EEF blog

On Monday the IPPR hosted an event where Vince Cable spoke about his thoughts on ‘an industrial strategy for the UK’.

This was very much in the mould of thoughts rather than an actual set of policies.

In essence, so far, industrial policy for Cable seems to mean:

• A selection of sectors with good future prospects or existing UK strength;
• ‘Technology Policy’;
• Better procurement practice.

But before hares are sent running, it’s worth peering underneath each of these to see what they actually mean in practice.

A selection of sectors may scare some people off with memories of failed policies in years gone by, most commonly grouped under the heading ‘picking winners’.

To be clear, I don’t think anyone talking about industrial policy means bureaucrats picking out individual companies to receive government funds.

At the most it means picking sectors that ‘go with the grain of the market’ and even then there seems to be relatively little implication for the allocation of government resources.

So on Monday for example Cable talked glowingly of the automotive sector with the Automotive Council as something he saw as a ‘good model’. The Council allows the sector to communicate to government its policy frustrations and priorities for reform e.g. improving the supply of skilled apprentices – but it’s not a receptacle for government slush.

‘Technology policy’ may mean coin for the TSB. Last time I checked this is circa £300 million per annum. A one off £125 million for ‘supply chains’ seems headed its way this year too. Compare that with total business investment of about £110 billion in 2011 and you can see the sums aren't staggering even if they were tripled for argument's sake.

And in financially straitened times tripling doesn't seem that likely.

But perhaps there is another aspect to technology policy that I think Cable favours. And that’s its ability to transcend the Parliamentary cycle and give certainty of support to entrepreneurs and investors looking to develop ideas and technology into marketable business returns.

It seems we may already be on safe ground here - the Coalition hasn't taken an axe to the TSB it inherited from Labour and indeed with the demise of the RDAs it seems to have picked up responsibility (although given its small scale we need to be careful not to ruin what the TSB does well by swamping it with extra activity).

The last area is procurement where recent controversies following large scale government purchases have got a lot of people asking whether we’re mugging ourselves a bit compared with other countries on the continent i.e. the French and Germans seem to give more/all their government contracts to nationally owned companies.

The idea here is that perhaps the UK government needs to be taking into account a fuller range of costs and benefits than it currently does it – for example the impact on UK industrial supply chains. Maybe not a bad idea you might think.

But almost immediately after saying this, Vince Cable qualified his statement by stressing there would be a tension with securing the best price on procurement for the UK taxpayer. That leaves it pretty open as to what the net effect of a new approach might be.

So in summary, I’m not sure we’re much clearer on what industrial policy means in the UK today or how much different it looks in practice from what already happens.

The UK’s trade deficit in goods improved in September, falling to £8.2 bn compared with £8.5 bn in August.

The value of exported goods rose by £0.5bn over the month, and there was an increase in import values of £0.2bn. This is good news in both cases - increased exports mean there is a potential for more balanced economic growth, while continued demand for imports reflects strength in consumer demand.

The value of UK exports has grown markedly and is currently nearly 25% higher than at the low-point of the recession. Year on year growth in exports is well above the long-term average.

What is more, the outlook for trade is good.

Emerging markets are providing opportunities for export growth. Between 2004 and 2009 (the last complete year for which there is data) the volume of exports to BRIC countries rose by 77%. The proportion of UK exports going to China and India more than doubled. UK manufacturers are keen to take advantage of these opportunities and have been developing their presence in emerging markets. This is already paying dividends: according to UKTI in the first eight months of 2010 alone goods exports to China rose by 44%, to £4.5 billion. Even better news is that recent surveys have repeatedly showed companies reporting increased export orders. One thing is clear: exports have the potential to drive growth.

However, the global marketplace is likely to become an increasingly competitive environment. And the potential for trade wars is threatening the global recovery. The government is rightly keen to promote UK exports, something which is clear from current Trade Mission to China. The importance of trade missions should not be understated. However a long-term strategy for growth is what industry needs to provide the clarity and certainty that will enable the necessary investment to drive exports. Therefore, manufacturers will be looking to the Prime Minister to make good on his commitments to back industries where the UK has a competitive advantage in the government’s upcoming White Paper on growth, and the Manufacturing Framework.

