Which policies can best support private sector growth in the UK?

JT: I wonder if we can start by looking back on your time in government and what you aimed to achieve as secretary of state for business, innovation and skills in the coalition government, 2010-15. How successful were the policies you were able to implement and what were the main constraints that you faced?

VC:

A big question! I have written a book that covers what I tried to do in government: Partnership and Politics in a Divided Decade, jointly authored with my wife, Rachel Smith. I had five years in my job, which is unusual – I think this was the longest since the Second World War. Certainly, compared with Conservative ministers in the recent government, who did five cabinet jobs in a year, it puts a different perspective on it.

I did have a series of objectives. They were ambitious and, I think, partly achieved. First of all, industrial strategy. It was very clear after about six months that the government was drifting, and there were a lot of ad hoc decisions around public procurement on railways and different industries with various problems. We had an overall approach, so I wrote a letter to the prime minister with Michael Heseltine (who was an unpaid adviser in the department and a former secretary of state for trade and industry) and made the case for having a comprehensive industrial strategy, which was accepted by the cabinet and implemented.

We had four years of working with a dozen sectoral groups – in some cases very effectively, leaving a real legacy. For example, in the case of the car industry, with government funding and private sector co-financing, we set up an automotive propulsion centre that still functions and has contributed greatly to the adaptation of the car industry to the new technologies that are required.

Similarly, in the aerospace industry, we launched a programme with £1 billion each from government and industry to work on new wings at Broughton in Wales mainly. That work has continued and it is the basis for the survival and expansion of the UK aerospace industry.

There were some big successes also in bioscience and a few others sectors where good deal of collaborative work was done until my Conservative successors decided that they didn’t really approve of industrial strategy. We did have Greg Clark’s period as secretary of state for business, energy and industrial strategy under Theresa May, which was very productive. But after that, they closed it down and it will have to be restarted under the next government.

Second, the banking system. One of my first tasks when I was appointed – which was a clear objective in the coalition agreement – was to split the big investment banks so that they would be safer. We commissioned the Vickers report (the independent commission on banking) and this led to ring fencing (separation of retail and investment banking). It was a long and tortuous process, but it did happen and it’s still in force. The banks are complaining about it, but it’s done.

The other side of banking policy that I had responsibility for was that banks were not lending to business. There was a very serious hiatus in bank lending and one of the constructive things that were done was the establishment of the British Business Bank, which was something I did as part of a political bargain with George Osborne (chancellor 2010-16). It’s still there and was the main mechanism for functioning British business during the pandemic.

Third, innovation. One of the first things I wanted to do when I got into office was to follow up an idea that was being promoted by Hermann Hauser, Will Hutton and various other people to set up a network of innovation centres loosely based on the Fraunhofer system in Germany. I did that and it became the Catapult Network. There are about ten of these centres now – one or two didn’t get off the ground. but most have succeeded and become quite an important part of joint working on innovation between government and the private sector.

A fourth and final point was that we were committed at the start of the coalition to setting up a green investment bank, which I did with support from Chris Huhne (secretary of state for energy and climate change 2010-12). This was a big success – I think we had a portfolio of around £12 billion, much of it co-financing wind farms in the North Sea. But then the Tories, in what I thought was a rather malicious piece of revenge, closed it down when we left office and sold it off in a really rather disreputable way to an Australian bank. I don’t know where it is, but it’s no longer performing its function, and the new government will have the job of setting up another one and wasting a lot of time because we had a very effectively functioning bank, based in Edinburgh.

I think that’s a reasonable summary of the big things, but there were of course a lot of small things too.

JT: It’s interesting to hear about your work across five years as business secretary. I was listening to a discussion about whether government ministers should have fixed terms to get around the problem of short-termism and people being in posts for a few months and then moving onto a new portfolio. What would your insight be on this based on your experience?

VC:

I don’t think you can legislate for it, but I think it’s good practice and something that governments should be trying to do. Clearly people will get involved in scandals or die, so you can’t require ministers to be in post for five years.

JT: To pick up on your point on industrial strategy – pretty much after the coalition government came to an end, we really haven’t had an industrial strategy. Why do you think that is? Is it ideological or a lack of interest, or something else?

VC:

I think it was a mixture of ideology and that they couldn’t care less. Under Theresa May – who was a believer – it was active, they were basically continuing what I did. I had a good relationship with Greg Clark, we compared notes and certainly the process was improved. They set up an industrial strategy council, so there was a form of governance over it, so actually under him and Theresa May, they built on it and it was very constructive. But I think after the 2019 election and Brexit, it was the kind of thing that didn’t interest them and the Brexiteers – Kwasi Kwarteng, Jacob Rees-Mogg and various people who had my job were ideologically opposed to it.

