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12 July 2017updated 09 Sep 2021 5:37pm

Making Britain make again: how to end the post-industrial myth

The president of the ERA Foundation presents the case for industrial revitalisation post-Brexit.

By Sir Alan Rudge

The critical issue for the United Kingdom before and after Brexit is the state of the economy. It is this above all that will govern the nation’s prosperity and our ability to afford the services that people expect in the modern world. But the underlying economy is not in good shape. The UK is running a huge deficit in trade; we import far more than we can pay for with our exports and our other earnings. The resultant deficit is balanced by increased debt and the sale of our assets to foreign buyers – including our ports, airports, utilities, industries, businesses and property.

The false mantra that the UK is “a post-industrial society” has led to the neglect of our manufacturing industries which, having shrunk to less than ten per cent of GDP, still provide nearly half of our exports. The 80 per cent of GDP identified as “services” provides the other half of our exports, but the total is still substantially less than our import bill. Pound-for-pound of GDP manufacturing is at least five times more effective than services in providing exports. Yet such have been the narratives of successive governments, we are led to believe that just focusing on “services” and especially “financial services” is a sound course of action.

The reality is that in pursuing a purely service economy and neglecting productive industry, we have in fact become a heavily indebted “servant economy”, providing labour and expertise for foreign-owned enterprise to an excessive degree. While foreign direct investment (FDI) is often regarded as good and to be encouraged, the truth is that nearly two-thirds of this has been merely buying up UK assets. Some discernment between desirable foreign investment and straight asset purchase is called for in the national interest.

The revitalisation and growth of productive industry in the UK is essential if the economy is to flourish and be able to fund the quality of life expected. An effective industrial strategy is essentially the national plan to achieve that end. In particular, as a first major objective, the strategy must provide for the creation of a fertile environment for the investment and operations of productive industry, small or large. Government has influence and sometimes total control over many of the parameters, ranging from: energy policy; foreign exchange rates; investment in infrastructure; banking and bureaucracy reductions for SMEs; procurement policy; taxation on investment and manufacturing operations; and skilling the workforce. It is important that we view these multiple components holistically and not as departmental silos – but a co-ordinated managed programme across government with clear objectives.

The economic issues raised here are not new; the UK trade deficit in manufactured goods has been steadily widening for more than 15 years and in 2015 was approaching £120 billion – three times the defence budget. The surplus due to services has grown but not fast enough to offset this deficit. Overcoming the banking crisis in 2008 added £1 trillion to a national debt that is now of the order of £1.6 trillion and still rising at the rate of more than £5,000 per second. This additional debt incurred by the banking crisis in 2008, with its servicing cost, is not normally taken into account when comparing the contributions of financial services with productive industry. However, it does reinforce the argument that the current imbalance is not a basis for a sustainable economy.

The decline in manufacturing and its supporting industries has been particularly evident outside of the south of England and is a contributing factor to the dissatisfaction felt by the population in these areas, as was demonstrated democratically in the result of the Brexit referendum. Hopefully, government will take note since the dissatisfaction is justifiable and an effective industrial strategy could do much to compensate for the errors of the past. The UK suffers from low productivity but this is primarily due to our own underinvestment. Globalisation has contributed to this problem by encouraging the flow of UK investment overseas. The challenge to government is to create an industrial strategy that makes investment in UK productive industry more attractive to investors.

Secure, competitively priced energy supplies are the basis of any successful industry and the UK is fortunate in having access to substantial deposits of shale gas and oil. The early tapping of these sources of energy could help to transform the industrial prospects of many parts of the UK as they have already done in the United States. In my view, the application of hydraulic fracturing technology, or fracking, to extract shale gas, has received an unjustifiable bad press. But given that every form of mass extraction of energy requires some disruption, for the ERA Foundation fracking is one of the safest and least disruptive techniques. The gas is a fossil fuel but with half the CO2 emissions of coal. It could provide the UK with secure home-based energy supplies and a huge saving in foreign exchange. It is our view that the 2008 Climate Change Act requires massive revision if we are to have an industrial base at all.

There is no doubt that Brexit will create challenges for the UK but the underlying economic problems discussed in this article have been present and untreated despite the UK’s membership of the EU. Indeed, EU rules may have restricted some of the actions the government might have taken to revitalise UK industry. Brexit therefore offers a number of additional freedoms for the government to act and these must be used to full effect in an industrial strategy if the fundamental problems of the UK economy are to be addressed.

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