A report released by NESTA suggests that a recovery based on high technology and innovation offers the best prospect for growth.

The report, entitled ’Rebalancing Act’, provides new analysis on how to rebalance the economy. It shows that a full-blooded revival of the wider manufacturing sector is wishful thinking and would require growth rates not seen since the Second World War.

NESTA worked with Oxford Economics to develop four scenarios for the future balance of the economy and applied them to an economic forecast model showing how each would affect economic growth, regional performance and employment in the UK.

The four scenarios are ’business as usual’, in which the UK continues to rely on financial and business services with no significant rebalancing; a manufacturing renaissance, where the gap between the UK and leading European Union (EU) manufacturing nations is halved; a high-technology growth scenario, where recovery is driven by growth in high-technology sectors; and an innovation scenario, where investment in innovation across the economy increases productivity.

Jonathan Kestenbaum, NESTA’s chief executive, said: ’Our analysis puts paid to the notion that a broad-based manufacturing renaissance will drive recovery. Instead, it shows that a recovery based on high technology and innovation offers the best prospect for growth.’

The report acknowledges that this won’t be easy to accomplish. It also states that, if the economy is not rebalanced, the UK’s employment rate will stagnate in the first half of the decade. Regions such as Wales and the north east, in particular, will suffer from poor growth.

In practice, this means that the government should pay special attention to the small minority of high-growth businesses that generate the bulk of job creation and which have shown to be disproportionately innovative.

The report suggests focusing support for these businesses by using small-scale, often private-sector programmes that encourage high-growth, innovative businesses such as Seedcamp and the British Library IP Centre. At a time of budget constraints, this is more effective than costly government programmes such as Business Links that offer general business support but lack a clear focus on high-growth businesses.

NESTA also argues that existing government spending – such as public procurement and further- and higher-education spending – should take into account the potential of the UK’s high-technology sectors and highlights this as a priority area for future policy work.

The four rebalancing scenarios:

Business as Usual

The report highlights concerns with the base case of a continued reliance on financial and business services, even assuming healthy levels of national economic growth. Employment growth does not begin until 2013 (compared with other scenarios, where it grows from 2011). Without a shift in policy, the situation in some regions looks particularly unpromising. For example, Wales has projected annual job growth of just 0.1 per cent pa over the next decade and the north east just 0.2 per cent pa.

UK Manufacturing

For the UK’s manufacturing sector to close half the gap with the manufacturing sectors of EU leaders, such as Germany or Finland (increasing its contribution to the economy to 15 per cent pa, up three percentage points from 2008), it would need to grow at an extraordinary average rate of 6.2 per cent pa. This translates into 400,000 new companies by 2020 and an increase in the UK’s workforce by 4.1 million, which would be extremely difficult to achieve in the context of the UK’s skills base. This would amount to a major turnaround in the sector’s fortunes – something not seen in recent times.

High Tech Base

Overall average growth generated from a burgeoning high-technology base would approach 3.0 per cent pa, with high-technology manufacturing alone growing strongly. This would create 2.4 million additional jobs, contributing 3.4 per cent of total UK GVA by 2020 – up from 2.5 per cent in 2000. While this is still a small part of the economy, other sectors such as business services and construction also benefit from growth in high-technology businesses.

Innovation Across the Economy

This scenario would generate growth rates of 3.2 per cent pa and an additional 2.7 million jobs by 2020. All of the UK’s sectors would benefit. For example, high-technology manufacturing and business services would enjoy growth rates of 4.4 per cent pa and 6.7 per cent pa respectively.