Coalition neglect blamed for slow economic growth
Civitas, 26 July 2011
Government lacks a convincing strategy
Today’s anaemic 0.2 per cent second-quarter GDP figure is not just the result of the international financial crisis. It is also the result of the Coalition’s failure to play its part in promoting economic growth.
A new report from independent think tank Civitas argues that the Government should demonstrate its loyalty to its own people instead of standing helpless on the sidelines. The Bombardier trains contract would have been secured for British workers by a competent government. Instead, ministers claimed to be powerless, insisting ‘the EU made us do it’.
A Clueless Coalition?
The Government has said it wants to promote economic growth, but measures so far adopted suggest a regime that is clueless about the part that governments unavoidably must play. On this issue at least, it could learn from Mrs Thatcher.
No one doubts Mrs Thatcher’s commitment to a market economy, but she was no market fundamentalist and her pragmatic patriotism is often forgotten. In 1981 she told the House of Commons how proud she was to have intervened overseas on behalf of British industry. Other leading countries were doing so and her Government would not be found wanting:
- ‘We have gained considerable contracts. The Government have operated behind private companies when we have been negotiating contracts overseas. We have achieved a very great measure of success. Foreign Governments stand behind their companies when contracts are negotiated. On occasion, they add aid to those contracts; so do we. We are operating on a similar basis and winning contracts in the teeth of international competition. We should be very proud of that.’
Her Government also recognised that the Government had a vital part to play in stimulating new investment. At one press conference in 1985 she spoke enthusiastically about regional aid:
- ‘We give regional aid as an extra incentive for companies to go to those areas, when otherwise they might not in fact go. … they do get considerable financial boosts.’
In particular, her government consistently offered financial inducements to Japanese companies to build factories in the UK. By 1989 about 100 firms employing about 30,000 people had been established in the UK.
UK’s trade in goods deficit approaching £100 billion
We already have a balance of payments problem, which can only get worse if the Government continues on its present course. With the annual trade deficit in goods now at a new record of £97.2 billion, a new Civitas report warns that only radical Government action will prevent Britain’s permanent decline as an industrial society.
The report advocates re-building a domestic manufacturing industry capable of fulfilling Britain’s consumer demands. Author, Alan Reece, a Newcastle entrepreneur argues that the Government must pursue our enlightened national interest and help British companies produce goods that would otherwise need to be imported.
The other inconvenient truth
In his foreword to the Civitas report, Cambridge economist Ha-Joon Chang states:
- Manufacturing companies have become chips in the casino of the financial market and got rattled, sliced and diced in the financially-driven M&A booms. (p. vii)
The result has been the eroded manufacturing described by Reece. Nominal output has remained constant at £150 billion for the last 13 years, representing a reduction in real terms of £3.5 billion per annum and a 30 per cent loss of capacity compared to 1997. But consumption has risen steadily to £300 billion. Financial services propped up the resulting trade deficit at a ‘mere’ £29.7 billion in 2009, but the recession took its toll and this jumped to £46.2 billion by 2010. When services are excluded, the deficit in goods stands at a staggering £97.2 billion.
More exports yes! But manufacturing for the home market is quicker and easier
Alan Reece argues that the Government should encourage an increase in manufacturing output by about £10 billion per year for the next ten years. As a successful entrepreneur he recognises that rebuilding manufacturing depends on the ingenuity and drive of people in business. Crucially, however, it also depends on what the Government does to create the most favourable conditions for enterprise.
The obvious initial reaction is to have an export drive, but exporting is costly. You need reliable overseas agents to be constantly alert to informal trade barriers and changes in local markets, not to mention the dangers in fluctuations of the exchange rate. Exporting is vital, but in the short run Alan Reece, a highly successful exporter, argues that it will be much easier to focus on the home market and out-compete importers.
Paper, Glass, Steel, Motor Vehicles
In a companion essay Civitas researcher, Stephen Clarke, looks at four sectors: paper, glass, steel and motor vehicles. The UK is a net importer of paper, and yet has a significant domestic industry with a strong exporting record. In 2010 the UK imported paper worth £6 billion with exports valued at £2.3 billion. Despite being dismissed as a ‘sunset industry’, paper manufacturing has strong potential. Paper mills have been closing but there has also been significant recent investment, including the opening of one of the world’s largest paper machines for producing newsprint at the Palm Paper mill at King’s Lynn and the planned opening in 2012 of the SAICA paper mill in Partington Wharfside, near Manchester. They are expected to reduce the UK’s need for imports by up to one third.
Despite strong domestic production the UK is a net importer of glass. In 2010 glass and glassware worth £1.3 billion was imported and products worth £646 million were exported. Some products have been especially successful. The UK is currently a net exporter of flat glass, with exports outstripping imports by nearly one million tonnes. The UK fibreglass industry is also expanding, capturing a greater share of the international market. With wiser public policies the UK could remain an attractive location for glass manufacturers.
The UK is a net steel exporter with exports exceeding imports by 1.5 million tonnes, resulting in a positive trade balance of £2.1 billion in 2009. However, British steel demand in 2009 was 7.9 million tonnes of which 3.7 million tonnes were met by imports, suggesting opportunities for the British steel industry to capture a greater proportion of the domestic market. Crucially the viability of the industry depends on public policies, above all the cost of energy, which is currently driven by climate-change policies rather than market forces.
The automotive sector employs about 700,000 people in the UK. Domestic production of motor vehicles with an internal combustion engine greater than 1500cc was valued at £7.8 billion, exports at £6.5 billion and imports at £7.6 billion. There is considerable potential for home production of vehicles currently being imported.
Reece explains that foreign take-overs are not always beneficial. Terry’s Chocolates, for example, was bought by foreign companies and then shut down with jobs relocated to Eastern Europe. He argues that the government should step in to prevent company sell-offs that will clearly lead to the gutting of UK industries.
Prescription for closing the deficit: 10 years of £10bn manufacturing growth
A clear goal is needed to motivate political leaders. Reece suggests reducing the trade balance to -1 per cent of GDP in a decade. This needs a reverse of the £3.5 billion annual decline and a 10 per cent growth in output each year. In other words, domestic production must rise by £10 billion a year. In employment terms, Reece says:
- We make £150 billion of manufactured goods, employing about three million people. This suggests that we need one worker for every £50,000 of output. So we need to increase the work force by 200,000 a year for ten years when we would be employing five million people. (p. 9)
To achieve this growth, Reece argues Britain needs a Ministry for Economic Growth, focused purely on reducing the trade deficit through increasing production.
Ha-Joon Chang agrees:
- [H]is suggestion for a single-minded focus on balance of payments for the new Minister for Economic Growth is powerful in that it is focusing our attention on a key question – how is Britain going to pay its way in the world? (p. viii)
The EU is a major hindrance
High energy costs are the most important barrier to growth. Membership of the EU has also compounded the manufacturing decline, in part because of the energy costs it imposes on UK businesses but also via its crippling red tape.
As Ha-Joon Chang concludes:
- If you have thought that Britain could ‘muddle through’ this crisis, read this paper and think again. (p. viii)
The online companion to Reviving British Manufacturing, Four Industries and a Funeral by Stephen Clarke, which provides examples of British industries that could be supported in closing the trade deficit, is available from the Civitas website.