EEF blog

Last week we had the good news that GDP didn’t contract, and in fact actually grew 0.3%, in the first quarter of 2013. While these numbers are positive, we can’t get away from the fact that there remains little underlying expansion and a lack of demand in the economy as a whole at this time. While this is expected to pick up over the course of the next couple of years, we can’t help thinking what more can be done to get the economy growing and rebalancing now.

In a survey we ran last year we asked manufacturers about their investment over the past few years and their investment plans going forward, and the barriers they face when investing. We also asked manufacturers the very question posed above. Specifically we asked manufacturers – what policy change would lead the company to increase the level of investment in the UK?

An Industrial strategy would have the biggest impact on investment in the UK

Perhaps not surprisingly, greater certainty in the policy environment would have the biggest impact on manufacturers’ investment in the UK. The investment cycles generally spans multiple political cycles so greater confidence over aspects of the business environment will lower the risks of an investment being unprofitable.

• 19% of manufacturers said a long-term strategy for manufacturing would have the biggest positive impact on investment in the UK.
• 53% said it was among the top three changes that would positively impact investment in the UK.

An industrial strategy needs to be based on a wide range of policies that matter for business

An industrial strategy needs to be informed by businesses priorities and needs to focus on getting the policies that affect investment incentives right for the broadest possible base of businesses. The chart below shows the top five policy changes that would have a significant impact on investment in the UK.

• The tax system is both an enabler and a barrier to investment. Making sure the country's taxes work, as much as possible, to promote investment means the government has many tax levers available to encourage greater investment, including, but not limited to, capital allowances, the R&D tax credit and the overall burden of tax.
• The finance environment has been changing since the financial crisis and is restricting the ability of firms to finance investments. Over a third of companies report they have viable investment going unfunded because of difficult credit conditions associated with external finance. The government could do more to encourage greater competition in the banking sector to improve credit conditions for businesses.
• The government has an important role in ensuring the economy has, and will continue to have, the right mix and supply of skills to support a growing and rebalanced economy. Four in five manufacturers report having problems with recruitment.
• UK companies face higher energy costs than most of our key competitors, putting us at a disadvantage. Government policy has had a greater impact on energy costs in the UK than elsewhere.
• The UK does not tend to innovate quite as successfully as other countries despite a strong science and research base and many highly innovative individual companies. The balance of government support is weighted towards early-stage research and the government could do more to help companies convert basic research into products and services that will make a profit.

As you can see, the policies that are important for manufacturers are broad and are not specific to the manufacturing sector. There is no single action or lever that will deliver the large shift in investment that our economy needs. Rather the government has a role in providing clarity and certainty about its priorities along with concerted activity to reform the policies that will support the widest group of companies to invest.

More information and research can be found in EEF’s report Invest for Growth, encouraging more globally focused companies to expand in the UK.

In EEF’s industrial strategy, The Route to Growth, we set out four ambitions that we believe are important for growth. One of these ambitions is that we want to see more globally focused companies expanding in the UK.

We will know when we are making progress when a higher proportion of turnover across the UK economy is accounted for by mid-sized businesses. This means we need to see companies growing and investing.

I have recently talked to a number of manufacturers about their investment strategies and the types of things that impact on their investment decisions. A couple of the messages that came through strongly are:

Certainty is exceptionally important for investment decisions

One company said the biggest barrier they faced when investing was the lack of a long-term plan for the business environment. The company in question perceived there to be a relatively high risk that the government will change some of the major policy areas they take into account when making investment decisions.

Another manufacturer said countries which provide some level of certainty around the variable cost elements of an investment were relatively attractive places to invest. Certainty around the legislative base, the cost of capital, assurances of how profits/losses can be treated, the stability of employment and wage discussions were some of the areas that can tip the scales when it comes to choosing where to invest. 

This need for greater stability chimes with the message we set out in The Route to Growth – The UK needs an industrial strategy that provides a clear vision for the kind of economy we want, and makes sure there is coherence and accountability across government.

