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Economy: Enterprise, Taxation and Manufacturing

My Lords, I congratulate the noble Lord, Lord MacLaurin, on securing this important and timely debate. He is a successful and distinguished business leader and the whole House respects his credentials on the economy. I wish to concentrate on the challenges faced by small and medium-sized businesses in the UK manufacturing sector. This is not a new issue for policy makers. One can go back to the Macmillan report of 1931 to learn of the difficulties that such enterprises have. It is worth remembering that while government can help or hinder businesses, the success or failure of any particular company is decided by the skill of the entrepreneur. The first question we should ask is whether there is a problem in manufacturing. Manufacturing output as a percentage of GDP has indeed fallen dramatically over the past 40 years. Today manufacturing is only 13 per cent of British GDP. That is partly due to restructuring, but we should also remember that many companies have outsourced functions such as IT, legal, design, personnel and so on. These functions are now counted as services, which radically reduces our estimate of the manufacturing share of GDP. That change is mirrored in every G7 country, but is more apparent in the UK as we have been at the cutting edge of outsourcing. As a professor of manufacturing, I am more optimistic about this sector today than I have been for years. Manufacturing output is 22 per cent higher than it was at the start of 1980, while manufacturing productivity has grown by 50 per cent since 1997. Look at the profits some of our companies are making. Take the aerospace sector. We have virtually 35 per cent of the world’s air engine market. Then there is the car industry; we are producing more cars today than we have done over the past 25 years. Even companies that were supposed to have lost their credentials, such as Jaguar and Land Rover, have produced billion-dollar profits. I would not say that we have never had it so good, but we are having it okay. Firms with fewer than 250 employees are responsible for about 40 per cent of our manufacturing value-added. These companies are a vital part of our economic landscape, and they have been exposed to increasingly tough global competition. As open markets have extended, they have affected manufacturing sectors in different ways. Some that have a high value-added technological content, like aeronautics and the automotive industry, have outsourced but retain manufacturing in the UK. Electronic components and clothing have faced huge pressures from overseas competitors. That is not a bad thing, as the consumer has benefited from the competition. We hear a great deal about the movement of investment to China and India, but, beyond the sectors I have mentioned, most of the investment in those countries is for their domestic markets, not to re-import to the UK. Companies have also changed the way they work. Today many companies make more profit from design or servicing than from physical manufacture. In fact, it is not hard to tell which companies are purely service and which are manufacturing. Many of our best new businesses operate in this area. Many competitors have asked what government should do to help manufacturing. The first response is to say bluntly, ““Get out of the way””. Manufacturers are good at being blunt. The burdens of regulation and taxation fall most heavily on the businesses with the tightest margins. We have seen the pressure of regulation increase. We all agree that regulation for its own sake must be eliminated, yet regulation is important. It is the way society reflects needs that are not met by the market. Good regulation improves our quality of life. Imagine what would have happened if tougher regulations in California had not sparked a wave of innovation in the drive to lower emissions. In the UK the minimum wage and health and safety regulation matter to us as a society. So while it is easy to call for deregulation, it is much harder to do. The new Mayor of London is a doughty believer in the perils of over-regulation, yet his first act as mayor was to issue a no-drinking regulation on public transport. I happen to agree with the regulation but I cannot help but smile at the irony. Last year the Legislative and Regulatory Reform Act came into force. The Government are currently considering how to use their powers to reform consumer protection regulation to help small businesses. These are welcome steps and we need to give the new powers time to make a difference. The burden of taxation is one which all businesses complain about, and rightly. The good news is that corporation tax has fallen from 30 per cent to 28 per cent, yet small manufacturers are concerned about the increase in the corporation tax they pay to 22 per cent next year. Yet that change should be considered alongside the new measures that help small businesses—the new £50,000 tax-free capital investment allowance, the increase in the R&D tax credit to 175 per cent, the increase in the small firms loan guarantee from £60 million to £360 million, and the extension of the enterprise investment scheme to offer tax relief up to £500,000. The Government have also made the right decision in providing an entrepreneurs’ relief on capital gains tax. These measures are in addition to services, such as the Small Business Service, which have seen major increases in funding. Economic competitiveness means more than just headline tax rates. We should focus on growth, being an economy with a good infrastructure and research base, high skills levels, a supportive fiscal framework and a focus on investing in the future. One area where we have had enormous success is inward investment. This is because the perception of the UK abroad is that our fiscal and regulatory framework is second to none. The UK is now the second greatest beneficiary of inward investment in the world, with $1,135 billion of foreign direct investment stock in 2006. That is more than twice the amount invested in Germany and almost a third more than France. Inward investment has brought secure jobs in the long term. These companies need a supply chain, and this will be predominantly made up of small and medium manufacturers. These have improved enormously by learning from inward investors. Indeed, they have improved so much that they are now being targeted by inward investment companies themselves. These companies benefit from the challenge of improving business systems and increasing flexibility. Those skills will lead to rewards with other customers. The task of government is to help small businesses innovate, and here we have done an enormous amount. I welcome initiatives such as technology demonstrators which will help major inward investors and smaller companies innovate together; the work of the Technology Strategy Board in driving forward research funding; and regional development agencies’ support for small business innovation and sector clusters. For the past 40 years I have heard that the British economy needs more skills. This is a subject with a long and thorny history in British policy-making. I have to say to those on the Benches opposite who call for more direct government intervention in skills that this was not the approach they took in office. I am proud that this Government have invested a huge amount in skills. The budget of the Learning and Skills Council is now over £10 billion—an enormous sum. I did an apprenticeship when I graduated which stood me in good stead for the future, so I applaud the Government’s modern apprenticeship programme. I also welcome the Government’s commitment to increase the funding of the Train to Gain programme from £200 million to nearly a billion pounds by 2010. Of course, when the economy is doing well and the demand for skills is high, companies will complain that they cannot recruit enough scientists and ask the Government to solve the problem for them. My first response to such calls is to ask, ““Well, what are you doing about it?””. The number of STEM graduates has increased from 60,000 to 85,000 in the past decade. Indeed, our universities are in many ways the envy of the world. Some complain that we are not recruiting enough indigenous students into the workforce. Yet, when one goes to the most innovative companies and research institutes in America, one sees that they are incredibly multicultural. They are interested only in recruiting the best, wherever they come from, because they know that their companies will get the benefit of their work. I hope that the new points-based immigration system will make it easier for the highly skilled to be ambitious in Britain. Today, too many British science graduates end up in sectors other than manufacturing. Why is that? It is because young people today have many choices of career. Raise the pay, develop the career structure and quality of life you offer and more will want to train and work for you. That is why the pharmaceutical sector is so successful. Manpower planning by Governments is always dangerous. In a fast-moving economic field it is the market that has to decide what labour is needed and ensure that it is trained. I fear that companies which demand that the Government do more while they invest little themselves really want to reduce the price tag of their recruits. I do not think that that is the way to invest in future success. So, what has happened over the past 10 years? This Government have created fiscal and regulatory frameworks and a flexible labour force. We know that business success is not in the hands of the state, but we believe that, by working together, we are on the right path.