By Neil O'Brien
Should free marketers worry about manufacturing? During the 1980s the Thatcher administration was forced to make a virtue of necessity. As manufacturing shrank, the right tended to argue that this was probably inevitable, and that it should be left to the market to determine where Britain’s comparative advantage lay.
This left many uneasy, including me. It is certainly the case that politicians can’t know which sectors should grow or shrink. I also am very sceptical about the “new industrial interventionism” pushed by Lord Mandelson, which looks a lot like the old industrial interventionism. Governments which have tried to “pick winners” have generally ended up propping up losers.
But manufacturing really matters, because it’s the area of the economy where productivity grows most quickly. Output per person in our economy as a whole grew 1.9% a year between 1980 and 2008. But output per person in manufacturing grew 3.1% a year.
There are sensible things that policy makers can do, not to favour manufacturing over other sectors, but to create the right conditions for it to flourish. That’s why Policy Exchange is holding a conference with Ken Clarke and leading manufacturers, and conducting a major research programme on the subject.
For a decade or more Britain’s politicians have thought a lot about how to divide the cake, and not enough about strengthening the productive base of our economy. We need reforms across the board to enable recovery and growth: from reforming our restrictive planning laws, and repairing our creaking infrastructure, to our making our public sector smaller and more productive.
But we should also specifically try to create better conditions for manufacturing in Britain. There are three main things we are looking at right now:
• Science skills. According to the CBI 92% of firms across all sectors require people with science, technology, engineering maths (STEM) skills, but more than 59% are experiencing problems finding them. But Since 1997 the percentage of pupils studying A-levels in Biology, Chemistry and Physics has fallen. The Government says the number doing science subjects at University are up. But we found that’s because the list of subjects classified as ‘science’ by the Government has become much broader, and now includes ‘Nutrition and Complementary Medicine’, ‘Geography Studies’, and ‘Sport Science’ among others. The number studying Chemistry has in fact fallen during the same period– from 13,923 to 12,515. Meanwhile, numbers doing Engineering and Technology subjects have dropped from 90,930 in 1997 to 80,425 in 2008.
• Tax and the role of Government. In general Britain has gone from having one of the lowest corporate tax rates in Europe to one of the highest. But as well as reducing the overall burden, there are some specific things the Government could to help manufacturers who make big investments in machinery. Current rules on capital allowances are designed for a bygone era where the pace of change was slower and machinery could last longer before it had to be upgraded. It can take 20-30 years to write down investments under the current tax rules, but firms now replace machinery every 7-8 years. Instead of the Research and Development Tax Credit, which has not raised the rate of R&D, we suggest that Government should increase capital allowances, so that investment in new machinery will “pay for itself” more quickly.
• Innovation in universities. More needs to be done to exploit the ideas developed in higher education and to strengthen business links with universities. We will shortly be publishing ideas about how get better at turning our good ideas into profits.
I am struck by the number of manufacturing success stories that there are in Britain, despite everything. A product may say ‘made in China’ on the bottom because the plastic case was made there - but its most valuable components are often made here. Britain exports a higher proportion of high tech products than the US, Germany and France, and leads the world in many sectors. I think there is a lot more that can be done to make sure we stay an engineering and manufacturing nation. I’d be interested in your ideas about how we can help make it happen.
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