Growth in manufacturing is driving the recovery. Today’s Index of Production shows that manufacturing output grew by 4.8% in the year to September.

At 0.1% over the month this is a lower rate of growth than we have seen in the past few months, but overall growth is still robust, and well above the long-term non-recession average growth rate. A slower rate of growth isn’t necessarily something we should be concerned about – indeed recent rapid growth rates are partly reflective of the improvement from the depths of recession – however, this fall back in growth does suggest that the recovery is not something we should take for granted.

The coming austerity measures including the rise in VAT and public sector job cuts will undoubtedly reduce domestic demand, at least in the short run. Consumption, in particular, is likely to be hit; manufacturers closest to the retail sector are already reporting a slowdown of orders. This is why the government’s austerity measures must be coupled with action to support economic growth. David Cameron announced last week that the government will “get behind those industries where Britain already enjoys a competitive advantage” this is good news for manufacturing. The sector can be a major driver of more balanced future economic growth thanks to its export-driven, innovative and agile companies.

Cameron was right to say that the government has a role in helping to create the conditions in which business can thrive. Manufacturers were heavily hit by the recession: despite subsequent strong growth, output in the sector is still around 10% lower than it was at its peak. In our Plan A for growth we put forward three key ways that the government can support growth: through strategic investments in the UK’s productive capacity; providing businesses with clarity and stability; and becoming a better partner to business. In the government’s forthcoming White Paper on growth and the Manufacturing Framework it will be crucial that policies reflect these principles.

The manufacturing PMI for October is out and – at 54.9 – it is both higher than expected and indicative of an acceleration in manufacturing output.  The PMI now shows that there have been thirteen months of expanding output, and eleven months of faster-than-average expansion in manufacturing sector since the recession ended.

Figure 1: Manufacturing PMI

This is good news, but after two months of data suggesting that growth was slowing, it must be remembered that the PMI is a volatile indicator. The last time manufacturing came out of recession the PMI was so volatile that it returned to the below-fifty level associated with contraction for some time. Manufacturing output was also unsteady.

At this stage of the recovery, growth cannot be taken for granted. As we have already noted, there remain significant downside risks to the recovery. Given that increased exports are currently driving growth, the possibility of a global currency war is particularly concerning. In addition reduced domestic demand as a result of consumer caution following public sector cuts will hurt companies who are more UK-focused. For these reasons, the government must deliver on its growth strategy. It can do this by: becoming a better partner to business; providing clarity and stability; and investing in the UK’s productive capacity.

The government can promote business growth and investment by improving access to finance

SMEs in particular are still struggling to access the funding they require, so it is encouraging that the Prime Minister noted in his speech on Monday that opening up access to finance and getting banks lending will be crucial to drive growth. Government should promote access to finance through facilitating greater transparency around lending policies; encouraging increased competition in the banking sector; and promoting alternatives to bank lending.

The government could take better advantage of green opportunities if more resources are given to the Green Investment Bank

The scale of investment needed to really capitalise on the opportunities in green technologies will not be met by the current plans for a £1bn Green Investment Bank. The government should be more ambitious: estimates suggest that the development of a low carbon infrastructure and low-carbon technologies will require £5bn of funding over the next five years.

The government will maximise the returns to its investment, if it is clear about its plans, and the kinds of support that will be available.

In many areas of government spending, greater details are required. Particular areas the government should clarify include which types of adult apprenticeship will be funded by the £250mn announced; and how funding to help firms commercialise their innovative ideas will be allocated. 

A headline in the Daily Telegraph this morning read “UK slides in manufacturing rankings”. This was on the back of a survey from Deloitte which measured businesses’ perceptions of competitiveness drivers like wages, skills levels and the policy environment.

Deloitte ranked the UK in 17th place out of 26 countries, falling to 20th place in the next five years.

Whilst this suggests that perceptions of the UK’s business environment are not ideal, it does not indicate that the UK’s manufacturing businesses are not competitive; far from it. The fact that the UK remains one of the world’s largest manufacturing nations is testament to our businesses’ abilities to compete and innovate despite the pressures of a high-wage, high-cost economy.

