ICAEW REPRESENTATION. ICAEW submission to the BEIS Select Committee inquiry on industrial strategy

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1 ICAEW REPRESENTATION ICAEW submission to the BEIS Select Committee inquiry on industrial strategy The Institute of Chartered Accountants in England and Wales Chartered Accountants Hall Moorgate Place London EC2R 6EA UK T +44 (0) F +44 (0) DX 877 London/City icaew.com

2 ICAEW is a world-leading professional accountancy body. We operate under a Royal Charter, working in the public interest. ICAEW s regulation of its members, in particular its responsibilities in respect of auditors, is overseen by the UK Financial Reporting Council. We provide leadership and practical support to over 147,000 member chartered accountants in more than 160 countries, working with governments, regulators and industry in order to ensure that the highest standards are maintained. ICAEW members operate across a wide range of areas in business, practice and the public sector. They provide financial expertise and guidance based on the highest professional, technical and ethical standards. They are trained to provide clarity and apply rigour, and so help create long-term sustainable economic value. Copyright ICAEW 2016 All rights reserved. This document may be reproduced without specific permission, in whole or part, free of charge and in any format or medium, subject to the conditions that: it is appropriately attributed, replicated accurately and is not used in a misleading context; the source of the extract or document is acknowledged and the title and ICAEW reference number are quoted. Where third-party copyright material has been identified application for permission must be made to the copyright holder. icaew.com

3 EXECUTIVE SUMMARY ICAEW would like to see an agile industrial strategy, focussed as much on potential as existing strengths to deliver a strong economy, drive technological innovation and manage the transition of exiting the EU. This will support Government priorities in furthering economic growth, boosting productivity and mending regional divides. Reinforcing success Comparative advantage: The UK is a world leader in professional services, technology, engineering and creative industries among others. We must provide sector specific support to those industries where the UK has a comparative advantage, which include: - Professional and Business Services (PBS): The UK is a world class provider of PBS and it remains one the of the UK s most productive sectors with a trade surplus. Regulatory coherence and stability alongside attracting world class talent are the foundations for success, maintaining these are crucial to our competitive edge. - Financial services: The UK s financial services sector is a jewel in the crown in setting global standards and making London the financial capital of the world. There are regulatory challenges which Government must consider to support the sector in light of leaving the EU. - Tech, engineering, science and creative industries: Our scientific industries are the forefront of global development, and need investment in R&D with guarantees on EU funding to ensure they thrive in the decades ahead. Creative industries need support on unique funding challenges, as they boost UK soft power around the globe. Innovation Reinforcing strengths must be balanced with creating a business environment from which newcomers can emerge. Government should develop clusters through shared infrastructure and skills for productivity growth, alongside creating a more entrepreneurial environment for businesses: Connecting clusters - Infrastructure: Government should borrow to invest in housing for urban areas, roads and rail to connect cities, and airport capacity to build global links. Upgrade digital infrastructure to get businesses online and support collaboration by improving broadband connections through fibre to home and businesses. - Skills: To cope with technological change, skills training must involve continual Continued Professional Development (CPD) including use of online training and apprenticeships for all ages. Better data must be available for students and careers advisers to make informed decisions on their future and respond to the needs of local and national labour markets. Entrepreneurial environment - Company structure: Limited liability structures are too cumbersome and we need change from what was a Victorian idea for the modern world. Government must reform business structures, considering new company structures as an alternative to joint and several liability. - Exports: Getting young businesses to scale up and expand globally will take our SMEs to the next level, boosting productivity and growth. A targeted export voucher to cover advice and costs involved in exporting to new markets should be implemented make Britain a global trading nation. 3