JT: Earlier in your career, you were an Overseas Development Institute (ODI) fellow – a role in which you have to make really important decisions at quite a high level – and you have a background as a trained economist and as a practitioner before you went into government. Did that shape how you thought about your role in government?

VC:

There was a big gap – the fellowship was in the mid-1960s in Kenya. It was an incredible experience and I’m still attached to the ODI as a distinguished fellow, so I do research with them. My approach was framed partly by this, but I was also part of the UK government machine at various points. I was in the diplomatic service for a couple of years, I was John Smith’s special adviser when he was in the cabinet in the Department of Trade, so I saw some of the ways in which government policy worked or didn’t work.

I think I also benefited from the eight years I worked at Shell, where I was chief economist. I learned a lot about long-term thinking and planning. They taught me the importance of strategic thinking.

JT: I’m currently writing a book on the history of the chief executive officer (CEO), and your name is going to crop up because of the Davies review, which looked at how to increase representation of women on FTSE 100 boards. You were a major supporter of it and, I believe, you wrote to companies to encourage them to do the right thing. We’re now 13 years on: are you surprised by the changes that have taken place? And what more needs to be done to make sure that we see more women as CEOs or in financial director roles?

VC:

I was pleasantly surprised by the early stages of what we did. We took it up as a big issue and we worked with different sectors on how best to make sure that there was diversity on boards, as well as which I got in touch with the top 100 companies.

I think the success was partly that we had a clear objective, of 30% representation, so it was possible to make sure that every leading company had women on the board. There was a simple metric that it was possible to achieve. We decided not to make it compulsory, as is the case in Norway, to build trust with the business community and to show we were going to listen.

I think as far as it went, it was successful and we did meet our metrics. But we began to see some of the problems, including that many of the women weren’t in executive positions, there was a shortage of women chairs, often the same very-qualified women were moving around different companies. So, underlying everything was the issue that there were a handful of very qualified women who moved into these positions but no pipeline of bright 30-35-year-olds moving up through the system. When I left, these challenges were being addressed, but I got the impression that the Conservative government lost interest in the problem.

There was also another dimension, which is racial or ethnic diversity. Shortly before I left office, I was approached by comedian Lenny Henry and other campaigners to do the same thing for ethnic diversity and there was quite an ambitious programme launched. I wasn’t there long enough to see how far it got, but this is a more complex challenge because ethnic diversity includes a multitude of different backgrounds.

JT: Another idea floated when you were business secretary that caught my imagination was the idea of regional stock exchanges. With everything being centred in London – the banking system and capital markets – there’s been a long-run issue of businesses not being able to get finance. Do you think we are too reliant on London and does that mean that the regions aren’t getting the capital they need?

VC:

I think it’s a given that we are very centralised country and very London-centric. It became obvious during the coalition that one of the weaknesses in what we were doing was the lack of a spatial dimension to the industrial strategy.

In part that was recognised, so we initially started with a regional growth fund, which was our alternative to the regional development agencies. That was directed by a panel of people led by Michael Heseltine, but it was a little bit of a Father Christmas-type approach to supporting industry in the regions. It was successful as far as it went, but we realised that the real issue was around devolution and decentralisation. Although there were mixed feelings about it, we did eventually settle on the regional mayor-type approach. I saw the Ed Balls report and I think everyone now accepts that this is the model we have to work with. We started the process of decentralising decision-making in that way, but we were very much at the beginnings of it.

As far as regional stock exchanges are concerned, they were a good idea, but there wasn’t any practical ‘go’ to it. The fact is that if people wanted to raise money at a regional level, setting up an exchange wasn’t going to solve the problem. Indeed, even London is now struggling as people are raising capital in the United States instead, so setting something up in Nottingham, for example, isn’t going to sort that city’s problems.

So we realised in a rough and ready way that helping early-stage companies to raise equity capital, partly by setting up the business growth fund – which was one of the outcomes of the negotiations with the banks at an early stage of the coalition – and in order basically to stop me shouting at them and instructing them to lend more, the banks coughed up around £1 billion I think it was, to set up this organisation to provide long-term equity capital. I think this has been a big success, but very low key. In addition, one of the functions of the British Business Bank is to support local angel networks, which is probably a better way of getting equity capital into local companies than artificially setting up a regional stock exchange.

