Yesterday morning saw the release of the Office for National Statistics’ Index of Production bulletin for November 2015, which showed up a pretty dire situation as far as manufacturing is concerned. Although these figures received some comment, they passed largely unnoticed, I guess not surprisingly as much of the political agenda was dominated by the junior doctors’ strike.
But I also worry that George Osborne has already been successful in his new strategy to blame a global “cocktail of risk” to explain away bad numbers for the government (and himself) so that when they come (as they did yesterday) then (he hopes) everyone is less likely to think this is “news” and he may continue to get away with it.
But the manufacturing figures were really worrying – and we mustn’t let George Osborne off the hook for the consequences of his domestic policy decisions.
Unless we want to continue on the course that the Chancellor has charted (destination – a completely unbalanced economy) then we, that is UK Plc, need to improve our manufacturing performance. It might ‘only’ constitute 10 per cent of our national economic output but it still employs 2.6 million people and accounts for 44 per cent of exports. The trade deficit is pretty awful as it is; it will be worse still unless we get a grip of manufacturing.
Manufacturing needs a pretty specific environment in which to thrive. By which I mean an environment in which investors will take a punt and invest; you wouldn’t buy an iphone if it didn’t work. Investors won’t put in their cash unless they think the business is going to make money. They need to feel confident that the product, the business and the environment in which the business exists all stack up. If not – since we are in a global economy – then they will take their money elsewhere.
Unfortunately in terms of manufacturing, that’s exactly what has been happening. Business investment in the sector has fallen to 15 per cent (compared to 23 per cent in 1997 – although that’s an increase of two per cent since 2009). We’ve seen a similar decline in R&D.
So what’s the problem? Well the problem is there are many problems. There are global factors that don’t help – the high value of the pound for one. But George Osborne’s domestic policy choices are a major contributing factor – his choices over the past 5 ½ years have failed to create the right environment for manufacturing to thrive, and having talked a good game on a “March of the Makers” (most notably in the Budget of 2011) it looks like that march is going backwards.
As I said the problem is there are many problems so I’ll pick just three.
Time and time again we are told that we are simply not producing enough people with the correct skills for manufacturing, particularly advanced manufacturing – either at the advanced apprentice level or at degree level. We are not even producing enough skilled apprentices or graduates to replace those people who are retiring from the sector. We need to significantly increase the number of people qualifying as advanced level apprentices, we need to expand the numbers of places in degrees in manufacturing related disciplines that are actually taken up by people who live in the UK – and who it is likely will remain here. The number of engineering degrees awarded has increased – but three quarters of this increase was accounted for by non EU students, who will find it difficult to stay in the UK.
The government makes great show of its headline rate of corporation tax and clearly this is an important component of the tax environment for any business or investor. But let’s be clear it’s not the only one and I’m far from certain it is the main one. Manufacturing is a very capital intensive industry and other incentives are significant such as the annual investment allowance (AIA) – a tax relief to support businesses investing in plant and machinery (which of course helps productivity). Businesses need certainty about the rate of this relief so they can plan. Since 2008 the level of this relief has changed four times. The most recent change, which is theoretically permanent, means from January 1st 2016 the AIA will be £200,000. It was £500,000 from April 2014 to December 2015. This level of chopping and changing of an important tax relief, over quite short periods of time, does business no good at all. They need stability in order to plan investment decisions, and I would argue that there is a good case, in a time when the UK is in a productivity crisis, for keeping the AIA at a higher level. I think that the reduction in the AIA threshold from £500,000 to £200,000 is an odd move given that there are currently a full 218 tax reliefs for which we have no estimate as to their exchequer cost. This non-revenue would be better directly at this vital sector.
A problem the government has entirely created for itself. Exports are vital to manufacturing and Europe is vital for exports. There can be little doubt that the instability created by the In-Out referendum is a massive cause for concern for investors in manufacturing. It’s no wonder that the annual EEF Executive Survey found that 44 per cent of manufacturers see more risk ahead in 2016 than opportunity. Whilst by no means the only factor of concern, 36 per cent of respondents said that uncertainty around the UK’s place in Europe was the top risk they will face in 2016.
George Osborne did not use the exact words that the dog had eaten his home-work. But the implication was clear: 8 days into the New Year George laid out his 2016 stall. He got it in early and I’ve no doubt we will hear it often over the next 12 months. The Chancellor may well think that he has stolen a march on his leadership rivals. But he hasn’t stolen a march on the makers on whom we all depend. They face a 2016 of uncertainty – a cocktail of risk – for which the Chancellor cannot escape the blame.