4 RESPONSES TO SPECIFIC QUESTIONS Q1. What does the private sector want from an industrial strategy? Reinforcing success 1. Comparative advantage: The UK is a world leader in many sectors and Government must play to the country s strengths as we engage internationally with increased intensity. But Government must avoid complacency about the success of these sectors, and many face unique problems which Government can help address. As part of an industrial strategy to upgrade the UK economy, Government should seek to reinforce success and support the UK s strongest sectors. 2. This includes: 3. Professional and Business Services (PBS): The large global accountancy firms have their roots and strong historical ties in the UK, not only in London, but in Manchester, Birmingham and throughout the UK. Our PBS sector is considered the gold standard around the world and as 11% of the UK s economy is key to its success (BIS, 2013). Previous industrial strategy recognised the importance of the PBS and the UK s pioneering role in developing the sector, and ICAEW is active and supportive of the Professional and Business Services Council. To continue supporting the PBS sector Government should focus on: - Regulatory coherence with the EU: Aligning the UK s regulatory framework for the PBS sector with the EU and global standards will be key to maintaining our competitive advantage. The recently announced Great Repeal Act will help reduce uncertainty for now, but Government must resist the urge to amend complex regulatory frameworks that deny us access to international markets. - Skilled workers: Freedom of movement underpins a successful services based economy. The UK s PBS sector works for the rest of Europe and beyond. To remain competitive, businesses and their work force must remain resolutely international in make-up and attitude. The mobility of ICAEW members and the capacity of ICAEW to continue offering access to ICAEW qualification and training in other European markets is at stake. 4. Financial services: The financial services sector is a heavily regulated sector and as such the main challenges which Government could offer support on are likely to come from changes in our relationship with the EU. Government should keep the following points in mind as part of its industrial strategy: - Reputation: The UK s exit of the EU should not lead to a race to the bottom, even when adopting less stringent regulatory measures may offer competitive advantages. The UK s long established reputation for strong regulatory frameworks, corporate governance and business law should be preserved as much as possible. - Rule shaping: The UK Government should establish new channels to influence financial services regulation at the EU level and continue to lead regulatory developments at the international level. This will help ensure that the UK is a rule shaper as opposed to a rule taker. 5. Tech, engineering, science and creative industries: Technology is changing the world of work, but it is also a source of jobs and prosperity, and the UK is at the forefront of many of these industries: from our engineers in the car and aerospace industries, to the scientists in 4

5 Innovation Stevenage who are building satellites to go into orbit. Around the world our creative industries boost our soft power, with one in six graduate jobs now being in a creative role. - Invest in R&D: The Government under invests in R&D which could be holding back UK innovation and businesses, stymieing growth and productivity. It needs to raise the current level of spending which is equivalent to 1.6% of GDP to the international goldstandard of 3% to keep the UK ahead of the curve in tech, engineering and science. - Guarantee EU funding: Keeping sectors competitive requires lowering barriers to entry and allowing an influx of ideas and talent to enter the market, this means supporting start-ups. Of particular concern are a number of investment streams currently in place under EU arrangements, which are now in doubt following the Brexit decision this summer. These include seed funds and grants for smaller companies, which need to be maintained. 6. Reinforcing strengths is one part of the equation and equal emphasis must be given to improving the business environment and encouraging the innovators and disrupters to start businesses and become the leading sectors of the future. The state cannot be expected to know which of these will emerge, so must create the right environment through clustering and sharing, and through providing the means for entrepreneurs to get started and scale up. Connecting clusters 7. Connecting the UK economy: The UK has pockets of strengths and specialisms. But outside London, they are not strong enough to compete internationally. The central premise of the Northern Powerhouse was to connect the Northern economies, through transport links to capitalise on the positive effects of agglomeration: shared infrastructure, knowledge spillovers, and a wider talent pool. Strong regional governance and developing urban areas is an OECD recommended approach. This approach should be developed throughout the UK, with an emphasis on infrastructure and skills to support businesses of all sectors and to develop our city regions as centres of growth: Infrastructure: Better digital and physical infrastructure to connect workers and business 8. Upgrading Britain s digital infrastructure is vital to protecting our rank as number one in the world when it comes to businesses trading with customers online. Regardless of this success, less than a third of small businesses currently trade online. Physical infrastructure is also required, and despite the rhetoric, investment in infrastructure in the UK is flat or declining. Government needs to seek a return on investments for effective infrastructure spending. 9. Digital upgrade: Government should look to ensure cities and surrounding rural areas are connected through fibre broadband, ensuring a strong connection for homes and businesses. Cities must also look to take advantage of big data, from delivering smarter transport systems to crowd control. 10. Building UK plc: Government needs to borrow to invest and should look to invest in roads, rail and airports, but also social infrastructure, namely housing. It is encouraging to hear Government signal their intent to invest. Business workspace must also be protected, for example, protecting incubators for start-ups in space near universities to access research and talent to boost innovation. For more, please see Funding UK Infrastructure. Skills: Building an agile and adaptable workforce for changing industries 5

