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Civitas Industrial Policy Blueprint Backs State Support For Manufacturing to Combat Recession

High energy costs “silent killer” of enterprise, warns new report

Civitas industrial policy blueprint backs state support for manufacturing to combat recession, warning that the European Commission is major obstacle to UK recovery

A combination of radical cuts in energy costs, red tape and taxes allied with targeted state support for manufacturing and German-style savings and enterprise banks should be at the heart of a bold new industrial policy, according to a major new report from an independent leading think-tank.

The report applauds the Government’s decision to embrace industrial policy, a dirty word in many quarters since the failure of the “picking winners” gambits of the 1970s.

But it bemoans much of the current policy mix, saying it lacks “urgency, consistency and resolution” in pushing through the big changes needed to reverse 30 years of de-industrialisation and reinvigorate the UK as a major manufacturing nation once again.

It points out that in the last 15 years, manufacturing has declined from 20 per cent of national output to 11 per cent today. But the once fashionable notion that services would plug the gap has been exploded by the present economic crisis.

“It turns out that we cannot pay our way in the world with manufacturing at only about 11 per cent of national output,” says the report by Dr David Green, Director of Civitas.

The report, A strategy for economic growth: a modern industrial policy, reserves its greatest scorn for two key Government policies: “over-enthusiasm for deficit reduction and a blind commitment to reducing carbon emissions”.

The tragic irony is that while current energy policies are damaging to British manufacturing, they are also failing to help the environment. UK carbon emissions may fall as a result of Government policy but global emissions remain unchanged as carbon production simply shifts to other countries.

Official climate change policies intended to reduce carbon emissions and promote green energy alternatives to coal and gas are driving energy-intensive industries such as chemicals to the point of extinction.

Closure of coal-fired power stations to meet “misguided” European Union regulations should be delayed and the Brussels Commission defied. Government policy should be reformed to ensure that UK energy prices are among the most competitive in Europe.

“If we follow the current policies of the UK climate change department, it will amount to an act of national self-harm. The foolish unilateral imposition of costs is a silent killer of enterprise.”

Key recommendations include:

  • Keep the UK in the top six most competitively priced energy markets in the EU and the G20.
  • Press ahead with shale gas extraction at full speed.
  • Delay planned closures of coal-fired power stations.
  • Abandon plans to impose a carbon price floor to supplement the EU’s trading system.

The Civitas report identifies the European Commission as a big obstacle to UK economic recovery.
As part of a deregulatory and tax-cutting drive for business, the report calls for the whole of the UK to be made an enterprise zone, rather than restricting business tax breaks to a few run-down areas.

Such a move would bring the UK into conflict with Brussels over state-aid rules. But Dr Green argues that the UK should be prepared to confront a body that is dominated by its main economic competitors intent on holding it back.

“We should pick a fight with the European Commission and insist on our right to declare every part of the UK an enterprise zone without their approval” – akin to a unilateral declaration of economic independence.”

Dr Green points to the example of the United States, which has ridden the recession far more successfully than the UK, and which has continued to pursue policies of offering state support for business, particularly small and medium-sized enterprises (SMEs).

While UK SMEs have struggled to secure funds from commercial banks and Government initiatives have had little impact, in the US loan guarantees from the state have led to big increases in funding the companies that create the vast bulk of American jobs and prosperity.

“The economically most successful nation ever has an extensive industrial policy designed to encourage American enterprise, especially manufacturing.

“Our economy is stagnating, while America’s is growing. Perhaps we could learn from them,” Dr Green writes.

The report warns that the halving of UK manufacturing in the last 15 years means that the UK no longer has the spare factory capacity to spark a private sector-led recovery.

“This means that tight control of fiscal policy of the kind currently in favour cannot be counted on to spark automatic economic growth in the private sector.

“Large-scale investment, especially in new manufacturing capacity, is needed; and in the immediate future some of the cash will have to come from the public sector.”

The report goes on to argue for temporary selective assistance for firms designed to promote competition and import substitution to improve an appalling trade deficit.

American policy has been to invest carefully in domestic productive capacity. Choosing where to invest, and investing in production rather than consumption, is a key driver of Dr Green’s report:

“In current conditions, borrowing to invest in productive capacity is desirable, whereas borrowing to pay for consumption is not.”

Other key recommendations include:

  • Abolition of job-destroying workplace regulations to include a £5000 cap on unfair dismissal and discrimination compensation awards.
  • Big reductions in company taxation and personal taxes to promote business expansion and start-ups. Corporation tax should be cut to 15 per cent and capital allowances abolished.
  • Manage the exchange rate to ensure that UK exports can be competitively priced.
  • Greater government oversight of foreign takeovers.
  • German-style regional savings banks capable of assessing risk more accurately than big banks because they know their local business people.
  • Caution about putting high-tech firms on a pedestal. Most jobs in the OECD are created by low-tech and medium-tech companies.

Dr Green challenges preconceptions that in the modern world, the high-tech industries are the most important, arguing that the most vital asset of SMEs is good staff, leaving companies with more freedom to capitalize on their skills in a way that is flexible and creative:

“Many successful firms are innovative and knowledge intensive but not high-tech.”

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