Leading article: The case for industrial activism

As Britain crawled from the rubble of the credit collapse two years ago, our politicians all seemed to agree on one thing: that our economy must not be so dominated by the financial services in future. The general view was that financial engineering had been privileged over real engineering. Lord Mandelson, the former Business Secretary, even spoke of a new policy of "market-driven industrial activism", which would be more solicitous to the needs of manufacturing and entrepreneurs.

But it emerged yesterday that the Department for Business, Innovation and Skills, traditionally charged with supporting this sector of the economy, is to provide a significant chunk of the £6.2bn in early savings from the coalition Government. So is Lord Mandelson's era of industrial activism to be strangled at birth? Is manufacturing to be left, once more, to sink or swim in the rough seas of the free market?

It should not be. Lord Mandelson was right to assert that official support for industry has a place in an open economy. And it is true that this area was irresponsibly neglected over much of the past two decades as ministers came to believe that Britain could ride the financial services boom forever and that they themselves could safely retreat into being redistributors of the proceeds of economic growth.

But we need to think clearly about the proper role for the state in the private sector. There is no future in a return to the heavy-handed statism of the 1970s or the discredited policy of trying to "pick winners". The guiding principle as far as industrial policy is concerned is that government should do what the free market will not, or cannot. The function of the DBIS should be to increase Britain's long-term growth potential.

This means supporting industries that cannot get funding from the capital markets and funding important research that would otherwise go unperformed. Most of all, it means education. Britain cannot compete successfully with the rising economic powers of China and India, which have access to a vast pool of cheap workers, on labour costs. Our only hope for advantage lies in our human capital. That makes the case for intensive vocational and advanced skills training.

So how do these preliminary cuts to the department rate from that perspective? The answer is reasonably well. Painful savings of £200m will come from the higher education budget. But the previous administration's support for green technology projects, such as tidal power, will be protected; as will the science budget. There will be cuts in the budgets of the Regional Development Agencies serving the south, while those in the north will be left alone. This makes sense. Firms hardly need encouragement to invest in London or the already crowded Home Counties. Cuts will also come from non-essential spending such as consultancy, travel and information technology. And £150m of the proceeds of savings will be used to fund 50,000 adult apprenticeships and £50m will go on the modernisation of further education colleges. This strikes a reasonable balance.

But this is only the beginning. The BIS's annual budget of £22bn, unlike health and defence, has not been ring-fenced by the Government. That means Vince Cable's department is facing cuts of up to 10 per cent over the next five years. Yesterday's £700m in net savings is simply a taste of what is to come.

The Government has plucked the low-hanging fruit. But it faces a much more difficult job in finding the necessary savings without returning Britain's industrial policy – such as it is – back to the feeble state of the recent past.