6 11. The world of work is changing rapidly through automation and technology. Our skills training must be informed by developments which are creating a glut in the labour supply and recognise the effects this has on workers and society. ICAEW Chartered Accountants have long emphasised a mix of knowledge, skills and experience as the foundation to a successful career. New ways of training workers may not solve all the problems, but it would create a more adaptable workforce and mitigate the impact of changes in declining industries: 12. Lifelong CPD: Continuing skills development throughout a person s career should be prioritised by employers in all sectors and supported by Government. Technology makes this relatively cheap, through MOOCs and online courses. Apprenticeships also have a role to play, ensuring that people of all ages have access to quality apprenticeships to train and retrain. Increasing diversity in apprenticeships should also be a priority, for example through more flexible and part-time apprenticeships. 13. Careers advice: Government must close the gap between business needs and education. Students need better careers advice to fully understand their options and the routes available to them to skilled jobs. Careers advisers need to be properly funded and have adequate training. They should be equipped with information on local and national labour market needs, alongside being in dialogue with local business. Entrepreneurship and competition 14. Ensuring the economy remains open to innovators, entrepreneurs and disrupters is vital to mitigating distortion or failure related to Government intervention, but more fundamentally to ensuring the UK economy thrives in the 21 st century. Reforming business structures and supporting young businesses to scale up can help enshrine competition in the economy: Company structure: Reforming company structure for new ways of doing business 15. We urgently need new options for company structures to allow for innovation and growth. Though the limited liability structure was perfect for the industrial revolution, it is too cumbersome and restrictive for the modern world and may also threaten trust and confidence in business. 16. Alternatives to joint and several liability: Allowing individuals to limit their personal liability could see new types of association grow. This would reflect the increased mix of business and personal life and new ways of doing business, though protections must remain in place for consumers. Technologies like blockchain mean keeping track of complex and constantly-changing entitlements are now a possibility. Exporting: Supporting exporters for an international economy 17. Technology and transportation are opening up exporting opportunities for entrepreneurs from the outset. A recent survey found close to 70% of exporters have always exported they were born global. Come 2020, the OBR expects the value of UK exports to be just 630bn, around a third lower than the government s 1 trillion target. 18. Export tax credit: Introduce an export voucher or tax credit to help businesses overcome the initial costs and to receive expert advice on exporting. With the possibility of new exporting opportunities arising from the UK s withdrawal from the EU, UK business must be primed to take advantage and start trading. Q2. What lessons can be learnt from previous governments' industrial strategies? 6

7 19. Government intervention in the UK economy has had mixed success. As the Economist notes, it is mostly reminiscent of interventions in the 1970s, as the UK economy s industrial base became unprofitable, strike prone and outmoded. Taxpayer money was wasted trying to support unprofitable industries and the companies failed regardless. ICAEW believes two main lessons should be learnt: Developing regional strengths 20. Too centralised: Industrial strategy during the previous Government used a whole-of- Government approach. This still risks a Government knows best attitude. A top down, Whitehall-centric approach will not do for building an agile economy that delivers for all regions of the UK. It further increases the risk of Government failure if local authorities and business representatives do not have a stronger say in industrial strategy through their understanding of local business and its needs. 21. Developing clusters: Government must recognise knowledge is dispersed throughout the economy, and allow local authorities and LEPs to have a strong role in choosing where to invest. It must empower regions to build on existing strengths, while supporting hubs and clusters of business for challengers to emerge, and for fledgling start-ups to use shared infrastructure and link with academia. These hubs can complement London s strengths and work as a partner to the South East, not a competitor. Reporting on spending 22. Lack of accountability and reporting: A worry with any Government intervention is that it will waste taxpayer money. There has historically been a lack of emphasis on what Government has got for its money, but a focus instead on staying within budget. This needs to be analysed at a more granular level to avoid Government failure and getting poor value for taxpayers, all the more important for a Government deciding which programmes to support and for how long. 23. Reporting and conditional investment: Greater investment must go hand in hand with strong reporting and flexibility to adapt policy based on results on the ground. There should be an economic or financial return with success measured against the aims of the policies and Government needs to be able to adapt to the evidence base. This must be balanced with giving programmes and initiatives a fair trial period and properly communicating with the business community. For more on Government financial reporting, please see ICAEW s A Modern Finance Ministry. Q4. What are the pros and cons of an industrial strategy adopting a sectoral approach? Should the Government proactively seek to pick winners? 24. ICAEW believes there is a place for both sector specific and broader action to support the economy. Government must reinforce our strengths while creating a business environment that fosters innovation and competition. Focussing on potential and implementing policies which allow for growth in a range of sectors are a necessary partner to supporting the UK s strengths. Pros of a sectoral approach: 25. Market failure: Some sectors may be particularly sensitive to market failure and require specific support. Areas such as Creative Industries and Engineering & Technology have unique problems in acquiring funding which capital markets unaided may not solve. There is also a difference between supporting a sector through partnerships and coordination, and supporting select businesses through measures such as tax breaks, with which the phrase picking winners is often associated. 7

