A strong rebound in manufacturing is driving the broader economic recovery.
In large part this is a result of the range of strategies that manufacturers have been undertaking before, during and after the financial crisis and global recession. Increased innovation, capital investment and penetration into export markets have contributed to improved productivity, competitiveness and ultimately ensured a strong growth path out of recession.
But there is considerable uncertainty in the air: the effects of public sector cuts and reform on business and the wider economy are, as yet, unknown.
If it persists, this uncertainty could hamper the ability of manufacturers to invest, grow and support the economic rebalancing that the government wants to achieve. Just as cuts without reform would not address, cuts without growth will not deliver the rebalancing our economy needs.
Never mind a ‘Plan B’, we need a ‘Plan A’ for growth.
Business has already started to drive growth forward by increasing investment, expanding exports and creating new jobs. The government can now help industry to sustain this by setting out a framework that explains clearly how it will work with the private sector to grow our economy.
To do so, the government must ensure that its strategies fit together to create the right environment for private sector growth. This will mean more than just getting out of the way. Rather, a private sector recovery requires the government must become a better partner to business; build business solutions to last; and invest in the future productive capacity of the UK economy. As it begins to cut spending, the government will be looking to the private sector to drive the economy. But if the private sector is going invest and grow then government needs to be a better partner to business.
Even in an era of cutbacks, the government can catalyse private sector investment by strategically targeting scarce funding. Government investments in port infrastructure, for example, will help attract foreign investment in the low-carbon economy in the UK. Similarly the £1 billion commitment for carbon capture and storage technology will enable the development of low carbon industries in the UK. Yet the government needs to commit quickly to next round of CCS funding. A Canadian CCS pilot took 16 months to complete a competition to allocate government funding. In the UK we are three years on from announcing the competition and the government has yet to award the money or to commit to much needed future pilots. Increased collaboration between government and business would also help to create a more stable and predictable business environment.
Another part of this will be ensuring that new frameworks for business are built to last. Constant reorganisations of business support can create uncertainty that reduces businesses’ ability to invest and grow. This is not to say that changes should not be made, but major changes to the support infrastructure must be approached in a consultative manner, and they must not be rushed.
For example, the government should be prepared to take its time over the development of Local Economic Partnerships (LEPs) and accept only those that have a credible plan to address the issues in their economy. Crucially, the LEPs must be given the chance to work. In the interim, it is imperative that Business Support is maintained, particularly as the economic recovery is still fragile. A stable support base for business is the best foundation for growth.
While stability is crucial for businesses, the government will need to go further to ensure the investment that is necessary if the UK is to achieve sustainable, long-term and balanced growth. Deep cuts to capital investment and capital allowances were disappointing, but businesses are aware of the financial strain that the government is under. However, the government must consider the impact any further cuts or changes will have on the incentives it provides to business, or it will risk undermining the potential the economy has to grow.
There is also more that can be done to encourage investment in the productive capacity of the UK. For example, grand challenges and X-Prize style competitions linked to orders can stimulate private sector investment of 10-40 times the prize or contract on offer. This kind of initiative could provide just the spur that companies need to make investments at a time when the economic outlook remains uncertain.
The government has to deal with the aftermath of the recession. This means cutting spending to reduce the fiscal deficit, but it also means supporting growth.
The government needs to put policy in place to restore the confidence of businesses in the face of an as-yet fragile recovery. As the government cuts back, the UK will be increasingly reliant on the private sector for growth.
It is therefore imperative that these cuts are combined with the structural reform and a framework for growth that will allow businesses to drive the recovery.