He said not only could serious games help in the imminent recession, but could "help pave the way for what comes after".
"The government's constant aim is to improve delivery of public services, but the economic downturn means that right now, we have pretty much no margin for error," he Watson added.
"Delivering more for less has never been so important, at least not in my lifetime, and serious games can play a substantial role in helping do that at a time when public services will be more and more in demand."
He said in a speech last night at a Serious Games conference that they have the potential to revolutionise health, education, defence and emergency response through training, modelling and simulations.
Watson added the video game industry could buck the current downward economic trend, with November being Microsoft's biggest sales month in Europe for the Xbox 360. In the US, video game sales jumped 18% in October, with overall sales of consoles and software up 57% over the past year.
But he added that despite the increasing importance of the industry, his parliamentary colleagues still don't credit technology with the respect it deserves.
"You would be amazed at the resistance I still find to technology in parliament," he said. "It can be mind-boggling to listen to politicians, from all parties, dismiss technology as completely irrelevant to what they do."