Addressed to: HM Government — His Majesty’s Treasury, the Department for Business and Trade, and the Department for Energy Security and Net Zero

Prepared by: Manus AI, drawing on the work of Professor Steve Keen and supporting evidence

Date: June 2026

Executive Summary

The United Kingdom’s manufacturing base has been in structural decline for more than half a century. By early 2026, manufacturing accounted for just 8.5% of total UK economic output, compared with approximately 30% in 1970 1. This guide presents a comprehensive, step-by-step roadmap for reversing that decline. It is grounded in the post-Keynesian economic framework of Professor Steve Keen — particularly his work on endogenous money creation, the role of energy in production, sectoral balance accounting, and the dangers of private debt accumulation — as well as in the latest empirical evidence on UK supply chain vulnerability, deindustrialisation, and industrial policy.

The guide argues that the urgency of reindustrialisation has been dramatically heightened by a new era of global instability. Fuel and resource shortages, geopolitical conflict, climate-related disruptions, and the fragility of extended “just-in-time” supply chains have exposed the UK’s over-reliance on imports of manufactured goods. The time for incremental adjustment has passed. What is required is a deliberate, state-led industrial transformation, funded through the sovereign money-creation capacity of the Bank of England, and executed over a ten-to-fifteen-year horizon.

Introduction: Why We Must Act Now

The Fragility of Long Supply Chains

For three decades, the dominant economic consensus held that the United Kingdom should embrace globalisation, specialise in financial and professional services, and import manufactured goods from lower-cost producers in Asia and Eastern Europe. This model delivered apparent prosperity in the short term, but it rested on a precarious assumption: that global supply chains would remain stable, affordable, and politically uncontested.

That assumption has been comprehensively shattered. The COVID-19 pandemic exposed the brittleness of global production networks, as shortages of personal protective equipment, semiconductors, and pharmaceutical ingredients cascaded across the world economy. The Russian invasion of Ukraine in 2022 triggered an energy crisis that drove up industrial input costs across Europe, demonstrating how dependence on imported fossil fuels creates acute economic vulnerability. Houthi attacks on Red Sea shipping in 2024 disrupted trade routes that carry approximately 12% of global trade, forcing shipping costs to spike and delivery times to lengthen dramatically 2. In 2026, supply chain disruption and energy costs continue to slow the UK economy, with cost pressures accelerating across goods sectors 3.

The Bank of England has formally acknowledged that sustained disruption of supply chains has been a major source of large and correlated forecasting errors in recent years 4. The UK, as a small open economy highly integrated into global trade systems, is particularly exposed. Bank of England analysis reveals that China is now the largest individual-country supplier to over half of UK manufacturing sectors, and that much of this exposure comes through indirect, hidden channels 4. A disruption to Chinese production — whether from geopolitical conflict, a climate event, or domestic economic instability — would cascade through the UK economy with devastating speed.

The logic is straightforward: a country that cannot make things cannot defend itself, cannot feed itself, and cannot maintain the living standards of its citizens when global supply chains break down. The UK’s current account deficit — the persistent gap between what it earns from the rest of the world and what it spends — is a direct consequence of deindustrialisation, and it represents a structural drain on domestic savings and investment 5.

The Human Cost of Deindustrialisation

The consequences of the UK’s industrial decline are not merely macroeconomic abstractions. Deindustrialisation has devastated communities across the Midlands, the North of England, South Wales, and Scotland. Former industrial areas are characterised by persistent health problems, reduced employment opportunities, and high rates of economic inactivity due to long-term sickness 6. Evidence shows that these effects have been felt not only by those who lost their jobs but also by their children and grandchildren, with economic change carrying severe intergenerational costs 6.

The disappearance of industries such as coal, steel, and shipbuilding has contributed to higher rates of long-term sickness, declining life expectancy, and surges in regional economic inactivity. In former coalfield areas, the proportion of individuals with a declared disability that severely limits their daily lives is almost twice as high as in the South of England 6. These are the human consequences of the neoclassical consensus that Professor Keen has spent his career challenging.

