Britain's Conservative drift

Lord Mandelson has the luck of the devil. A late train meant the UK business secretary arrived at Sheffield Forgemasters in Yorkshire just as its old 10,000 tonne press began fashioning a column of molten steel into a ship's propeller shaft. Press photographers at the event last month were therefore able to snap the ruling Labour party's chief election strategist amid the white heat of industry even as he announced an £80 million loan to the forgings company for a new 15,000 tonne press.

The moment had dual significance. First, the de facto deputy prime minister had made a 330 mile round trip from London to bolster the heaviest of heavy industries shortly before the start of an election campaign. In contrast, during the 2001 campaign, Labour prime minister Tony Blair visited more than 20 hospitals and schools but only one factory. Second, there were no jokes that day in Sheffield that the Prince of Darkness, as Lord Mandelson was once unaffectionately known, was in his element in their latter-day inferno. Both he and his policy of interventionism, the latest phase in Labour's fractious 13-year engagement with business, have been surprisingly popular.

But the Labour fixer's self-styled "industrial activism” cannot divert attention from the fiscal fault lines increasingly dividing business leaders from a party that, against the traditional grain of British politics, many had once supported. The rancour has recently come to a head. A large group of business leaders is endorsing a Conservative party pledge to cancel National Insurance rises, demonised as a tax on employment. With an election due on May 6, business is drifting towards the Tories in parallel with an electorate that pollsters believe favours the opposition.

How did we get here? Sir Geoffrey Owen of the London School of Economics says: "When Labour took office in 1997, the party's economic [and business] policies broadly followed the line of Margaret Thatcher and her successors.” The libertarian views of the 1980s Tory prime minister meant that Conservatives shied away from interventionism, an approach discredited by the costs Labour governments in­curred propping up companies such as carmaker British Leyland during the 1970s.

Senior Labour politicians including Gordon Brown, the current prime minister, had wooed finance and big business in the years leading up to their 1997 landslide. They had emphasised a US-style commitment to enterprise, free markets and private ownership while wolfing hors d'oeuvres with bankers and chief executives. Senior Tories dismissed the campaign as "the prawn cocktail offensive”. Back in 1991 Rachel Johnson, sister of London's Tory mayor Boris Johnson, wrote in the Financial Times: "The City does not vote Labour. Like self-regulation, expensive lunches and big bonuses, that is one of the Square Mile's most time-honoured traditions.”

This consensus was eroded during the 1990s by recession, the humiliating withdrawal of sterling from the European exchange rate mechanism and waning Tory popularity. Labour mustered supporters from business such as Sir Ronald Cohen, a pioneering venture capitalist. Broadly, its early years in government were a honeymoon. It stuck to cautious Conservative budgeting while making the Bank of England independently responsible for setting interest rates, a move apparently vindicated by sustained economic stability.

By 2002 the honeymoon had turned into a mundane, occasionally acrimonious, marriage. In that year's budget Mr Brown, then chancellor of the exchequer, increased National Insurance without tipping off employers' organisations such as the CBI. Digby Jones, then the body's director-general, a bluff lawyer from the industrial Midlands, was furious, not least because the body had been an irreproachable lobbyist of government, vigorous in private representations, sparing in public criticism.

From then on, Mr Brown established a pattern of budgetary tinkering, as when he created and later abolished a zero rate tax band for micro enterprises. Richard Lambert, current head of the CBI says: "There was a lot of unnecessary micro management. The government thought that it could create new industries with a tweak here and there to the tax system.”

The upper echelons of Labour, a party created by working-class socialists, had become "intensely relaxed about people getting filthy rich”, as Lord Mandelson put it ("as long”, he added, "as they pay their taxes”). Mr Brown, who saw new business creation as a means to raise stubbornly low UK productivity, schmoozed wealthy entrepreneurs such Bill Gates of Microsoft, Sir Richard Branson of Virgin Group and Sir James Dyson, inventor of the bagless vacuum cleaner.

Labour's admiration for the enterprise culture reached its zenith in 2005. That year it secured a historic third successive term. It also awarded knighthoods to Stelios Haji-Ioannou, an entrepreneur active in the UK but resident in Monaco, and Philip Green, a retailing tycoon whose wife's residency in the same tax haven sharply reduced family tax bills.

Honours for frequent-fliers between London City Airport and Nice are hard to imagine in penurious 2010. But back then, ministerial magnanimity towards the wealthy was underpinned by cheap loans and soaring property prices for all. In the wake of the credit crunch, Labour has redirected its approbation to "small business”. Tax avoiders are being hammered and high earners forced to hand over more of their earnings.