JT: In Northern Ireland, we’ve seen some of the benefits of devolution but not all of them, but there’s still a huge gap between the North East, Scotland, Wales, Northern Ireland and the rest of the UK. And it’s interesting to think, as government decentralises, whether the private sector will follow. One of my hypotheses is that that the private sector congregates in London because that’s where government is, but when you push government back out into the regions, the private sector will follow. What do you think?

VC:

The test case is Scotland because it’s on a different scale from Northern Ireland, Wales and the North East, and if it could be done anywhere, it would be done in Scotland. The Scottish National Party government has had a fairly dirigiste approach to policy: they set up the Scottish development agency and the Scottish National Investment Bank, but neither has been a great success and there have been reports of misuse of funds.

JT: Indeed, the attempt to set up a regional stock exchange in Scotland fell flat on its face.

VC:

If it couldn’t work in Scotland, it wasn’t going to work anywhere. They have the institutional network, they have the banking system in Edinburgh – the Scots should have been able to do it if anybody could.

JT: If you look at the UK’s productivity since the global financial crisis of 2007-09, it has flatlined. What do you think that crisis has done to the UK?

VC:

It’s a terribly important question. I did see a chart showing that the rate of growth of productivity had been pretty constant since the Second World War through the upheavals of the 1970s, through the Thatcher era, through New Labour. None of these things seem to have dented it – it was massively impressive, but it was fairly steady productivity growth. Then it fell off a cliff after 2008 and is only just recovering, as I understand it. So why did that happen?

Source: ONS

I don’t buy party political arguments that say it is all due to austerity. But there was a chronic break in the financing of business after the financial crisis. It was the fact that the banks retracted essentially from business lending, and particularly from small business lending, and we tried to counter it in all kinds of ways, but it was a powerful force.

There was sense behind it, because the banking system had almost collapsed and needed to build up the equity base, the regulations governing prudential risk meant that the banks had to attach a higher risk weight to business lending as opposed to mortgage lending. This meant that basically the banks turned their backs on the small and medium-sized enterprise (SME) sector, and that certainly in the early years after the financial crisis, those were critical factors.

I saw a very good piece of analysis by Goldman Sachs, which attributed the decline in productivity to the loss of credit from the export sector. British exports were really very badly hit, particularly through SMEs and it was their inability to raise capital at a crucial time that really knocked them off course.

JT: And I suppose, then, the other policy that we got after the global financial crisis was quantitative easing and near zero interest rates, which lasted right up until quite recently. Do you think that had a distortionary impact on businesses and the economy?

VC:

It was designed to keep business afloat. It was the only mechanism that the authorities could conceive of at a time when the government was having to do fiscal contraction to keep the economy afloat. I think people now have a reasonably good theoretical and practical understanding of quantitative easing, but in the early stages it was a bit of a black box, nobody quite understood how it was going to work. Ben Bernanke (then chair of America’s central bank, the US Federal Reserve) had come up with it but whether it operated primarily through credit flows or boosting asset values was quite mysterious.

The way I’ve often likened it was as if a country had a massive heart attack, which was the financial crisis, and all kind of wires were stuck in the body with adrenaline and so on to keep it alive. And quantitative easing did keep the economy alive, but with all kind of side effects that we we’ve now learned all about.

Quantitative easing was absolutely critical and I tried, during the coalition, to persuade Mervyn King (then governor of the Bank of England) to make quantitative easing more targeted, in other words, instead of just purchasing government bonds or corporate bonds to buy up bundles of SME loans. He took the view that they weren’t willing to do that, that it was ‘political’ and distorting and their policy was politically neutral, and so they weren’t willing to entertain it.

JT: Circling back to the green investment bank and the Davies review, if we think about UK public companies today, there are also corporate governance problems. Executive pay is still out of whack with the average worker’s pay; there are sustainability issues with a lot of these big companies; and then we spoke about issues of diversity – there is a voluntary business-led approach to tackling these issues. Do you think that’s the right way to do?

VC:

Actually, one of the big things we did, and certainly spent a lot of time over was executive pay, and I got legislation through that gave shareholders the legal powers to approve forward-looking pay policy. Now, you could argue that it didn’t make a great deal of difference and there were people who said that there should have been something built in linking executive pay to workers’ pay. That is a fair criticism, but we did seriously try to address executive pay and make it more directly linked to company performance and I think we’ve probably gone as far as we could in that.