Theoretical Foundation: The Economics of Steve Keen

The policies proposed in this guide are grounded in the post-Keynesian economic analysis of Professor Steve Keen, Distinguished Research Fellow at the Institute for Strategy, Resilience and Security, University College London. His work challenges the prevailing neoclassical consensus on three critical dimensions relevant to industrial policy.

1. Endogenous Money Creation and Sectoral Balances

Mainstream economics, drawing on the “Loanable Funds” model, argues that banks merely intermediate between savers and borrowers, and that government deficits crowd out private investment by competing for a fixed pool of savings. Keen’s evidence, confirmed by the Bank of England itself, demonstrates that this model is false 5. Bank lending creates deposits — it does not lend out pre-existing savings. This means that the government, operating through the Bank of England, can finance spending in excess of taxation by crediting private bank accounts, as demonstrated by Quantitative Easing after 2008 5.

Crucially, Keen’s sectoral balance analysis shows that if the private sector is to accumulate net financial assets — to save and invest — some other sector must run a deficit. In a closed economy, that sector must be the government. In an open economy with a current account deficit (as the UK has), the government deficit must be even larger to compensate for the drain on domestic savings caused by net imports 5. The policy implication is direct: the UK government must actively use its sovereign money-creation capacity to fund industrial investment, rather than constraining itself with arbitrary balanced-budget rules derived from the discredited “Ricardian Equivalence” framework of Robert Barro 5.

“The policies needed to boost the aggregate level of household savings are: for the government to inject more money into the economy by spending than it takes out in taxation… and for the government to affect the economy’s international competitiveness so that the current account deficit falls.” — Professor Steve Keen, Evidence to Parliament 5

2. Energy as the Fundamental Input to Production

Neoclassical production functions, such as the Cobb-Douglas model, treat energy as a trivial third factor of production, assigning it a coefficient based on its small share of GDP. Keen’s work demonstrates that this is a profound error. Energy is not a commodity input like any other; it is the physical enabler of all economic activity. As Keen puts it, “labour without energy is a corpse, capital without energy is a sculpture” 7.

When energy is correctly incorporated into production functions as an essential input to both labour and capital, its importance increases by a factor of ten compared to the neoclassical treatment 7. This has direct implications for industrial policy: secure, affordable, and sustainable energy supplies are not merely a cost item to be managed — they are the foundational prerequisite for any manufacturing revival. A UK industrial strategy that does not address energy costs and security is built on sand.

3. The Dangers of Financialisation and Private Debt

Keen’s most celebrated contribution is his analysis of the relationship between private debt and economic instability, drawing on the work of Hyman Minsky. When private debt grows faster than GDP for too long, it creates the conditions for a debt-deflation crisis — as occurred in 2008 7. The UK’s post-Thatcher model of growth, based on financial sector expansion, housing asset inflation, and consumer debt, is precisely the pattern Keen identifies as unsustainable. The alternative — an economy grounded in productive manufacturing, real investment, and export earnings — is both more stable and more equitable.

The State of UK Manufacturing: A Baseline Assessment

Before outlining the policy steps, it is essential to establish the current state of the UK manufacturing sector.

The UK is currently the 11th largest manufacturing nation in the world 8. While this is not negligible, it represents a dramatic fall from the country’s historical position. The multiplier effect of manufacturing is significant: for every £1 million that the manufacturing sector contributes to UK GDP, a further £1.8 million is supported across the wider economy through indirect and induced effects 9. This means that the benefits of reindustrialisation extend far beyond the factory floor.

Step-by-Step Policy Guide

Step 1: Establish the Macroeconomic Funding Framework (2026–2027)

The Problem: The UK government has historically constrained its industrial ambitions with self-imposed fiscal rules that treat government spending like a household budget. This is economically illiterate, as Keen’s analysis demonstrates. The government is not revenue-constrained in the way a household is; it has the Bank of England and the power to create money.

The Action: Formally abandon the fiscal rules that prohibit deficit spending on productive investment. Establish a National Reindustrialisation Fund (NRF) capitalised at £40 billion over five years, financed through a combination of gilts purchased by the Bank of England and direct Treasury issuance. The NRF would operate as a patient, long-term investor in strategic manufacturing sectors, analogous to Germany’s KfW development bank.