Companies face a number of draws on cash

One example is the cash companies must put away to cover pension deficits which can have a significant impact on their investment. One company that is heavily committed to investing indicated that over the past few years their annual pension costs have been roughly equal to their annual capital investment. They also said, if it were available, they would have used it for investment.

Making sure all parts of government policy are working towards the investment and growth our companies and economy needs is important. 

Over the last couple of weeks both the government and EEF have put out some thoughts on industrial strategy. So what's the difference?

I think the biggest difference is in terms of ambition. When the government and many others talk about industrial strategy they talk about parts of the economy and parts of economic policy. So putting in place sector strategies perhaps with modest amounts of money associated with them is de rigeur.

By contrast while we see some role for the government providing support for a limited range of selected technologies, this is very much only a part of the picture. The Route to Growth is a strategy for the whole economy and tool to prioritise all areas of economic policy.

In this sense our strategy effectively subsumes not just the industrial strategy but an earlier government strategy still sadly little known outside Whitehall: The Plan for Growth.

The Route to Growth provides a clearer vision where we want the economy to head, suggestions for getting greater coherence across govt, and an accountability framework to match that in place for the fiscal mandate.

There are aspects of the government's industrial strategy which are positive. A closer look reveals admirable talks of giving companies a clearer view of government procurement guidelines to give British companies a better chance of winning government contracts. We support this aim. But where is the cross-government impact or reference to things like the MoD's procurement white paper or rewriting of the 'yellow book'?

On sector strategies, despite the evidence papers released justifying the selection of particular sectors, the process looks opaque. We think it would be better to focus on technologies, where the market failures are more easily identified and where technologies for potential support can be more transparently evaluated against clear criteria, such as:

• Potential size of future market
• Existing UK comparative advantage
• Range of applications

On this I don't necessarily think we are poles apart from the government but its a question of making the framework robust and therefore hopefully enduring.

The government's industrial strategy is good but could be so much better.

On Monday, we launched our Industrial Strategy – the Route to Growth – and we have been blogging about it all week.

We have argued that successful Industrial Strategy needs to be underpinned by three strands:

- Vision
- Coherence
- Accountability

Today, I will be looking at accountability.

There is clear accountability for deficit reduction, but no similar accountability for growth…

We have argued that the government needs to take a similar approach to growth as it has done to deficit reduction. When it comes to deficit reduction, the Office of Budget Responsibility tracks progress, and if it looks like things are going off course, the Chancellor has to announce to Parliament what actions he is going to take in response.

… but growth is just as important for the economy’s long term success as deficit reduction…

Although – as any business that has been through the downturn will know – cutting costs and rebuilding balance sheets is crucial to sustainable growth, but it is only half of the picture. No business would expect to become a global leader through cost cutting alone, and the story is the same for the UK economy. Deficit reduction must therefore go hand in hand with a focus on growth.

…the link between accountability and achieving deficit reduction is clear…

If the OBR determines that the public finances are heading down the wrong path the Chancellor must announce what actions he is going to take to address this.

…Therefore we need to be able to hold someone accountable for growth, at the highest levels of the Cabinet...

As with the deficit, success on the rate of progress on a small number of measurable benchmarks for growth should be monitored. This could be done by the National Audit Office and communicated to Parliament alongside Budget and Autumn Statements.

...Accountability is a key strand of achieving growth.

EEF’s Industrial Strategy, The Route to Growth, was published on Monday.

As Felicity pointed out in her blog yesterday, we face a substantial challenge getting the economy back on the path to growth. Without an explicit growth strategy, policy pulls in different directions making the task even harder.

The fiscal mandate provides a clear path towards reducing the deficit – all parts of government are committed to achieving, the OBR measures progress towards it, the chancellor is accountable for it and it can be explained in less than two minutes.

We need something equivalent for growth, we need an industrial strategy.

Key components of our industrial strategy:

1. A vision for the economy

2. Coherence across government

3. Accountability

The vision (in two minutes)

The vision should provide a clear, simple and bold statement that gives businesses a compelling reason to invest here.  Like the fiscal mandate, our vision for the economy can be set out in two minutes.

