The Naked Engineer

Posted on 18 Oct 2011 by The Manufacturer

Our naked engineer provides regular anonymous comment on manufacturing policy and practice. For October, NE delivers a no holds barred critique of the historically unbalanced government-services-manufacturing coven.

We hear a lot at the moment about how important manufacturing is to the UK economy; and about time too.

Those of us who make and export things know that the UK is the 6th biggest manufacturer in the world, that manufacturing accounts for 50% of UK Exports and makes up 13% of the UK Economy. For the record, that is much larger than Financial Services, which is only 8% of the UK Economy, but has the profound ability to derail the other 92%.

It is a relief to see political rhetoric changing. I remember attending a meeting with the previous Government’s Industrial Advisor. The audience was told Tony and Gordon’s ‘Master Plan’ was to let manufacturing continue its decline, from about 25% of the UK economy in the 1980’s, down to under 10% by 2020 – This did not matter, apparently, because Britain’s future lay in the service sector, particularly the City.

Fortunately, UK manufacturing growth is now back on the agenda. Unfortunately, that growth is not coming through as fast as it could, and much of what passes for ConDem and Men-From-The-Ministry industrial support is well meaning though largely irrelevant window dressing.

Manufacturing does not need special grants, technology strategy boards, strange tax breaks, or a blizzard of seemingly unconnected government initiatives. What it does need is stable and internationally competitive tax and regulation, and even-handed treatment when compared to other sectors of the UK economy. Neither of these is currently happening.

Examples of uncompetitive tax and regulation are numerous. National Insurance: At 24% of wages, spread across employer and employee, NI is a pure tax on jobs, which is a strange thing to do if you are aiming to build employment. Add in high personal taxes and it ends up much cheaper to employ people, particularly more senior managers, overseas. Entrepreneurs: Let’s keep changing the income tax, capital gains tax, and pensions rules around every few years, so they never know what to expect and leave the country. UK energy costs: Not only high and variable, but now turbocharged with a carbon stealth tax. So take any activity that involves a lot of energy, such as manufacturing, and offshore it.

Want to build a new factory in the UK? Land and construction costs are more expensive than just about anywhere else, before you get onto planning restrictions and transport. Use your spare cash to invest in your existing factory? Forget it, your UK bank not only won’t lend, but also wants to charge you a fat fee to spend your own cash. It’s got its own problems to worry about, so reducing its own risk is much more important than letting you grow, whatever the fluffy TV adverts might say.

Moving on to even handedness: Manufacturing does not need special protection, but nor should it be expected to subsidise everything around it. Like all private enterprise, manufacturing needs to share the burden of paying for government spending…but when the business of government becomes more than half of the UK’s economy, it has gone too far.

The private sector horse wants to pull the government cart, but when the cart gets heavier than the horse, and wants to keep getting heavier every year, the horse starts to give up. A more specific danger is that the UK has, like it or not, developed a predilection over past decades to “pick a winner”. This winner was seen to be banking, and it annually subsidises its development at the expense of other industries.

This subsidy takes the form of an implicit state guarantee of customers’ bank deposits, so the banks pay less interest to borrow than they should…they have government subsidised raw materials. This is alright if controlled, but let the retail banks expand into the casino aspects of investment banking, and they have then managed to dramatically increase their annual subsidy, as if by magic. Relax your local legislation; rely on self regulation, and watch overseas banks flock to London. Periodically, this all goes wrong, and the cost of the hitherto hidden annual subsidy suddenly becomes obvious.

We gave up subsidising shipbuilding, steel making or car manufacture some time ago. The cost of the subsidy was more obvious, and the argument that shipbuilding, or whatever, was a strategic industry that had to be protected was quickly seen through. So it is strange that we adopt other rules for financial services.

So how is this relevant to manufacturing? Not being even-handed badly distorts the UK economy. The part that is being overfed keeps growing, like a cuckoo. The part that is helping pay for it shrivels up, and is even in danger of getting rolled out of the nest.

Our national resources get allocated in the wrong places. We end up with too much government spending and too much banking, in a mutual and uncritical embrace. It is also very difficult for cuckoos to stop eating. One chick will want expensive public sector pension schemes, the other chick large cash bonuses while claiming to do God’s work.

This rather grates with everyone else, who is actually paying for it all. Now we have to put the whole thing right. We have to rebalance the economy back towards more of making and exporting things. It’s a large dose of common sense.

So, as manufacturers, we have quite a challenge. But we are back in fashion and have a weak pound to help exports. We need to seize the moment and make sure we get the fundamentals of internationally competitive tax and regulation properly fixed.

We need a level playing field in the UK, not one that has become inadvertently but violently anti-manufacturing. And we mustn’t get fobbed off with the shallow window dressing of largely irrelevant Government initiatives.

Our decisions on manufacturing investment and employment are long term, with a twenty to thirty year timeframe. These decisions are ill suited to here-today-gone-tomorrow changes in politicians and their economic rules.

Get this wrong and we won’t be the 6th biggest manufacturer in the world for long, and the old Master Plan to reduce UK manufacturing will have come true.