Tim Horton: Remove the state from the equation and British business will be exposed

Now that he is the Business Secretary, it might be a bit much to expect Vince Cable to follow through on an earlier Liberal Democrat pledge to abolish the business department altogether. But of all the savage cuts announced this week, the £700m cut in industrial support is perhaps the most predictable.

These cuts aren't simply born of necessity. They are deeply ideological for both coalition parties. For the Tories, "picking winners" brings back nightmares of the Hover-train and other cash-swallowing industrial white elephants of the 1970s. And the Lib Dems are even more hawkish than the Conservatives. In an unnoticed pamphlet last autumn, Mr Cable set out radical plans to curb business support and scrap the regional development agencies.

The alternative Lib-Con formula is simple: government should get out of the way. Provide enough tax cuts and deregulation and everything will be OK. It is standard neo-liberal orthodoxy from about 30 years ago. The trouble is, the world has moved on – and that includes our understanding of competitiveness. Few think a laissez-faire approach will rebuild British manufacturing today.

First, unlike 30 years ago, we now understand much better how governments must intervene to tackle "market failures" that can be barriers to enterprise.

Take research commercialisation. In the year the Conservatives last left office, a paltry 26 spin-out companies were formed from university research. A decade later, the annual total was 226 – more per pound of research spending than in the US. This was part of a mini-revolution in the knowledge economy fostered by Labour, with academics culturally more geared towards commercialisation and significant government funds invested to help them do it. Far from getting out of the way, government has had to get involved to make it happen.

The same applies on skills. For all the economic modernisation Thatcher wrought on Britain, her belief that government was "the problem, not the solution" meant that by 1997 Britain was an international laughing stock in terms of skills. Over the last decade, we've gone from "appalling" to "OK". Going further requires more investment and ambition, not less.

Yet the Conservatives oppose key measures to increase participation in education, such as Educational Maintenance Allowances and raising the participation age to 18. And, along with the Lib Dems, they also oppose the goal of getting half of young people into higher education, even though more than half say they want to go.

Of course tax is important (though Labour did cut corporation tax and capital gains tax). But on many other issues, the Right's minimal-state ideology will leave the UK economy dangerously exposed. From addressing regional weaknesses to filling equity gaps, tackling market failures first requires believing in them.

The real bone of contention is around what's called "selective" industrial support – targeted help for specific industries. Labour's Strategic Investment Fund provided £1bn of selective investment last year, in areas such as low-carbon vehicles and industrial biotech.

The Conservatives and Liberals assume such intervention must necessarily equate to the failed industrialism of the 1960s and 1970s. Before the election, Vince Cable dismissed it as "a really dreadful old Labour idea" and "a massive waste of money". But it simply reflects best practice in many OECD countries that we compete with.

Being competitive in the global economy increasingly means developing comparative advantage in particular specialisms. And this often requires government making choices. Many world-leading industries today – from Japanese cars, to South Korean electronics, to renewables in Denmark and Germany – are testament to the success of selective government intervention in decades gone by.

There is a hard lesson here: while governments might not be able to "pick winners", sometimes we have to pick, or we risk not having any winners at all.

Tim Horton is the research director at the Fabian Society, a centre-left think-tank