The government’s forthcoming industrial strategy must provide certainty, clarity and stability to business to avoid a “chilling effect” on investment, ICAEW says.

In its response to the Invest 2035 green paper, ICAEW says that policies and incentives that change too frequently would deter businesses from investing and stifle economic growth. The industrial strategy should demonstrate long-term policies to encourage investment and boost growth over a 10-year period, it says.

The UK economy “thrives when it embraces what it does best and encourages open and free trade across the world”, ICAEW adds in its submission.

ICAEW also believes the industrial strategy – due to be published in spring 2025 – should focus on developing skills, including helping individuals identify the skills and qualification pathways into the sectors that need talent for growth. 

Data to monitor performance

Meanwhile, the new Industrial Strategy Advisory Council (ISAC) should use data on well-defined metrics to measure specific barriers to investment, and monitor performance of the industrial strategy against them.

ICAEW also calls for a commitment from government to follow through on its existing policy commitments, finish projects already under way, and invest sufficient resources in government departments and the private sector.

Iain Wright, ICAEW Managing Director, Reputation and Influence, said a modern industrial strategy is critical to ensuring the foundations are in place to generate strong economic growth. “It is always difficult to strike the right balance between policies that help the entire economy, or targeted intervention in certain sectors, which boosts growth in those areas in which we in the UK have a global advantage. We think that with this green paper the government has got that balance about right.

Industrial strategy to address policy churn

“A strategy that lacks a clear plan, or includes policies and incentives that change too frequently, is likely to have a chilling effect on investment. Businesses can’t and won’t invest when there is fast policy churn; the industrial strategy has to address that,” Wright said. 

“We were delighted to see recognition of the professional and business services sector as one of the areas with the highest growth opportunity for the economy and business, as it is key to the building of a highly skilled economy.

“We want the UK to be the best place to invest and to start, run and grow a business. Our members have enriched our response through their insights and experiences. We’re pleased to have contributed to this process and stand ready to play our part going forward,” Wright added.

ICAEW’s response welcomes the government’s decision to include the professional and business services sector, which accounted for one in seven UK jobs last year, in its list of growth sectors.

Higher education as growth sector

ICAEW is also urging the government to include higher education as the ninth sector in the industrial strategy, in addition to the eight growth-driving sectors already prioritised for a targeted approach to investment.

The sector, worth £41.9bn since the 2021/22 academic year, according to a report from London Economics, would provide a major export value as well as wider benefits to the UK economy through access to leading international talent and expertise, ICAEW says.

However, it warns that improving access to high-level skills is critical to boosting the economic performance of growth sectors, and says action is needed to help people more easily plot their path from school leaver to skilled worker. To measure this, the industrial strategy should reintroduce the metric tracking the proportion of those who hold a technical qualification as their highest educational attainment.

Security strategy essential

Following a series of ‘once-in-a-lifetime' shocks, including the ongoing war in Ukraine and the global financial crisis, the Institute emphasised the importance of injecting resilience into the economy.

The strategy should identify those key sectors and value chains likely to be compromised by geopolitical uncertainty and subsequently exposed to issues such as supply-side challenges and price hikes, ICAEW said.

The Institute said the new industrial strategy should also:

• Support productivity growth and innovation in the accountancy sector by improving data-sharing processes with government departments, introducing a digital identity system, providing greater insight into how AI regulation will work in practice and leveraging skills bootcamps; 
• Deliver a tax roadmap for businesses that identifies areas holding back business activity and growth, and potential tax policy options, such as reforms to business rates and VAT;
• Put ISAC on a legislative footing, to make it difficult for any subsequent government to abolish it without taking parliamentary steps to repeal it;
• Set out strategies for planning reform, housing, infrastructure, energy security and transport, and investigate barriers to infrastructure investment in pension fund risk profiles;
• Grant cluster status for cities and regions to champion technologies to enable better integration and targeting for existing government interventions, including local skills improvement plans, freeports and investment zones and research and development (R&D) investment;
• Commit to spending 3% of GDP on R&D, and provide a roadmap for achieving this, including levers relating to regulation and taxation, and support from HMRC; and
• Explore a new version of the growth voucher scheme and consider more bespoke resources to facilitate scale-ups in the UK, to ensure access to financial advice is more readily available.