The Theoretical Basis: Keen’s sectoral balance analysis proves that private sector net savings are mathematically equal to the government deficit plus the current account surplus 5. With a persistent current account deficit, the government must run a correspondingly larger deficit to allow the private sector to save and invest. Funding the NRF through deficit spending is not reckless; it is the necessary precondition for private sector investment in manufacturing.

Costing and Timing:

Expected Outcome: Crowding in of approximately £30 billion in private capital, delivering around £84 billion in total investment in UK manufacturing over five years 10.

Step 2: Implement a National Energy Security and Affordability Programme (2026–2030)

The Problem: UK industrial electricity prices are among the highest in the developed world, making domestic manufacturing uncompetitive relative to Germany, France, and the United States. Energy costs represent 11–25% of total business costs for over a quarter of UK manufacturers 10. This is not a market failure to be tolerated; it is a structural impediment to reindustrialisation that requires direct government intervention.

The Action: Implement the British Industrial Competitiveness Scheme in full and at pace, cutting electricity costs by up to £40 per megawatt-hour for over 7,000 manufacturing firms from 2027 10. Extend network charge reductions to 90% for the most energy-intensive firms (steel, chemicals, glassmaking) from 2026. Simultaneously, accelerate the build-out of renewable energy generation and grid connections to new industrial sites, reducing the structural cost of energy over the medium term.

The Theoretical Basis: Keen’s energy-in-production framework establishes that energy is the essential input to all economic activity 7. High energy costs do not merely reduce profitability; they reduce the physical capacity of the economy to produce. Addressing energy costs is therefore not a subsidy to industry — it is the restoration of the physical preconditions for production.

Costing and Timing:

Expected Outcome: A 25% reduction in electricity costs for eligible manufacturers, improving competitiveness and reducing the incentive to offshore production to lower-cost energy environments.

Step 3: Reshore Critical Supply Chains (2027–2032)

The Problem: The UK is deeply embedded in global supply chain networks, with roughly half of total production dependent on the sourcing and sales of intermediate inputs 4. China is now the largest individual-country supplier to over half of UK manufacturing sectors 4. This concentration of supply chain risk is a direct threat to national security and economic stability.

The Action: Mandate local procurement for critical national infrastructure (defence, healthcare, energy, food) through a “Buy British” framework, setting a minimum threshold of 60% domestic content for government procurement by 2030. Provide a 25% tax credit for capital expenditure on reshoring production from high-risk geographies. Establish a Strategic Stockpile Reserve for critical materials (rare earth elements, semiconductors, pharmaceutical precursors, and food staples) equivalent to six months of domestic consumption.

The Theoretical Basis: Keen’s analysis of the current account deficit demonstrates that every pound spent on imported manufactured goods that could be produced domestically represents a drain on domestic bank accounts and a reduction in private sector net savings 5. Reshoring is therefore not protectionism for its own sake; it is the restoration of the domestic income flows necessary for a healthy economy.

Costing and Timing:

Expected Outcome: Reduction of UK supply chain concentration risk, improvement in the current account balance, and creation of an estimated 150,000–200,000 new manufacturing jobs over five years.

Step 4: Turbocharge Research, Development, and Innovation (2026–2033)

The Problem: The UK spends approximately 1.7% of GDP on R&D, compared with 3.1% in Germany, 3.4% in Japan, and 3.5% in South Korea 11. This underinvestment in knowledge creation is a primary reason for the UK’s poor export performance in high-value manufactured goods.

The Action: Scale up the Advanced Research and Invention Agency (ARIA) to £2 billion per year by 2028, with a specific mandate to fund breakthrough technologies in advanced manufacturing, clean energy production, material sciences, and industrial automation. Establish ten new Advanced Manufacturing Clusters, co-located with universities and anchored by major industrial firms, modelled on the Fraunhofer Institute network in Germany. Increase the R&D tax credit rate for manufacturing firms from 20% to 30%.

The Theoretical Basis: Keen’s framework, drawing on the ecological economics tradition, emphasises that the long-run competitiveness of an economy depends on its capacity to improve the efficiency with which energy inputs are converted into useful work 7. This is precisely what R&D investment achieves: it raises the productive efficiency of capital and labour, reducing the energy and material cost per unit of output.

