Sunday, April 18, 2010
We can make it here - try telling the politicians
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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A few weeks ago I was in Surrey and visited the Brooklands museum. It is a fascinating if slightly down-at-heel tribute to Britain's manufacturing heritage.

There you will find cars, motorcycles and bikes, many of which I am old enough to remember but with names that would be lost on a younger audience. Try talking to anybody under the age of 25 about a Brough Superior or Sunbeam Rapier.

They are more likely to be drawn to the attraction next to the museum on the Brooklands racetrack site. This is Mercedes Benz World, a gleaming monument to German auto engineering, where you can look, drive and generally wallow in Teutonic manufacturing excellence.

As an analogy for British and German manufacturing, it is a caricature but not that much of one. Concerns about the decline of British manufacturing have been around a very long time. At the Great Exhibition of 1851 experts noticed the superior quality of German products on display.

They have, however, taken on a new significance. "We don't make anything anymore" is not only a tired old cliche but is factually wrong. Manufacturing is one-and-a-half times the size of financial services. Britain is still the sixth or seventh largest manufacturing nation, depending on which exchange rate you use. Manufacturing is bouncing back more strongly than other parts of the economy.

Yet something needs to change. Even before the recession, manufacturing's status as the poor relation of the economy was well established. In 2007 manufacturing output was a mere 4.5% higher than 10 years earlier. Now, as a result of recession, output is no higher than it was in 1974.

The longest statistical series for manufacturing employment workforce jobs in the sector shows a decline from 7.1m in 1978 to 2.8m, a drop of nearly two-thirds. Since 1997, it has dropped from 4.5m.

Manufacturing's share of the economy has declined sharply under Labour. Last week I attended an event organised by the ERA Foundation, which has been around in one form or another since 1920, representing the electrical industry. Now it has a wider brief to promote manufacturing.

Its latest report, The Sustainability of the UK Economy in an Era of Declining Productive Capability, set out the challenge. Four decades ago manufacturing accounted for more than a third of gross domestic product; now it is about an eighth.

Under Margaret Thatcher and John Major it declined from 27% to 22% of GDP. Under Tony Blair and Gordon Brown it has sunk to just 12%. We may be sixth or seventh now but the ERA study predicts Britain will be out of the top 10 in a few years.

Does it matter? Britain should surely concentrate on what it does best where comparative advantage lies rather than chase Germany. Maybe the declining share of manufacturing tells us, despite significant pockets of genuine excellence, that Britain is just not that good at it.

There are two reasons set out in the ERA report why that would be too complacent a view. One is that, as it says: "Services financial, knowledge-intensive or otherwise do not exist in a vacuum; they all benefit from a strong industrial base."

The other is the balance of payments. Last year there was a 52.5 billion trade deficit in manufactures, mostly finished manufactured products. Britain's first peacetime manufacturing trade deficit was as recently as 1983 and in 1997 the deficit in finished manufactures was only 6.5 billion.

Part of the reason for the sharp widening of the deficit was the strength of the pound, particularly against the euro, from 1996 until late 2007. Initially, firms saw sterling's 10% to 20% overvaluation as temporary but then many succumbed, shifting production elsewhere.

What an overvalued exchange rate can destroy, a competitive one does not necessarily replace. Sterling is now at a level with which manufacturers can be comfortable, and this will help produce export-led (and import-substituting) growth. But replacing lost manufacturing capacity takes time and even on optimistic assumptions it will probably take until the end of the next parliament to get back to pre-recession levels of manufacturing output.

A 50 billion manufacturing trade deficit was not a problem as long as North Sea oil was generating a surplus, service industries were in the black and capital flowed into Britain from abroad. But oil is in deficit and we now know many of those flows were into Britain's banking system, which was borrowing heavily from abroad. That cannot be the future.

What should be done? The ERA Foundation argues for a "greenhouse" of factors that would encourage the re-growth of manufacturing, ranging from a genuine government commitment to manufacturing, improved technical skills at all levels, competitive energy costs, a bank for industry, higher investment allowances, better targeted research-and-development tax credits, and so on. What it is really looking for is a change of culture.

ERA's chairman, Sir Alan Rudge, is highly sceptical of the idea that "green" jobs in alternative energy will be manufacturing's saviour. Any benefit will be offset by the high energy costs that will be the consequence of meeting renewables targets.

Perhaps the most surprising views come from David Green, head of the Civitas think tank. Green, formerly of the Institute of Economic Affairs, has been a free marketeer man and boy. As set out in a Civitas pamphlet Prosperity with Principles, however, he now favours protecting strategic industries from foreign takeover, allowing temporary trade barriers, managing the exchange rate to industry's advantage and setting up a new industry bank. Non-intervention, he suggests, has failed.

A different perspective is provided in a Policy Exchange pamphlet, Innovation and Industry, by John Willman. Though he agrees with the need to re-skill Britain, and provide better investment incentives, he fundamentally disagrees that the best way for manufacturing to revive is behind a protectionist wall.

There is a debate but it is not being had in the election. Labour has belatedly rediscovered industrial interventionism but this, and a pledge to be tougher on foreign takeovers, does not add up to a robust manufacturing strategy.

The Tories, judging from their manifesto, are not thinking about it either. Of three mentions of "manufacturing", one is in a thumbnail sketch of Glasgow and two are in its green chapter, alongside a commitment to turn the City into a green financial centre. In case I missed something, I tried "industry", only to get the banking industry and, bizarrely, the childcare industry.

Maybe the politicians have decided there is nothing they can do. Kenneth Clarke, the shadow business secretary, espouses a bullishly non-interventionist policy. I can't help thinking, without signing up to all David Green's suggestions, that we have tried that and it failed.

PS: There will be more to write on the public finances, if you can take it, before May 6. But just a quick one. How draconian will post-election spending cuts be? One puzzle, for me, has been the question of what is left once the big cuts in capital spending on new schools, hospitals and so on are factored in.

The answer, according to Maurice Fitzpatrick of Grant Thornton, the accountant, is less of a squeeze than you might think. Treasury plans imply a very big cut in capital spending, more than halving it, between 2009-10 and 2013-14.

Capital spending is important, though there has been a lot of it, but what about day-to-day spending on public services? Fitzpatrick calculates that even allowing for rising government debt interest, the plans imply 0.6% annual real growth in current spending from 2009-10 to 2013-14 and, taking out 2010-11, a real fall of only 0.1% a year in the 2011 to 2014 period. It is tough compared with the splurge of recent years, but it should be achievable.

From The Sunday Times, April 18 2010