In the early 1950s, Britain launched a third of the world’s merchant ships, spun enough
cotton to wrap the planet, and rolled a new car off the production line every minute. It was an
industrial titan. But within a generation, that titan fell. British manufacturing, once the envy
of the world, faded into memory. Many culprits come to mind, but none more guilty than
Britain’s obsession with finance. And while many rely on the state to appease our nostalgia, a
call to free markets makes more sense.
From the 1980s onward, policy in Britain tilted increasingly toward financial services. The
“Big Bang” deregulation of 1986 gave the financial sector unprecedented freedom, cementing
its dominance as an engine of the country’s growth. Monetary and exchange rate decisions
were shaped to serve London’s financial interests, even when they priced manufacturers out
of global markets. This phenomenon dubbed the “finance curse” meant that capital inflows
inflated the pound, eroding the competitiveness of British industrial exports. Manufacturing,
by contrast, saw no equivalent Big Bang. No sweeping reforms, no strategic boost, just
benign neglect. Today, services account for 80% of UK output, manufacturing, barely 8.6%.
Finance didn’t just win policy favouritism, it won the capital war. By late 2024, over 54% of
all UK bank lending was tied up in mortgages. Loans to non-financial businesses were under
17%. Lending to manufacturing actually shrank, even as credit for real estate soared. The tax
system amplifies the distortion. Debt interest is tax-deductible, encouraging leverage.
Business rates penalise firms for investing in machinery meanwhile much of the financial
sector escapes equivalent taxation. And when crises hit, banks get rescued but manufacturers
go under.
All told, Britain’s fiscal, regulatory, and policy frameworks have structurally favoured
finance, nurturing a world-class banking sector while enabling the slow decline of industry. It
is no surprise, then, that Britain ran a £226 billion trade deficit in goods last year, offset only
by a £194 billion surplus in services, largely from finance. We have become a nation whose
wealth and tax base are subsumed to the splendour of the Balance Sheet, not the production
line.
To balance the equation, we must understand the real barriers to industrial revival. Start with
skills. A recent Make UK survey found 36% of manufacturing roles are “hard-to-fill” due to a
lack of qualified applicants. Veteran engineers are retiring and fewer of our young people are
entering these trades, with even smaller numbers having the capabilities to match demand.
One in ten firms says it takes over a year to fill critical roles. Without skilled workers, firms
can’t scale or adopt new technologies.
Britain’s crumbling infrastructure is equally dire. Beyond London, outdated roads, slow rail
links, and patchy broadband cut off entire regions. UK industrial electricity prices are now
the highest in Western Europe, nearly triple the EU average. One in three manufacturers say
poor infrastructure and energy costs are blocking modernisation.
A deep irony also lies in the fact that despite being a global financial powerhouse,
manufacturers are often starved of capital. Net lending to the manufacturing sector has either
turned negative or stagnated. Unlike Germany’s Mittelstand or the state-backed finance
models in Asia, Britain lacks relationship banking that nurtures real economic growth.
Venture capital, too, chases fintech and software, not dirty coal factories.
To the issue of industrial decline is sure to follow the reemergence of “industrial strategy”,
this time under new names like “mission-led government”. Whatever the new title, the
historical record of central planning remains dismal. Successive governments have backed
politically popular but economically shaky sectors (British Leyland, the Concorde, “clean
coal,” or offshore wind over cheaper onshore alternatives to name a few) only to waste public
funds and distort markets.
Even well-meant strategies get derailed. Theresa May’s 2017 plan favoured offshore wind,
despite cheaper onshore options, due to rural opposition. Politics, not economics, often picks
the winners, but even when they may be promising, they are vulnerable to rebranding and
reversal. May’s strategy was replaced within four years but businesses simply can’t plan on
such a timeline.
Unsurprisingly, the road to industrial prominence is paved in market principles, not nannystate guidance. What Britain really needs is not a new industrial strategy, but a fresh fiscal
environment. Market-enabling policies, not top-down planning. That starts with reforming
how we tax investment. The UK’s property tax, penalizes business investment by increasing
tax bills when firms install new machinery or upgrade facilities. This has deterred retooling
and modernization. Shifting to a land value tax (taxing land, not improvements) could
eliminate this disincentive
Mission-led investment also holds promise. Instead of backing firms, government sets
ambitious goals, like net zero by 2050, and lets industry compete to solve them. This model
supports innovation through co-investment, green procurement, and long-term policy signals.
Gigafactories in the North East, or modular nuclear reactors championed by Rolls-Royce, can
thrive under this structure if commitment and vision is assured.
Finance reform is equally as important. Britain’s capital markets are awash with money, but
too little of it actually reaches the factory floor. Things like Mansion House reforms aim to
unlock £25–50 billion for UK private investment by 2030. But more needs to follow. Tools
like green bonds and venture funds for advanced manufacturing could put London’s capital to
work on the real economy (funding factories, labs and tech that drives long-term
productivity).
Finally, power must be decentralised. A one-size-fits-all policy from Whitehall won’t fix
Britain’s regional imbalance. Local leaders know their strengths better than any “industrial
strategies”, whether semiconductors in South Wales or hydrogen in Teesside. Germany
thrives by giving cities like Länder real economic power, why shouldn’t Britain should do the
same?
This isn’t about rejecting government. It’s about rethinking its role, from planner to enabler.
The stakes are high and the current path , a laissez-faire hope that the City will generate
enough wealth to compensate for industrial decline, looks increasingly untenable for an
inclusive, resilient economy. The alternative is not a nostalgic return to the 70s, but a
favourable fiscal environment that aligns incentives so that finance serves the broader
economy rather than the economy serving finance.