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Budget 2014: measures are an inadequate fix for British manufacturing

Sorry George, we’ll need more help than that. Rui Vieira/PA

The current vogue for heralding the recovery of the British manufacturing should not lead us to complacency about the very real difficulties currently faced by the sector. George Osborne’s budget offered one or two fairly substantial measures to support manufacturing, allocating £7 billion to lower manufacturers’ energy costs, and doubling the investment allowance. But by failing to tackle the key obstacles to making real his “march of the makers”, there is little to suggest a genuine resurgence is on the cards.

In the lead-up to the budget, we were subject to a steady stream of “good news” about manufacturing in the UK. Most of these stories arise from the media’s tendency to report the statistical output of regular surveys to a regimented timetable, without seriously questioning the importance of tiny monthly or quarterly fluctuations, or the validity of the measures themselves.

Economic activity in virtually all sectors invariably creeps forward in normal circumstances – but consistent improvement from a very low base is not a sign of success. The most remarkable aspect of this story is that it comes so long after the recession ended; that the recovery has been so tardy suggests profound problems with the British economy and manufacturing in particular.

False positives

The worry is that misplaced positivity helps to conceal the government’s ongoing neglect of manufacturing – indeed growth in the sector was championed by George Osborne in a key speech on the economy last month, an apparent sign that the economic “Plan A” is working.

In the opening remarks of his speech in parliament today, Osborne argued that while manufacturing “halved” under the Labour government, it is growing under the coalition. This is an utterly meaningless statistic: a much delayed post-recessionary uptick is no indication that manufacturing’s long-term relative decline has gone into reverse. Comically, Osborne neglected to clarify what it was about manufacturing that had previously halved – and intriguingly this passage of his speech does not appear in the version published on the government’s website.

In truth, the limited recovery evident in manufacturing has been fuelled by a single industry, that is, car manufacturing. Even this largely consists of Japanese-owned firms increasing production in the UK. Output in the transport equipment industry (principally cars) grew by more than 50% between 2009 and 2013, whereas all other manufacturing industries saw either a fall in output or only a small increase. In fact, in every non-transport industry that has seen rising output, the growth recorded between 2009 and 2010 was greater than that recorded from 2010 onwards.

Clearly, foreign car manufacturers have been attracted by falling real wages and the pound’s significant depreciation; that so few other industries have benefited from the same dynamic is therefore also quite remarkable, and demonstrates the UK’s crippled manufacturing capacity in most industries. Improving capacity requires investment – new factories, upgraded machinery, workforce skills – but business investment as a proportion of GDP remains lower than before the recession.

The energy to change

The corporate sector can and must invest more. But while Treasury minister Danny Alexander is content to lecture British businesses about investing their cash, the coalition government has done little to address the underlying causes of investment stagnation: the chronic short-termism of the financial sector in the UK, the absence of long-term public investment to lever private investment, and poor incentives for institutional investors.

None of these problems feature in the main measures to support manufacturing announced today. The annual business investment allowance will be doubled, with this higher rate continued to 2015 – this should help manufacturing firms as they are more capital-intense. But removing tax barriers to investment does not mean funds for investment will actually be forthcoming. Far greater efforts to reorient the banking system back towards “the real economy” are required.

Many manufacturers will welcome support for lower energy costs, achieved principally by reducing the burden of environmental levies on business. Yet while the chancellor reported that lower energy costs have boosted manufacturing in the United States, he neglected to mention that most European countries have much higher energy costs – not to mention higher wages – than the UK and the United States, yet somehow manage to sustain stronger manufacturing sectors.

Challenge neglected

The most acute challenges have been overlooked. Instead we remain dependent on the strategy for manufacturing detailed in the coalition’s 2011 “plan for growth”: changes to tax allowances and more extensive advice services, now supplemented by a de-greening of the tax base. The plan for growth sought to boost “advanced manufacturing”, but more recently declining wages have led the government to turned to low-skilled manufacturing, as it seeks to convince British firms to “reshore” their production back to the UK from overseas.

The one welcome development in recent years has been a greater focus on university-based manufacturing research centres – mentioned in the budget, although it is not clear whether any new funding will be made available.

And housing policy could in fact further damage the manufacturing sector, by extending Help to Buy until the end of the decade. Such schemes suck investment into the housing market and away from the productive economy.

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