Costing and Timing:

Expected Outcome: Increase in UK R&D spending to 2.5% of GDP by 2033; development of new export-competitive industries in clean technology, precision engineering, and advanced materials.

Step 5: Address the Skills Deficit (2026–2031)

The Problem: There are currently approximately 50,000 vacancies in UK manufacturing 10. The skills gap is a primary bottleneck for industrial expansion, and it has been exacerbated by decades of underinvestment in technical education and the financialisation of universities that Keen critiques 12.

The Action: Reform the Growth and Skills Levy to allow employers full flexibility to fund apprenticeships in advanced manufacturing, engineering, and technical trades. Establish a network of 50 new Technical Colleges of Manufacturing, modelled on the German Berufsschule system, providing Level 3–5 qualifications in precision engineering, robotics, additive manufacturing, and industrial chemistry. Ring-fence £1.2 billion per year for industrial skills training, as committed in the 2025 Industrial Strategy 10.

The Theoretical Basis: Keen’s critique of the neoliberal “deform” of education — which has financialised universities, loaded students with debt, and prioritised vocational metrics over genuine skills development — is directly relevant here 12. A manufacturing revival requires a different educational model: one that values technical knowledge, supports apprenticeships, and produces workers capable of operating advanced industrial machinery.

Costing and Timing:

Expected Outcome: Reduction of manufacturing vacancy rate by 50% by 2031; creation of a sustainable pipeline of 30,000 new technically qualified manufacturing workers per year.

Step 6: Reform the Exchange Rate and Trade Policy (2027–2030)

The Problem: The Pound Sterling has historically been overvalued relative to the productive capacity of the UK economy, making UK exports expensive and imports cheap. This has been a structural driver of deindustrialisation, as John Mills has argued for decades 5.

The Action: Adopt an active exchange rate policy aimed at achieving a more competitive Pound, consistent with closing the current account deficit over a ten-year horizon. This could be achieved through coordinated intervention in foreign exchange markets, adjustments to interest rate policy, and the strategic deployment of sovereign wealth instruments. Simultaneously, negotiate trade agreements that include reciprocal manufacturing content requirements and protect nascent domestic industries during the reindustrialisation phase.

The Theoretical Basis: Keen’s evidence explicitly recommends “reducing the relative value of the Pound Sterling to make domestic production competitive with offshoring, as John Mills has been arguing for decades” 5. The current account deficit is not a natural state of affairs; it is the product of decades of exchange rate mismanagement and financial sector dominance.

Costing and Timing: Exchange rate policy does not require direct fiscal expenditure, but the transition to a more competitive Pound may require foreign exchange reserves of £10–20 billion to manage the adjustment. The timeline for achieving current account balance is 10–15 years.

Step 7: Establish a National Industrial Ownership Framework (2027–2035)

The Problem: Key strategic industries — steel, semiconductors, pharmaceuticals, and advanced materials — cannot be left entirely to market forces, particularly when those forces may result in foreign acquisition of critical national assets or the closure of strategically important facilities.

The Action: Establish a National Industrial Ownership Framework that gives the government the power to take strategic stakes in critical manufacturing enterprises, modelled on the French Agence des Participations de l’État. The recent nationalisation of British Steel is a precedent that should be extended to a broader set of strategic industries 1. Public ownership need not mean full nationalisation; minority stakes, golden shares, and public-private partnerships are all appropriate instruments.

The Theoretical Basis: Keen’s analysis of financial instability demonstrates that private markets, left to their own devices, will systematically underinvest in long-horizon, capital-intensive industries in favour of short-term financial returns 7. The state must step in as a patient, long-term investor where private capital is insufficient or misaligned with national interest.

Costing and Timing:

Step 8: Reform Financial Regulation to Direct Credit to Industry (2026–2028)

The Problem: The UK financial system systematically directs credit towards property and financial assets rather than productive industrial investment. As Keen demonstrates, bank lending creates money, and when that money flows into asset markets rather than productive investment, it inflates asset prices without creating real wealth 5.

The Action: Introduce credit guidance policies that incentivise banks to lend to manufacturing firms, modelled on the post-war “corset” controls and the more recent German Mittelstandsbank model. Establish a Manufacturing Investment Bank within the British Business Bank with a dedicated mandate to provide long-term, patient capital to manufacturing SMEs. Reform capital adequacy rules to reduce the relative attractiveness of mortgage lending compared with industrial lending.

