New Labour will today abandon 12 years of support for market forces by unveiling an interventionist strategy under which the Government will subsidise the growth industries of the future.
In an interview with The Independent, Lord Mandelson said the drive could create hundreds of thousands of jobs in hi-tech and low-carbon industries over the next 10 years, to compensate for the smaller financial services sector that will emerge from the current recession.
The new strategy marks a reversal of the Government's free-market approach since Labour won power in 1997, as ministers follow the bailout of Britain's ailing banks by intervening in other key areas of industry.
The Business Secretary said: "If markets fail or don't work efficiently, government has a role to play – as we saw in the financial markets." He insisted: "The Government's job is not to substitute for markets or displace the private sector. We are not into bailing out the past, but removing the barriers to investing in the future."
His "strategic plan" will be a central part of a "going for growth" Budget to be announced by Alistair Darling on Wednesday.
It could lead to hundreds of millions of pounds of taxpayers' money being used to fund the expansion of "green" industry. Projects funded could include wind, wave and nuclear power, and electric and hybrid cars. Digital communications, pharmaceuticals, life sciences, aerospace, business services and electronics may also be in line for such "green" funding. As well as providing direct aid, all government departments will shape tax and regulatory policies to help these firms.
Ministers will use the Government's huge purchasing power – £175bn a year – to buy as many British goods and services as possible. They insist that a "buy British" policy will not breach European Union rules on state aid and public contracts.
Today's "New Industry, New Jobs" report, to be launched by Gordon Brown, the Skills Secretary, John Denham, and Lord Mandelson, calls for "a new activism" in industrial policy.
It is designed to provide a more upbeat message, as Mr Darling admits the economy will not recover in the second half of this year as he forecast last November.
The Chancellor is expected to predict it will contract by about 3.5 per cent this year before starting to grow again at the end of the year. Another gloomy set of unemployment figures will be released three hours before they are overshadowed by the Budget.
In his interview, Lord Mandelson said: "It is not enough to limit the damage of the recession, however vital this is. We need also to provide a vision of the opportunities and advantages of the UK in the world economy at the upturn and beyond."
Claiming the interventionist approach would help Britain emerge more quickly from the downturn, he said: "We have to grow our way out of this recession, not simply sit back on our hands, do nothing about it and let events take their course." The shift is designed to answer criticism from business that other governments, notably France, are doing more to help their domestic industries than Britain is. "We cannot be the odd one out," Lord Mandelson said. He insisted the change would not mean "economic nationalism", because the Government still supported open markets and free trade.
The Business Secretary added: "To justify government action, there will have to be a real opportunity to make a difference, and any government initiative must make a genuine long-term impact to give value for money to the taxpayer."
Other proposals include: ensuring that high-growth, high-innovation firms get the financing they need; more government support for exporters; more aid to turn bright ideas into "world-beating" products; and exploiting opportunities created by university researchers.
The document insists the Government will not "pick winners", opt for state ownership of industry, "override market forces or ignore market signals". Its new activism "does not imply a fundamental change in our view of the relationship between the market and the state.... However, the way the Government sees its own role in the market needs to change in order to deliver a more coherent and effective approach." This means "a readiness to intervene where necessary" by "supplementing" rather than "substituting itself for the market" and "correcting significant market failures."
It says the credit crunch showed that markets cannot be relied upon to serve the public interest. "In future there should be no barriers of mind-set that hold back sensible and prudent intervention," it adds. "This is not activism for its own sake." While not denying Britain "the huge benefits of free enterprise," the Government recognises that the private sector "has important limits."
Lord Mandelson said that "government has to act, as other governments do, in removing the barriers holding business back".