Can No 10 North pass the MG Rover test?

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The Prime Minister has announced that economic policymaking will be led by No 10 North. Does this mean that the so-called ‘dead hand’ of the Treasury will no longer be able to frustrate worthwhile projects which will boost the UK economy? Or does it run the risk of expenditure and borrowing getting out of control and leading to a bond market meltdown?

From my experience over several decades of Government policymaking there are two key guidelines for successful microeconomic policy. If No 10 North can get these right, then moving economic policy nearer Andy Burnham could pay dividends. But if they are ignored or watered down, which tends to happen if political rather than economic factors are prioritised, then we will be on a primrose path to collapsing market confidence.

These tests apply to all the main levers Government can pull to influence business activity: regulation, public expenditure to incentivise investment or innovation, public procurement and trade policy. They are deceptively simple, but politicians have found them extremely inconvenient.

Test 1: consider the counterfactual

The first test is to ensure you think about a realistic alternative world in the absence of your policy intervention. Governments often assume that the alternative to, for instance, rescuing a business which seems economically important is that the whole of this economic activity will be lost. In practice this will almost never happen. Employees will find other jobs; technology and IP will be bought by others who are often in a better position to make use of them. In fact, thanks to market forces, the resources are highly likely to be used in a more productive way which adds greater value rather than less. So lesson one: when proposing intervention always consider whether the likely alternative scenario is actually a worse economic outcome.

Test 2: consider the whole economy

The second test is to consider the impact of your intervention on the economy as a whole, not just part of it. Governments are often shortsighted. But not the so-called Treasury shortsightedness which prevents worthwhile investment. This is the myopia which can see the need to support certain ‘strategic’ or ‘sensitive’ sectors but gives little or no thought to the impact of that support on other sectors or the wider economy as a whole. That impact can result in higher prices for users, lower productivity as a result of weakened competition and higher taxes or regulation on more competitive businesses. Lesson two: always consider whether support for a particular part of the economy is actually in the interest of the economy as a whole.

Over the last 40 years of so called neoliberal policies, currently being blamed by some for the UK’s ills, successive administrations have on the whole grasped the value of these tests and avoided too many false steps. A classic case, with which I was heavily involved, was the collapse of the MG Rover car company in 2005. Rover was subscale economically and uncompetitive with international rivals. It had been given a substantial dowry by BMW to get it off its hands but when the money ran out, the company faced insolvency. The crisis broke in the midst of an election campaign and the management clearly thought that the loss of 6,000 jobs at Rover, plus suppliers, in the West Midlands was not something the Labour Government could contemplate. 

However the Government was not so easily rolled over. No rational observer could envisage a stand alone company succeeding. The Government supported efforts to find a buyer, including from China. When this fell through it was clear that any funding would at best buy some time, and that – applying the tests above – the resources in this loss-making company were better deployed elsewhere. Employees went to other car or engineering companies – or self-employment (many wanted to become plumbers); the IP was sold to the Chinese – hence the MG cars we see today – which meant Rover’s creditors, often SMEs, recovered some money. Public money given to Rover would have been a net negative to the economy as a whole.

What the Government did, however, was aid the transition through significant skills support. Rover workers who wanted to retrain as plumbers or anything else got help to do so, thus encouraging continued participation in the workforce in jobs more likely to last.

Sometimes, of course, these judgements are difficult to make. Will innovation expenditure lead to a pioneering role for new UK companies, with massive spillover benefits, or will it disappear down the drain like the Betamax videoplayer – or the failed investments of the Scottish National Investment Bank? But we must not allow politicians to make this difficulty an excuse for not applying these tests to the best of their ability. One conclusion in relation to innovation support is that it should be broadly based, applicable across different sectors and technologies, rather than betting the farm on an apparently brilliant product. A classic case was Reaction Engines, a UK aerospace company which pioneered a new type of engine for space orbiters. This received £50 million of public money before going bust in 2024. Was that the best use of our innovation budget?

Applying all this to the current Government, which has vowed to bring back manufacturing to the UK, we need to hold their feet to the fire in using these tests. Is money and protection for the steel industry, on the scale being provided, actually in the interests of the wider UK economy if it leads to higher prices for steel users (whose importance to the economy far outweighs steel) and public expenditure costs paid for by taxes on other viable companies. Similarly with industries like ceramics, which have received significant public investment. Is that the best use of public money across the economy?

Does it make sense to require public authorities to buy British if that means lower quality products at worse cost than could otherwise have been achieved, and a reduction in the competitive forces which lead to innovation?

It’s no secret that the tests I’ve mentioned are the ones Treasury officials (and to be fair, teams in the Business Department) would look to apply to Government intervention

So my question for Burnham and No 10 North is – are you committed to these tests? Would you resist the siren attractions of a good press release in the short term while ignoring the likely damage to the wider economy in the longer term? Would you pass the MG Rover test?

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