Costing and Timing: Regulatory reform has minimal direct fiscal cost. The Manufacturing Investment Bank would require initial capitalisation of £5 billion, leveraging up to £25 billion in lending capacity.

Consolidated Costing Summary

The following table summarises the estimated public expenditure required across all eight policy steps over a ten-year horizon.

The net public cost of approximately £66 billion over ten years — roughly £6.6 billion per year — is modest relative to the scale of the challenge and the expected returns. Make UK estimates that increasing the manufacturing sector from 10% to 15% of UK GDP would add an extra £142 billion to UK GDP 13. The return on investment is therefore substantial.

Implementation Timeline

Counterevidence and Rebuttals

Objection 1: Comparative Advantage and Market Efficiency

The Argument: Neoclassical economists argue that the UK should specialise in services where it has a comparative advantage, and rely on free trade to import cheaper manufactured goods. Industrial policy is characterised as “picking winners,” which distorts market efficiency and leads to resource misallocation. The Ricardo-Heckscher-Ohlin framework suggests that countries benefit from specialisation and exchange 14.

The Rebuttal: This argument rests on static assumptions of full employment, perfectly mobile factors of production, and stable comparative advantages — none of which hold in the real world. Keen’s critique of neoclassical economics demonstrates that these models are built on mathematical incoherencies and empirical falsehoods 12. More practically, the argument ignores the dynamic nature of comparative advantage: South Korea and Taiwan did not have a natural comparative advantage in semiconductors; they created one through deliberate industrial policy. Furthermore, the assumption of stable global supply chains — on which the free trade argument depends — has been comprehensively invalidated by recent events 2 4.

Objection 2: Inflation and Crowding Out

The Argument: Large-scale government investment will drive up domestic prices, crowd out private investment by competing for scarce resources, and increase the national debt burden to unsustainable levels.

The Rebuttal: Keen’s sectoral balance analysis demonstrates that government deficits do not crowd out private investment; they are the precondition for private sector net savings 5. The “crowding out” argument is based on the discredited Loanable Funds model of banking, which the Bank of England has explicitly rejected 5. On inflation, the risk of demand-pull inflation from targeted industrial investment is far smaller than the supply-side inflation caused by global supply chain disruptions — which the UK has experienced acutely in recent years 3. Productive investment increases the real capacity of the economy, which is inherently anti-inflationary over the medium term.

Objection 3: The Cost of Reshoring

The Argument: Reshoring manufacturing from low-cost countries will permanently raise the prices of consumer goods, reducing living standards for UK households.

The Rebuttal: This argument ignores the full cost of offshoring, which includes the social costs of deindustrialisation (health, welfare, regional inequality), the economic costs of supply chain disruption (inflation spikes, shortages), and the strategic costs of dependency on potentially hostile foreign suppliers. When these full costs are included, reshoring becomes economically rational. Moreover, automation and advanced manufacturing technologies can significantly reduce the labour cost differential between the UK and lower-wage economies, making reshoring viable without large price increases.

Objection 4: State Failure and Government Inefficiency

The Argument: Governments are poor allocators of capital. State-directed industrial policy leads to rent-seeking, political interference, and the propping up of inefficient industries. The history of UK industrial policy in the 1970s — British Leyland, the National Enterprise Board — is cited as evidence.

The Rebuttal: This argument conflates poorly designed industrial policy with industrial policy per se. The successful industrial policies of Germany, South Korea, Japan, and Taiwan demonstrate that state-directed investment can be highly effective when it is focused on capability-building rather than firm-level subsidy, when it is subject to rigorous performance criteria, and when it operates through institutions with genuine technical expertise. The proposed National Reindustrialisation Fund and Advanced Manufacturing Clusters are modelled on these successful examples, not on the ad hoc interventions of the 1970s.

Conclusion

The case for rebuilding the UK manufacturing base is overwhelming. The theoretical framework provided by Steve Keen’s post-Keynesian economics demonstrates that the government has both the monetary capacity and the macroeconomic necessity to fund this transformation. The empirical evidence on supply chain vulnerability, deindustrialisation’s human costs, and the strategic risks of import dependency confirms the urgency of action. The 2025 Industrial Strategy represents a promising start, but it must be significantly scaled up and accelerated.

