Flying on empty

Rebalancing our economy is the current economic mantra of the coalition government. Private investment must replace public spending and manufacturing replace the service industries. Measures necessary to tackle the levels of public debt incurred to save the banking system have been conflated with an orchestrated attack on the public services designed to create the perceived fiscal and monetary climate appropriate to achieve this rebalancing.

The big question is whether it will deliver. The idea that by cutting back the public sector the private sector will step in to breach the gap requires a leap of faith not backed by historical experience.

As an MP representing a traditional industrial constituency in the Midlands, I welcome the recognition of the role of manufacturing.  Many businessmen welcome the ‘mood music’ coming from the government but are apprehensive about the impact this strategy will have on consumer spending and those manufacturing companies dependent on public spending. Strip out that element of economic growth dependent on public spending, particularly in some of the regions, and the challenge becomes even harder.

The scale of that challenge cannot be underestimated. The Office of Budget Responsibility has outlined the levels of business investment and exports needed for the private sector over the next few years to mop up the unemployment resulting from cuts in the public sector. These have rarely been achieved over the last 50 years.

Success or failure will be determined by the support government can give manufacturing. This must not be confined to direct support but co-ordinated across a range of policies and departments designed to back manufacturing. Supporting manufacturing and economic growth cannot just be the responsibility of the Business, Innovation and Skills Committee but must be a priority of other departments.

Manufacturing has been leading the way out of recession. Growth of 1.4 per cent and 1.6 per cent in the first two quarters of 2010 and an anticipated annual growth of 3.8 per cent for 2010 is well in excess of the predicted growth in GDP.

Investment grew in the early part of the year but there are considerable concerns about its sustainability. With cuts in capital spending, low consumer confidence and credit restrictions at home coupled with faltering markets in Europe, the US and even China, manufacturers are going to have to be exceptionally resourceful in identifying new markets abroad to offset stagnant demand at home.

There is some evidence that there is strong demand in Asia and the Middle East but one of the challenges for the new government will be the sort of backing it can give to SMEs to enable them to tap into these new growth markets.

The government is due to publish two key policy documents this autumn: a new ‘Manufacturing Framework’ and proposals on finance for enterprise. Urgent action is needed on a number of issues.

The first issue is finance. Access to capital has always been a problem for SMEs and this has been exacerbated by the ‘credit crunch’. Historically, investment has come from bank loans; banks claim they are lending more to business, but this is disputed by manufacturers.

What is indisputable is that where banks are prepared to lend, conditions attached are more onerous. As growth estimates drop and confidence in the recovery wanes the price of ‘risk’ will increase.   

Anecdotally, many SMEs are now not even applying for loans. As business confidence drops, investment decisions are likely to be postponed. There is a genuine prospect of low confidence, higher risk, higher-cost loans and reduced investment. These conditions are hardly going to generate the level of private sector investment necessary to drive the economy out of recession.

The latest Bank of England credit survey shows that even the current sluggish business investment is concentrated on replacing assets and making efficiencies rather than improving capacity.

Vince Cable has, quite rightly, publicly traduced the bankers for failing to back manufacturers. The battle between the Treasury and its desire for better capital adequacy ratios and BIS demanding better financial support for industry has yet to be resolved, but I know of few small manufacturers who expect a favourable outcome for business.

A bankers’ tax might help, but I can only reflect on a conversation with one of my local manufacturers who gloomily predicted that any such tax would only be passed on to business.

The challenge for the government is to plug that investment gap. The enterprise finance guarantee scheme has enjoyed a degree of success but its administration through the banking system has often been a daunting and unrewarding experience for applicants. The government budgeted for an increase of £200m for this scheme but the level of take up appears to be dropping.  

The second issue is government support in the regions.  Many companies currently receiving RDA financial support are uncertain about their future. Currently, RDA budgets are to be reduced to 60 per cent and then 40 per cent by 2012. The regional growth fund to replace them is only £500m a year. How manufacturing can access these funds is still unclear. What is certain is that total funding is to be much reduced. The Local Enterprise Partnerships will have to be very successful to compensate for this.

Whilst many manufacturers welcome what they hope will be a more business-driven approach, there is uncertainty about what areas of current RDA responsibilities will be exercised nationally and what will be delivered locally. How European funding is to be disbursed with no regional structures is not clear. Clarity from the government is urgently needed on these issues.  

The third issue is energy supply. Providing a secure energy supply whilst reducing carbon emissions means more gas storage, making support for renewables more effective and removing planning obstacles to nuclear power.

The new emphasis on local planning control and the abolition of the infrastructure planning commission sends all the wrong messages. For industry, it conjures up the nightmare of major strategic projects bogged down for years in expensive public consultations — hardly an incentive for investors. I have been given assurances that new planning procedures will be devised to surmount this. This must be a priority. Manufacturing must not be throttled by nimbyism masquerading as local democracy.

The fourth is tax. This is a Treasury responsibility, but the BIS’s ability to persuade the Treasury to adopt a tax regime that will foster business whilst dealing with the fiscal deficit will be crucial. It is ironic that at the same time as there is a green paper on finance for enterprise, the Emergency Budget, by reducing investment allowances and cutting corporation tax, raised costs on manufacturing investment and lowered taxes for banks.

The Conservative-sponsored Dyson Review highlighted policies necessary to translate research into industrial innovation. A taxation regime which recognises and supports this must be developed. The existing R&D Tax Credits scheme has been successful but needs to be refined.

The fifth issue is skills. The mismatch between the skills profile of our workforce and the needs of the manufacturing industry has been obvious for a long time. The transfer of funding from the ‘Train to Gain’ programme to apprenticeships will only work if both employers and recruits can be found to take the places. It is possible that the proposed Local Enterprise Partnerships will be able to promote closer working with local manufacturers and tertiary education providers to do this.

At higher education level, the Browne Review on university funding will be crucial to ensure that the STEM subjects — vital for manufacturing — will be maintained. Science-based courses require a higher level of capital investment and could be cut if funding is reduced. The government needs to foster new ways for academia and manufacturing to work together to boost our high value-added industries.

Government proposals for a ‘cap’ on immigration pose huge problems for manufacturing at all levels. Local foundries in my constituency would have gone out of business but for imported labour. Advanced technology companies need the graduates from both home and abroad to give them a cutting edge in world markets. With four fifths of immigration from the EU and therefore beyond the scope of the cap there will be enormous pressure on the government to meet its cap by restricting access for those most needed by manufacturing. This must be resisted.  

If the government is serious in meeting its stated objective, these are the issues that need to be resolved. The BIS Select Committee will be testing this commitment over the coming months and making appropriate recommendations on them.