JT: It was interesting when Theresa May came into power that this is one of the things that she wanted to deal with, and of course, other things overtook it.

VC:

One of the rare elements of continuity was actually in the industry strategy. What happened was that my special adviser, Giles Wilkes, was invited to join Theresa May’s team, and I said ‘why not, we want good policy’. So, a lot of this stuff, including executive pay, came as a result of an unusual bit of continuity.

JT: That’s interesting because that link between executive and average worker pay breaks sometime in the 1980s in the UK, and it’s continued ever since. I think part of the thing here might be de-unionisation because when you’ve got unions bargaining with firms, they’re looking at what senior executives are paid and saying, ‘well, if they’re getting 10%, we want 10%’. With the de-unionisation of the private sector, that link between average worker pay and the executive pay has been broken.

Moving to sustainability – is this something you think we should leave up to the corporate or business sector? Do you think they’re doing enough in terms of tackling or thinking about this? Or are they just virtual signalling?

VC:

We thought a lot about this, and there was a recognition that there was a sort of big market failure. Most of us were aware of the Stern report on climate change and that the government had big obligations in this area.

There was initially a reasonable level of consensus around the green bank. The problem we had with it was the Treasury. We took the view that the green investment bank should have borrowing powers that would enable it to leverage the equity that has been put into it and do a lot more. But the Treasury took the view that any state-backed entity that had borrowing powers would add to the overall government borrowing. The bond vigilantes were on the lookout for this kind of thing, so they scuppered it. So, although, the green bank had a balance sheet of £12 billion, which is fairly respectable, it wasn’t on the scale that Ed Miliband (current secretary of state for energy security and net zero) has been talking about and he’s likely to run into the same objections from the Treasury.

So there was a lot of awareness of sustainability, but the question was what we were going to do about it. I think the other initiatives that were relevant were the relaunching of nuclear power, which was a green initiative. Within the industrial strategy, we had offshore wind, which again was regarded as not just a private sector matter but also a government one. And there was a lot of very complex policy around Chris Huhne’s reform of the pricing system. It was above my head, a lot of it, but this idea of an implicit carbon price fed into policy in various ways. But certainly behind the scenes, there was a lot of concern around sustainability and what government could and should be doing.

JT: Realistically, what can governments do to try and promote the private sector? How far can they go and how important are they in terms of promoting the private sector?

VC:

Well, I think there are different levels of engagement. First of all, for the industrial strategy, you just have a dialogue, which is quite helpful because you uncover issues of which government ministers may not otherwise have been aware.

I think, secondly, co-financing proved to be very valuable. If the government was willing to put up £1 million and demanded that this was ‘match financed’ by the private sector, this was a way of getting a lot of investment over the line that would otherwise be difficult.

Total investment (as a percentage of GDP) split by public and private, 1960-2022

Source: Chadha and Samiri, 2022

And I think the third thing was something we spent a lot of time and energy on, which was the area where Britain is historically done very badly, which is vocational training and apprenticeships. One of the trade-offs for the very unpopular policy on tuition fees was that we got some more money to plough into apprenticeships. We started this system of advanced level/degree level apprenticeships, which has actually become the best bit of the government’s policy in that area. That is another market failure where there was an obvious obligation to help with it.

JT: If you were business secretary now, what are the two or three big ticket items that you would be pushing?

VC:

Well, I would re-establish the industrial strategy and restart the green investment bank. I think probably the important thing is to get a much stronger and clearer position on public sector borrowing for investment. The Treasury view, which is quite hard to refute when you’re in the middle of a financial crisis, is that all borrowing is borrowing. It doesn’t matter whether you’re borrowing to pay civil servants or borrowing to build a railway, it’s all borrowing and the markets treat it the same. That is clearly nonsense in the real world but in the markets, that’s the orthodoxy we are confronted with. So I think, having a clear fiscal rule that enables the government consistently to invest, maybe 3% of GDP in investment, whether it’s infrastructure or support for industry, is a necessary discipline.

JT: Thank you very much for your time today. Is there anything else that you like would like to mention?

VC:

We’ve only covered about a quarter of the stuff that was going on. There was the whole area of trade promotion – most of us spent a lot of our time on aeroplanes going around China, India and Russia trying to boost performance in emerging markets. There were export credits, the role of the armaments sector – whether it is a priority sector or something we should hang back from. There were a whole lot of other issues but I think we’ve covered the central policies.

Image: CASEZY on iStock