David Merlin-Jones: A strategy for economic growth

David Merlin-Jones is a Research Fellow in economics and energy at Civitas.

The UK is still in an economic crisis, and Chancellor George Osborne’s Autumn Statement is therefore eagerly and nervously awaited by many. Mr Osborne must bear in mind that with the economic outlook appearing increasingly dismal, the time for ad-hoc policies has passed, and must be replaced by a long-term economic strategy if growing unemployment is to be stemmed and confidence buoyed. Without such a plan, Britain risks another recession.

Many might recoil in horror at the idea of having a long-term economic plan, which smacks of the failed policies of the 1960s & 70s, national champions and white elephants. That is not what is being advocated here. Instead, a modern plan must be centred on improving the business climate of the UK to make it attractive to investors, not granting hand-outs to businesses and certainly not propping up ‘lame ducks’. What it does require though is intervention in specific areas of the economy.

Any long-term plan for economic growth must centre on manufacturing, not for nostalgia’s sake, but for practical reasons. We have lost much industry over the past few decades, from manufacturing contributing 20% of GDP as recently as 1997 to just 11% now, and this means the rapid expansion of private sector employment hoped for by the Government is unlikely to happen. The only way to bring some of the UK’s record 2.6 million unemployed people into work, and permanently, is to concentrate on re-industrialisation. This means providing support for all forms of manufacturing, not just the high-tech sectors the Government has focused on so far which make up only 14% of British manufacturing. Indeed, it is high-value industry we need more of, which is often labelled derogatively as ‘metal-bashing’ as the products are unassuming, even if they are created by some of the most precise machines on the planet.

The current preoccupation with high-tech industry belies another problem: the overbearing focus onR&D as the source of innovation, which in turn provides the means to stay ahead of the competition. For many companies though this is simply not the case (a recent survey found only 2% valued research as their leading advantage); the true source of their competitive advantage is informal innovation, such as improving the production process. These improvements mostly come from the factory-floor workers, not PhD-wielding researchers. As such, there is a lot to be said for focusing attention on developing school leavers’ abilities and not on getting graduate numbers up.

More widely, the Government should not base its involvement in the economy on individual interventions here and there. At the beginning of November, the Government announced the 120 companies benefitting from second round dispersions of the regional growth fund, worth £1.4 billion. Whilst Government investment in industry is certainly welcome, the funds are a drop in the ocean. Many thousands of other companies have not benefitted from the fund and never will, regardless of how successful they might be.

The real aim must be to nurture a favourable business environment in which existing companies can flourish and new ones will flock to the UK: a ‘greenhouse approach’. Companies need to be given access to the tools they need to grow, to export more and to employ more people as a consequence, which in turn is a national benefit. Developing this enterprise-friendly atmosphere needs a dual approach: recognising where the state is getting in the way and needs to do less, and where it needs to do more.

In terms of doing less, the aim is to make the UK more competitive on the world stage by reducing the cost of setting up shop here. Britain is no longer able to rest on its laurels and assume businesses will come to the UK on the basis of our skilled workforce: other countries are catching up in educational terms and overtaking us. Other incentives now need to be offered and this means lowering the rate of corporation tax faster and further than the Chancellor’s 24% by 2014. A rate of 15% would be a powerful signal to the world that the UK is serious about attracting business.

In addition, providing relief from the increasing burden of the green tax regime would mean many companies likely to leave the UK in the future do not. At present, the average energy-intensive manufacturer faces bills of £3m, but this is set to rise to £17m by 2020, a cost unbearable by most of these firms. Supporters of the policies say this doesn’t matter and that energy-intensive businesses account for ‘only’ 1% of British GDP. Quantify that and you’re looking at the potential loss of roughly £15 billion from the economy and 290,000 jobs.

Where should the Government be doing more, then? The answer is wherever our rivals’ governments are intervening in the economy for growth. Take Germany for example, which has a fairly harmonious relationship between government and industry, with the former rarely doing anything to endanger the latter. A strong mechanism to support manufacturers’ export ability exists, and when lending is needed, the state-backed KfW is there to assist if commercial lenders are unwilling to help. In 2010, KfW financed a record €28.5 billion in loans for SMEs, while in the UK, SME loan rejections increased from 10% in 2007 to 35% in 2010, and there is little for British businesses to fall back on. Additionally, at the EU level, Germany finds loopholes in EU state-aid rules to ensure it can maintain its approach towards SMEs while the UK blindly accepts EU red-tape. Our lack of support for businesses means we are losing out on potential growth, continuously and mostly to other countries which are, like Germany, willing to back their businesses. 

Having a long-term strategic plan does involve spending taxpayer money, but the crucial thing is to see this as wisely investing for the future (as many other countries do) and not as spending money for zero return. The Treasury should be happy that through this investment, more companies will emerge and more people will be employed, both generating tax revenue. This is not to mention the saved costs of reducing the numbers on unemployment benefit. It is time to put sustainable growth first in the economic agenda, and that means we need decisive decisions from a brave Chancellor.

Civitas today launches its new report: A Strategy for Economic Growth. The sources for statistics quoted in this article are available in the report.