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Budget Resolutions and Economic Situation

We should certainly see what happens after 2008, but I do not think that we need any lessons from the Tory party about the level of public expenditure. If the right hon. and learned Gentleman could give the Government credit for achieving a much higher run of public expenditure over many years than we have had before, his prophecies of doom might carry rather more credibility. The Budget contained many excellent provisions, not least on education, but, surprisingly, one foundation of our national prosperity was not much mentioned. I refer to the state of our manufacturing industry. Prominent attention was given to knowledge-based services, but they account for only a fraction of total export earnings—less than a third of the earnings from the export of manufactured goods. They pay for only a quarter of the expenditure on manufactured goods that we want to buy. Yet our manufacturing base, which is the lifeblood of the country, is in long-term decline, and that continues. Output continues to fall and we are losing 100,000 jobs a year, without any prospect that the services sector will ever be large enough to compensate for the weakness of manufacturing. The facts are stark, and not just one Government are responsible. The position dates back over many decades. The share of manufacturing in total UK output has almost halved since 1979. That is serious enough, but in recent years it has been accelerating. In 1970, fewer than 10 per cent. of manufactured goods sold in the UK were imported; now the proportion is 60 per cent. Whereas in other developed countries manufacturing output has been growing—although, admittedly, less than the services sector—the key point is that in Britain there has been not just a relative but an absolute fall in manufacturing in recent years. I do not think it an exaggeration to say that if those trends continued, manufacturing in Britain could almost face extinction within 30 years or so. I am well aware that the decline in manufacturing jobs is seen in some circles as a sign of healthy efficiency rather than failure. Despite the avalanche of Chinese-made goods that is hitting western shops, the free trade lobby draws attention to the continuing expansion of manufacturing output in most developed countries. It recognises that jobs have been lost, but claims that that is because workers are replaced by new technology to boost productivity, while labour-intensive sectors such as the textile sector have given way to higher-tech ones such as IT and pharmaceuticals. Low-skilled jobs, they say, have moved offshore, while higher-value-added research and development, design and marketing have prospered at home. There are several things wrong with that argument. First, China and India are not dominant merely in low-tech sectors. They are turning out a third of a million new engineers each year, and are rapidly entering high-tech and service areas such as design, software and digital technologies. Moving upstream—the current conventional wisdom—will not escape Asian competition at cut-price rates. Secondly, where new jobs have been created in Britain over the past decade they have been largely low-paid, low-skilled and often part-time jobs in retail, catering, entertainment and care services. Thirdly, there is a regional mismatch. Manufacturing jobs have been lost largely in the north, while the expansion of business and financial services has been skewed to the south. There is a danger that continuing manufacturing losses, combined with the lack of any effective regional industrial strategy—which we have seen in this country for about 30 years—will leave large swathes of the country outside the south and the south-east increasingly denuded of highly paid and attractive jobs. It is also worrying that Britain has been hit harder than other developed economies. After the oil shock of 1973, US manufacturing output has grown by about 120 per cent. Ours has grown by 15 per cent. US companies now achieve more than twice the production level since then with the same number of workers, while British companies produce about the same as they did before with almost half as many workers. Productivity here has been almost exclusively at the expense of labour-shedding, and I think that that is perhaps the biggest failing of the British economy over the past quarter of a century. How can that endemic failure be addressed, and how can de-industrialisation be halted, as I believe it must be? I think that the Government were absolutely right to identify the key problem as the well-documented gap between the productivity of the UK and that of its major competitors such as France, Germany and the United States. They have genuinely tried to raise Britain’s traditionally low levels of skill, investment, research and development and innovation. Statistics show that over the past quarter of a century the UK seems to have closed the skills gap between us and the US, but there is still a significant skills gap between us and European countries such as France and Germany. Interestingly, in higher skills—at university levels—we just about match those countries, but we are still far behind when it comes to intermediate skills, by which I mean technical qualifications such as higher national diplomas. Many experts say that those represent the hinges of economic performance, and I think that they require more attention. Another area of chronic UK weakness that still remains is investment. Despite all the Government’s efforts—they have put in a great deal of effort—Britain has performed significantly worse than all its main competitors in terms of capital investment per worker hour. A recent cross-national study found that German, French, US and Japanese levels were no less than one third to two thirds higher than the UK level. That is a massive gap. I accept that the UK record has strengthened markedly in the last decade. The quality of capital has also improved, which is important, and the impressive growth in information and communications technology investment has begun to have an impact on output growth. However, getting UK plc to invest adequately is still a big problem. Britain also continues to lag badly in R and D expenditure. Again, many studies have shown that such expenditure contributes significantly to productivity growth. Despite the Government’s welcome and substantial encouragement of business R and D, not least in the Budget, Britain still spends far less of its GDP on R and D—as much as 45 per cent. less than Japan and the US. Moreover, it is a serious weakness that British R and D, such as it is, has been much too heavily concentrated on two industries—defence and pharmaceuticals—instead of being cascaded across industrial sectors, where technological capability is now more important than price competitiveness. Another factor is almost wholly ignored, which the Government should take on board. As the London McKinsey strategy consultancy recently commented, many UK manufacturers fail to implement management methods, including involving shop-floor workers in improving production, that rivals abroad have recognised produce results and have therefore taken on. Improving people management and working practices should be central to the Government agenda, rather than being treated as subsidiary to investment, innovation, skills and competitive labour and product markets. Another worrying point is particularly disturbing at present: Britain’s current manufacturing weakness, combined with the Government’s neo-liberal ideology, has exposed some of Britain’s most prized industrial assets—P&O, BAA, Standard Chartered Bank, Centrica, BOC and Pilkington—to foreign takeover. There is absolutely nothing wrong with the occasional foreign takeover, but industrial jewels such as those have been auctioned off—thus gaining, in effect, subcontractor status—to pay off very large deficits. Losses of that scale at the highest reaches of industry need to be stemmed if Britain’s overall national manufacturing capability is not to be irredeemably mortgaged beyond democratic control. Above all, if we think that market forces are paramount, let us look at the US. The US record has been built on not only unalloyed market forces, but on heavy R and D expenditure, channelled through the universities; on military Keynesianism; on Government procurement, as a protagonist for US industry; on a resort to protectionism, where foreign pressures become too great; and on a low dollar exchange rate to assist exports. If that is market ideology, we need more of it here.