Mr Brown, prime minister since 2007, and Alistair Darling, his chancellor, are meanwhile accorded only qualified praise from business for rescuing the UK banking system via an £850 billion bail-out. "There is a recognition that government acted quickly to avert what could have been a catastrophe,” says Stephen Radley of the EEF, the manufacturing employers' body. "But the applause was muted by the fact that Labour had previously made some pretty grandiose claims to have abolished boom and bust.”

Kenneth Clarke, veteran Conservative politician and shadow business secretary, says: "There is a lot of disaffection in business because of the longest and deepest recession since the war. The problem was global but Gordon Brown contributed to it through his mistakes as chancellor.” He ridicules Labour's decision to impose an additional 1 per cent in National Insurance on workers and employers, saying: "When I was [chancellor and] getting Britain out of recession in the mid-1990s, I avoided raising business taxes at all costs.” The letter of protest signed by such business figures as Sir Stuart Rose, chairman of the Marks and Spencer retail chain and a government adviser, was according to Mr Clarke, "a resounding endorsement of a Tory policy”.

But there is a big difference between supporting a Tory policy and backing the Tories. Mr Haji-Ioannou says: "I'm not partisan. I co-signed the letter because I don't think that they should increase (National Insurance) and make it more expensive to hire people.” Labour tax policy has, he says, frequently been muddled, as when the government increased a per capita air passenger duty instead of moving to a greener tax levied on each aircraft. But he adds: "I would still rather invest and do business in the UK than in any other European country.”

Pat McFadden, Lord Mandelson's deputy at the Department for Business Innovation and Skills, says the revolt over National Insurance has been overplayed. "The NI change does not encompass our whole relationship with business,” he says, "If you look at World Bank rankings for the ease of doing business, the UK comes fifth in the world and first in Europe.”

"Industrial activism” has afforded Labour new bragging rights with business. It is a policy of government investment in companies seen as strategically important to rebalancing the UK economy towards high-technology industry. For example, Sheffield Forgemasters' new 15,000 tonne press will make parts that nuclear group Westinghouse requires for its AP1000 nuclear reactors in Europe. These components would otherwise come from Japan or Korea, Mr McFadden says. The government has also put up about £130 million to support research and development by Rolls-Royce, the aircraft engine maker.

LDV, a sub-scale, loss-making van-maker was last year allowed to go bust with the merest infusion of public funds. Lord Mandelson, quoting economist James Foreman-Peck, has promised to eschew the old Labour policy "not so much of picking winners, but of losers picking government support”.

Mr Clarke is dismissive of industrial activism, arguing UK governments have always intervened pragmatically in markets. However Mr Lambert senses approval for the policy: "There are worries about government trying to pick winners. But there is also a mood abroad that maybe there may be a case for judicious intervention.”

Lord Mandelson's stance is inspired partly by his exposure to French dirigisme during his stint as European Union trade commissioner. Similarly, the government adviser and technology investor Hermann Hauser has proposed creating centres modelled on Germany's Fraunhofer institutes to commercialise university research. To Sir Geoffrey, this is "another illustration of the way in which people are looking to France and Germany for models, and the extent to which the US model has been discredited by the financial crisis [which started there]”.

Yet nothing succeeds with UK business like promising tax cuts. This is what the Tories are offering, alongside tough action to cut a yawning budget deficit. They spent part of the previous decade picking fights with big business. In 2006, for example, leader David Cameron attacked retailers for encouraging obesity by discounting chocolate. The rebranded party now sees advantages in being friends with the private sector again. "The opinions of business leaders matter more than in the past when they were automatically assumed to be Tories,” says Mr Clarke, "and after a recession people associate their wellbeing with that of the company that they work for.”

The main complaint of business leaders is that Tory policies remain too vague. In part, this is excused as a smoke screen to avoid spooking voters with the details of spending cuts. But some company owners and managers complain of a deeper ideological void, just as trade unionists once did in relation to Mr Blair.

"I've spent a lot of time with David Cameron,” says one multimillionaire businessman and Tory donor, who prefers to remain anonymous, "but I still haven't the faintest idea what he really stands for.” Miles Templeman, director general of the Institute of Directors, says: "People are disenchanted with Labour but still waiting to be enchanted by Mr Cameron.”

The legacy of 13 years of Labour government is that British business appears to care remarkably little for either party.