_______________________________________________

The UK needs to generate better balanced growth and maintain its position as a leading economy. Four ambitions, set out below, spell out the vision for the economy and can be used as a compass to make sure we are on the right track.

Ambition 1: More companies bringing new products and services to market

Ambition 2: More globally focused companies expanding in the UK

Ambition 3: A lower cost of doing business

Ambition 4: A more productive and flexible labour force

_______________________________________________

Why these ambitions?

Ambition 1 

The UK must be a leading destination for all aspects of innovation to anchor production and compete with rising R&D intensity across the world. We know that UK manufacturers are planning for growth and they are innovating.

» If we have More companies bringing new products and services to market companies will be investing and innovating which is central to supporting their ambitions to grow.

Ambition 2 

The UK must be global in its outlook and create a dynamic business environment that supports high-value investment and job creation. Manufacturers have an appetite to invest, we need to give companies every reason to do it here in the UK.

» If we have More globally focused companies expanding in the UK we will know that the UK business environment is competitive and companies have good reasons to invest in the UK.

Ambition 3 

A competitive business environment is important but the job is not done in some areas, such as energy costs. The UK must provide a stable, predictable and competitive regulatory environment and cost base. 

» If we have A lower cost of doing business companies will be supported to grow with more cash available for innovating and investing and the UK will remain a major destination for foreign investment.

Ambition 4 

Skills needs are increasing and companies are struggling to attract the people they need. The UK must have the talent that a diverse and agile industrial base requires to be competitive in 21st century global markets.

» If we have A more productive and flexible labour force firms will have the right skills to respond to shifts in demand, changing customer needs and economic factors.

As the UK economy pulled out of recession in 2009, a consensus emerged that we should build a better balanced economy, one built on innovation, investment and trade rather than debt-fuelled consumer spending.

Even then, we knew that rebalancing would be a daunting task, but growing economic challenges – most notably in the Eurozone – have cast a shadow over the UK’s recovery.

Though trade figures today point to some improvement, on the whole, progress towards better balanced growth appears to have stalled. The UK’s recovery has been more sluggish than in many competitor economies, including some in Europe.

And while the UK economy has significant strengths – in its industrial diversity, innovativeness, and openness – there is something missing in our approach to growth.

The government’s plan for growth lacks the clarity and consistency of purpose of the Fiscal Mandate. There are clear targets to get the deficit and debt down, but where are the comparable targets for growth?

But what good is a target? Well, so far the OBR has said that the government is on track to meet its fiscal aims, but when it comes to growth and recovery, this has fallen short of earlier forecasts.

Without an explicit growth strategy, policies can end up pulling in different directions.

• Without an explicit growth strategy reprioritisation of spending will lack focus
• Without an explicit growth strategy actions of individual government departments may be inconsist
• Without an explicit growth strategy there is no accountability if economic performance fails to meet expectations

Our future competitiveness hinges on the decisions we take as an economy now. Government can be a strong collaborative partner with business but it needs to set the course for a rebalanced economy. We need a bold new approach to growth.

EEF’s Industrial Strategy: The Route to Growth was published yesterday.

We had a bit of positive manufacturing news last week as output rebounded by over 3% in July, following June’s Jubilee-related slump. But talking to our members the view from many, at the moment at least, is that conditions for growth are set to be challenging over the next six months.

This not only makes the outlook for our economy pretty uncertain, but given the export-focused and capital-intensive nature of the sector, progress towards better balanced growth continues to look like an uphill struggle. 

Where growth is going to come from is pretty high on the agenda.  Last week the coalition returned from recess with a new energy (and new Minsters) to lead the charge on getting the economy moving again.  We’ve had announcements on infrastructure, planning reforms, with more likely over the coming week.

There has been a lot to welcome, but there’s still something missing.  And in our new report, published today, we set out how a modern industrial strategy can plug the gap in the government’s economic policy.