View ICAEW’s full consultation submission here. 

Sentiment tracked by ICAEW’s Business Confidence Monitor put confidence at 6.1 on the index for Q2 2023 (see chart, above), a significant improvement on the previous quarter (2.5), but below the pre-pandemic average of 7.2 across 2010-19. Domestic sales growth has slowed to its lowest level since Q3 2021, impeding confidence. Growth in capital investment spending also slowed and is expected to moderate further in the year ahead, reflecting fragile business confidence.

ICAEW’s latest BCM also revealed that there was significant variation in confidence across sectors. Transport firms were the most confident in Q2 amid improvements in the global availability of ships, increased road haulage capacity and rising demand for air travel. Energy, water and mining firms were the second most confident, benefiting from the easing in the global energy crisis. In contrast, confidence was negative in the property and retail and wholesale sectors, reflecting their direct exposure to rising interest rates and, for the former, a weakening housing market. 

UK inflation drops to 12-month low

UK Consumer Price Index (CPI) inflation stood at 7.9% in June 2023, the lowest rate since March 2022 and down from 8.7% in May. However, inflation is still almost four times the Bank of England’s 2% target. A 22.7% fall in petrol and diesel prices at the pumps compared to May 2022 was the main driver behind the fall in the headline rate. 

While the marked easing in firms’ pricing expectations in the latest BCM suggests that inflation will continue dropping back, the impact of historically high wage costs points to the headline rate remaining stubbornly above the Bank of England’s 2% target well into 2024.

As a consequence, the Bank of England raised UK interest rates by 25 basis points to 5.25%. While the end of this rate hiking cycle is close, concerns over stubborn inflation mean that unless the economy slips into a prolonged recession it may take more than a year before rates start falling again.

Labour market cooling despite record wage growth

Regular pay growth (excluding bonuses) was 7.3% in the three months to May 2023, the joint highest on record. However, due to continued high inflation, wage rises are lagging behind price rises (see chart, above), maintaining the squeeze on real household incomes and consumer spending. 

There are signs that the UK labour market is starting to loosen with the unemployment rate rising from 3.8% to 4.0% in the three months to May 2023. Similarly, the number of job vacancies, a good indicator of demand for workers, fell by 85,000 in the three months to June 2023, the 12th successive fall. The squeeze on economic activity from the lagged impact of interest rate hikes could see labour market conditions weaken further in the next year.

Mental health challenges drive increase in people too ill to work

The UK economic inactivity rate – the proportion of people who are neither working nor looking for work – was estimated at 20.8% in the three months to May 2023, 0.4 percentage points lower than the previous quarter, but 0.6 percentage points higher than before the pandemic. 

The increase in economic inactivity since the start of the coronavirus pandemic had been largely driven by those who are long-term sick. More than 1.3 million (53%) of those inactive because of long-term sickness reported that they had depression, bad nerves or anxiety in Q1 2023 (see chart, above). Other health conditions, including long COVID, have risen by 53% since 2019.

Implications for accountants, business owners and the economy

Taken together, the latest data releases suggest that economic conditions in the UK remain weak as high inflation and rising interest rates hindered economic activity among businesses and consumers.

ICAEW’s BCM suggests a more challenging second half of 2023 for the UK, with mounting concerns over rising interest rates, a higher tax burden and waning customer demand all likely to weaken UK GDP in the months ahead.

UK economy – what to watch for 

1. The latest quarterly UK GDP data to be released on 11 August is likely to confirm that the economy effectively flatlined in the second quarter. Figures are also likely to show business investment fell amid tougher economic conditions.
2. The latest official productivity estimate to be released on 15 August is likely to show that productivity in the UK remains anaemic, limiting future economic growth and living standards. 
3. Next official figures due out on 16 August should show another big fall in inflation, with lower energy bills – following the reduction in Ofgem’s energy price cap in July – likely to pull the headline rate below 7%.