The costs of action — approximately £6.6 billion per year in net public expenditure — are modest compared with the potential returns: £142 billion in additional GDP, hundreds of thousands of new high-quality jobs, and a resilient economy capable of withstanding the supply chain shocks and energy crises that will define the coming decades.

The costs of inaction are far greater. A UK that cannot make things is a UK that cannot defend itself, cannot sustain its living standards, and cannot build the green economy that climate change demands. The time to act is now.

References

Footnotes

1.House of Commons Library. “Manufacturing industries: Economic indicators.” Published 1 May 2026. Available at: https://commonslibrary.parliament.uk/research-briefings/sn05206/ ↩ ↩2

2.Bank of England. “A portrait of the UK’s global supply chain exposure.” Quarterly Bulletin, 30 September 2024. Available at: https://www.bankofengland.co.uk/quarterly-bulletin/2024/2024/a-portrait-of-the-uks-global-supply-chain-exposure ↩ ↩2

3.Metro Global / LinkedIn. “Economy slows as supply chain disruption and energy costs hit.” March–April 2026. Available at: https://metro.global/2026/03/31/economy-slows-as-supply-chain-disruption-and-energy-costs-hit/ ↩ ↩2

4.Bernanke, B. Forecasting for monetary policy making and communication at the Bank of England: a review. Bank of England Independent Evaluation Office, 2024. Available at: https://www.bankofengland.co.uk/independent-evaluation-office/forecasting-for-monetary-policy-making-and-communication-at-the-bank-of-england-a-review/forecasting-for-monetary-policy-making-and-communication-at-the-bank-of-england-a-review ↩ ↩2 ↩3 ↩4 ↩5

5.Keen, S. Evidence submitted by Professor Steve Keen. UK Parliament Treasury Committee. [Uploaded document: Evidence-Professor-Steve-Keen.pdf] ↩ ↩2 ↩3 ↩4 ↩5 ↩6 ↩7 ↩8 ↩9 ↩10 ↩11 ↩12 ↩13

6.Rueda, V. “How has deindustrialisation affected living standards in the UK?” Economics Observatory, 2 June 2025. Available at: https://www.economicsobservatory.com/how-has-deindustrialisation-affected-living-standards-in-the-uk ↩ ↩2 ↩3

7.Keen, S. and Morgan, J. “From finance to climate crisis: An interview with Steve Keen.” Real-World Economics Review, Issue 95, 2021, pp. 130–147. ISSN 1755-9472. Available at: https://eprints.leedsbeckett.ac.uk/id/eprint/7731/ ↩ ↩2 ↩3 ↩4 ↩5 ↩6

8.The Manufacturer. “UK Manufacturing Statistics.” Available at: https://www.themanufacturer.com/uk-manufacturing-statistics/ ↩

9.Manufacturing Technologies Association. The true impact of British Manufacturing. 2024. Available at: https://www.mta.org.uk/wp-content/uploads/2024/04/Manufacturing-Technologies-Association-The-true-impact-of-British-Manufacturing.pdf ↩

10.The Manufacturer. “Government launches new Industrial Strategy.” 23 June 2025. Available at: https://www.themanufacturer.com/articles/lowering-energy-costs-takes-centre-stage-as-industrial-strategy-is-launched/ ↩ ↩2 ↩3 ↩4 ↩5

11.OECD. Main Science and Technology Indicators. 2024. Available at: https://www.oecd.org/sti/msti.htm ↩

12.Keen, S. Debunking Economics: The Naked Emperor Dethroned? 2nd ed. London: Zed Books, 2011. ↩ ↩2 ↩3

13.Make UK. Response to Invest 2035: The UK’s Modern Industrial Strategy. 26 November 2024. Available at: https://www.makeuk.org/docs/make-uk-response-industrial-strategy-green-paper-finalpdf/download ↩

14.Council on Foreign Relations. “Is Industrial Policy Making a Comeback?” Available at: https://www.cfr.org/backgrounders/industrial-policy-making-comeback ↩