We need a different approach from government; one that brings the same clarity to growth as the government has already outlined on reducing the deficit.  There are three crucial strands to this:

1. A clear vision of the kind of better-balanced economy the government is trying to create and an economy-wide industrial strategy for delivering it.
2. A cross-government commitment and approach to work relentlessly to deliver that vision
3. Measurable benchmarks and an accountability framework that holds all parts of government accountable for progress

The Vision

A vision for better-balanced growth must be simple and speak to the widest possible group of businesses that are aiming to grow by investing and exporting.  It must give them a compelling reason to do it in the UK. 
As part of economic rebalancing we will see progress on the following within the next five years:

1. More companies bringing products and services to market

2. A lower cost of doing business in the UK

3. More globally focused companies expanding in the UK e.g. the number of companies with 25% or more of turnover coming from exports will increase

4. A more productive and flexible labour market e.g. 25% increase in level 3 STEM apprentices

Coherence

Too often we’re heard past positive, pro-growth policies announced, but at the same time, other parts of government have been singing from a very different hymn-sheet.

A clear vision should set the direction for all government action, but this needs to be supported by decision-making structures that are fit for purpose, including close cooperation across government departments and the creation of a new Cabinet Committee for Growth jointly chaired by the Prime Minister and Deputy Prime Minister.

Accountability

There must be clear lines of accountability to ensure that growth and rebalancing remain on track. If progress towards deficit reduction drifts, the Chancellor must set out – in Parliament – what action it will take in response.  

A similar responsibility for growth must flow from the highest levels of the Cabinet. And success on the rate of progress on a small number of measurable benchmarks should be monitored by the National Audit Office and communicated to Parliament alongside Budget and Autumn Statements.

Actions for today

This strategy provides a framework for what we want our economy to look like, we also need to focus on how we get there; starting with;

1. Getting growth capital to the supply chain
2. Cost-effective focus on energy reforms, including a commitment to a technology-neutral approach from 2020 to address business concerns of open-ended subsidies to uncompetitive energy sources. 
3. Cutting the burden of employment regulation, by accelerating progress on reform to Employment Tribunals, collective redundancies and TUPE, ensuring that most tribunal claimants pay some upfront fees, scrapping proposals to introduce pay audits and abolishing fines for employers that lose tribunals.             
4. Investing in modern infrastructure and reprioritising spending where private sources for infrastructure projects remain a problem
5. Reforming funding for apprenticeships to ensure that resources are targeted at employers who provide longer apprenticeships and greater opportunities for higher levels of attainment.

An industrial strategy needs to endure beyond the latest political fad or any one political party.  All our politicians to recognise the value of having a clear vision, gearing the whole of government to delivering that vision, and setting clear accountability arrangements. Our challenge is to define industrial strategy in terms of the overall economy we all want.

George Osborne has an article in the FT this morning, co-written with Google’s Eric Schmidt, where he lays out what he says is his “explicit industrial strategy: to turn Britain into Europe’s technology centre”.

The article recognises the importance of technology for the UK economy, stating that “the role that technology plays in driving job creation and economic growth becomes more important each day”. I couldn’t agree more.

But, the article takes a relatively narrow view of what industrial strategy to support technology should be. The article focuses on four things:

• improving the internet infrastructure
• overhauling how computing is taught in schools
• ensuring access to finance for early stage technologies
• support start-up businesses

If we want to see a growing economy these measures are entirely necessary: but is it consistent with what the rest of the government is saying?

How does Osborne’s strategy fit with what the rest of the government is saying?

Industrial strategy is, it seems, back in vogue. But, as yet, the definition remains unclear. What can businesses take away from what the government is saying about its growth priorities, when different departments are saying different things?

While Osborne is talking about the UK becoming Europe’s leading technology centre…

Cable has talked about the importance of intelligent government procurement; supporting innovation and technology; and focusing on strategically important sectors.

Hestletine has talked about every industry being sponsored by a government department to ensure the public sector works more effectively with the private sector to encourage enterprise, stimulate investment and reward success.

It is not so much a question of whether any of these measures individually might be good for the economy, but how they fit together to achieve the kind of sustainable economic growth want to see.

Without a coherent strategy for growth, which all departments of government have bought in to – be it an ‘industrial strategy’ or not – prioritising the right policy measures remain a difficult thing to do. And businesses will be no closer to understanding what the aims of government actually are.