today of some faulty autonomous tweeting. I draw his attention to the advice of the noble Lord, Lord Heseltine, not to confuse healthy ambition with unrealistic assumptions. The network effect is likely to give a huge advantage to companies with scale, such as Waymo and Baidu. I hope and believe that the UK can contribute significantly to autonomous driving and other emerging technologies, but I am not sure it is helpful to couch it in terms of market leadership Autonomous driving will rely heavily on artificial intelligence and deep learning, another area of innovation highlighted in the White Paper. It may be worth bearing in mind in this context that 43% of all academic papers ever written on AI have had at least one author who is Chinese. As the noble Lord, Lord Heseltine, said, we face formidable competition. I hope the argument that students should not be included in the main migration figures, which the Prime Minister has so far ignored, even from within her own Cabinet, might yet succeed Another way of illustrating the scale of the challenge that the UK faces is to consider the availability of venture capital investment to support early-stage high-technology companies. I think it was Professor Ronald Gilson of Stanford and Columbia Universities who wrote that: "Venture capital … is widely recognized as a powerful engine that can drive a nation’s innovation, job creation, knowledge economy, and macroeconomic growth" In 2015, $36 billion of venture capital funds were raised in the US and $30 billion in China, where the figure is up six times in 10 years. In Europe as a whole, only around $6 billion equivalent was raised. The British Venture Capital Association records only the funds raised by its members, so underestimates to some degree the size of the total UK market. Its figure for 2015 was only $700 million equivalent The White Paper and the November Budget drew on the patient capital review, commissioned in 2016. One of the recommendations from the industry panel was for a patient capital investment vehicle capable of co-investing £1 billion per annum in knowledge economy companies. In the event, the Government have announced a £2.5 billion fund over 10 years, to be run by the British Business Bank. That is around one-quarter of the amount recommended and it is to be floated or sold as soon as is possible—and this at a time when UK venture capital funds will be losing, in all likelihood, up to £400 million per annum of investment from the European Investment Fund, the SME arm of the EIB Why has the UK, with its powerful position in financial services, been so weak in the development of a venture capital industry in keeping with its academic, technological and entrepreneurial strengths? There is a clue perhaps in an article from Forbes magazine in April 2016. Forbes is not a magazine for bleeding-heart liberals, nor, I suspect, is it even the second-favourite reading of my right honourable friend the shadow Chancellor, but the headline of the article read: "How the UK’s Growth Businesses Became Addicted to Tax Relief". The article was reporting on research commissioned by Her Majesty’s Treasury from Ipsos MORI that found that 40% of all investment under tax-advantaged EIS and VCT schemes would, in the view of the investors and the investee company, still have happened without any tax relief. Seventy-nine per cent of investors said that the principal reason for investing was to gain the tax relief. In 2012-13, £2 billion of EIS and VCT investments were made, implying the loss or deferral of tax revenues of between £600 million and £1 billion. The Government have in the November budget proposed some tightening of the rules for EIS and VCT eligibility to prevent, they hope, low-risk investments benefiting from tax relief as they have done in recent years However, this is a never-ending treadmill, remembering similar initiatives as far back as the 1980s and 1990s. Up-front tax breaks will invariably attract risk-averse investors and ingenious intermediaries. Even for risk investments there may be little or no additionality yet, at the same time as tightening the eligibility, the Government propose a doubling of annual limits for both investors and companies There are two adverse consequences of this: one is the loss of tax revenue and the other, arguably even more important, is the distortion of the market. Thirty years of tax-advantaged investing in unlisted shares—unique in major economies—has contributed significantly to the stunting of a professional institutional venture capital industry on the scale necessary to support our knowledge economy and comparable with those in our principal competing centres Breaking an addiction can involve cold turkey, not an appetising prospect for any of us—particularly at this time of year—so I accept that, even if this argument is regarded as valid, any further changes may have to be phased in. However, the Government have a long way to go before there is an effective venture capital industry to support the knowledge economy.