True, the UK is ranked well below the US (in 4th position) and Germany (in 8th), countries which also experience similar high costs. But this is not something that reflects badly on our businesses. Rather, it suggests more needs to be done to enhance the UK (in reality and in perception) as a place to do business, such as: enhancing skills provision; promoting investment through the tax system; and reducing the regulatory burden on business. 

The PM said yesterday that the coalition government will,

“do what we can in the Budget to ensure that we have in this country a tax regime, support for apprenticeships and support for training that will want to make businesses locate, stay and invest in Britain."

This is encouraging news.

Whilst the budget will focus on the spending cuts and tax rises that will be needed to reduce the UK’s fiscal deficit, policy is required to support the business investment that will ultimately drive economic growth in the UK.

Business investment suffers heavily after a recession.

After the recession in the 1980s ended it took five quarters for levels of annual business investment to begin to grow again, and fourteen quarters for investment to return to pre-recession levels. After the 1990s recession ended it took ten quarters for business investment to make a sustained recovery.

Quarter on quarter change in GVA; and business investment in the 1990s

The size of public sector cuts to come mean that economic growth will only happen with private sector investment. The UK cannot afford to wait as long for investment to recover this time.

EEF have long said that tax reform needs to be central to rebalancing our economy.

But because of silly Whitehall turf wars, the good work coming from BIS on industrial activism and a manufacturing strategy has often existed apart from the realities of the tax system.

For example, the Strategic Investment Fund of £950m is being put to use to encourage investment in growing markets and supply chains.

But the capital allowance regime actively discourages manufacturing investment.

How? 

Manufacturers replace their equipment, on average, ever 7-8 years. With a capital allowance level of 20%, the tax system only recognises that investment over 28 years. That gap raises the cost of investing in modern machinery in the UK. Looking across the tax system, you get similar disincentives to invest in manufacturing.

But at a speech on Monday night at a Progress event, Pat Macfadden, the BIS Minister linked the two issues of tax and industrial activism.

It was a first for the government and an extremely welcome recognition that building a balanced economy requires strategy that is implemented across government, not just by a forward-looking BIS department.

Back in December, the head of construction company told me the following:

"No one has got to grips with what's just happened to us. Which means the don't really understand what it takes to get us out of this. And that leaves us drifting."

His comment got to the heart of the matter - do we really know where we are , why we've gotten here and where we want to go as an economy?

A couple of recent reports on the state of government in the UK suggests why we haven't come to grips with our problems:

"a conspicuous lack of a single coherent strategy for government as a whole...inhibits the ability to set overall government priorities and translate them into action."

Another report by Whitehall Manderins comes to similar conclusions and makes the following recommendations:

• improve the quality of legislation by slowing down the legislative process and improving scrutiny;
• strengthening Commons Selet Committees; and
• stopping the frequent shifting of Ministers.

Although these criticisms are slightly sensational as they come just months before an election, they are all too familiar to businesses at the sharp end of frequent changes to the tax and skills systems, for example.

EEF raised these issues last year - first in our report on the competitiveness of the tax system, and then again in Manufacturing. Our Future. report which set out a government-wide strategy to rebuild our economy.

So what's the key challenge for the next parliament given these criticisms about the state of government?

Thinking and acting differently, because we can't afford to drift any longer.

An insightful article from Ben Hargreaves at Professional Engineering asks a fairly pointed question: whither 'industrial activism'?

"The financial crisis provoked an unusual level of political rhetoric about the importance of manufacturing and the role of engineers that was refreshing. In the summer, it seemed Lord Mandelson – with his “less financial engineering, more engineers” soundbite – was on a national tour designed to take in every significant car plant in the UK, posing for photo opportunities on production lines.

"But talk of a 'new industrial activism' has not been given much concrete impetus in this week’s pre-budget report, which, with an election six months away, has been widely viewed as dodging decisions of substance in favour of crowd-pleasing measures such as the 50% tax on bankers’ bonuses."

Building a better-balanced economy isn't the just the job of the admittedly powerful Business Secretary - it needs to be the responsibility of the entire government.

(And, while a 10p rate on income from patents is a start - it's a very narrow measure that doesn't begin until 2013.)