8 26. Comparative advantage: Government money would be most efficiently spent supporting industries where the UK has a comparative advantage, rather than sectors which employ only a small number of people or are unprofitable. For example, Professional and business services (PBS) sector was one of the 11 sectors recognised in the previous Government s industrial strategy, and ICAEW is active and supportive of the Professional and Business Services Council established during that period. Research done for the last Government s industrial strategy showed the PBS sector employed 3.8 million people and is worth 153 billion (BIS, 2013). Cons of a sectoral approach: 27. Limited impact: A sectoral approach can risk ignoring many sectors to support only a chosen few, which would not tackle structural weaknesses in the economy. Maximising the value of investment requires broader measures. These are policies which can improve the business and economic environment and so are beneficial to a broad range of businesses and sectors. For example, investment in infrastructure be it roads, rail or housing, can have significant economic benefit and resulting from Government coordination and investment. 28. Government failure: Though there is always risk of Government failure in market intervention, historically this has been amplified during sectoral policies or picking winners (see section 12). Broader measures would support the economic and business environment, allowing more businesses to prosper without the need for Government to be able to know which sectors are likely to succeed or how they should be supported. If not a sectoral approach, should the industrial strategy have a broader objective, such as improving productivity? 29. Productivity: ICAEW has previously recommended that boosting productivity should be a national priority, and the Chancellor s recognition of the urgent need for improvement is positive. It could therefore be a reasonable objective for industrial strategy. Productivity gains are a likely outcome of the measures recommended in this submission, but Government should additionally adopt a national productivity target of 2-3% productivity growth. 30. Measuring productivity: In a world which is becoming more interconnected and with the rise of the digital economy and sharing economy, it is important that the tools we use to measure our progress are relevant and accurate for the 21st century. The work Sir Charles Bean has done on statistics is an important contribution. As part of measuring the returns on investment, sectoral productivity targets could be put in place as a yardstick. Q4. Should the industrial strategy have a geographical emphasis? How should the industrial strategy work with local authorities and Local Economic Partnerships, reconciling a U.K.-wide strategy and local, regional and devolved nations' priorities? 31. Industrial strategy should have geographical emphasis, supporting the development of clusters to capitalise on the effects of agglomeration and it is encouraging to see the Secretary of State for BEIS recognise the importance of location. Local and Combined Authorities and LEPs must be involved in advising on the specifics of choosing the right projects for investment, the skills their region needs to support local businesses, as well as the drive to boost regional exporting. To support this: 32. Commit resources to LEPs and Growth Hubs: LEPs and Growth Hubs should play an important role in developing and delivering regional industrial strategy, but they need to be properly resourced beyond 2018 and equipped to deal with any increase in demands. The NAO report on LEPs (NAO, 2016) states that LEPs do not possess the resources necessary to deliver Growth Deal projects, with only 5% believing they had the resources available to deliver, and 28% did not think they had sufficiently skilled staff. Partnering with professional 8

9 advisers, such as ICAEW is currently doing with Growth Hubs may be one option to boosting available skills. 33. Combined and Local authorities and LEPs need rigorous reporting standards: Increased fiscal responsibility for local authorities increases the need for principle based reporting and guidelines for projects and additional spending powers. This needs to be applied to measuring ROI on projects, and accountability for success and failure. Given the expected reduction in budgets that councils are facing local authorities will find the increasing financial management responsibilities challenging. There should be clear apportioning of responsibility between central and local government, and mechanisms to deal with failure on the local level. 9