Cutting off your nose to spite your face

Well thank you so much for inviting me to speak this morning.

I know you were expecting the Shadow Business Secretary to but I’m afraid the Shadow Business Secretary was unable to be here so you’ll have to make do with me instead.

I am particularly honoured to be invited to speak by my good friend, Lord Kumar Bhattacharyya, who is truly an inspiration not only to UK industrialists but to all of us. 

I have been asked to speak to you, in the short time available, on why - from a policy maker’s point of view - supply chains matter.

The global financial crash of 2008/9 exposed serious structural imbalances in our economy. 

For all the many good things the last Labour Government achieved and the progress made in developing an active industrial strategy, we did not manage to sufficiently restructure the economy we had inherited during out time in office. Of course, the economy had severe imbalances that had grown since the 1980s under Mrs Thatcher and then John Major.

After all those years, it still has those imbalances. We’ve had half a decade of George Osborne’s chancellorship and our economy is still one with too few savings, too concentrated in too few sectors and regions of the UK, and too based around cheap credit. We also have the worst productivity in the G7 save for Japan; the current account deficit was 5.5% of GDP last year – the highest since the 1830s. Over the past year 70% of economic growth has come from private consumption. 

I suppose the Chancellor’s challenge will be to pull off what no other Chancellor has managed to pull off under the last five Prime Ministers and materially see a rebalancing of the economy by the time he – and it will be George Osborne who wins the Tory leadership in my view – enters No 10 himself.

But this is not about George Osborne’s career – essentially this is about people’s jobs. I am a Labour Party politician and the clue as to my obsession is in the name of my party. We have dysfunctional labour market which does not deliver enough jobs that pay a wage people can live off and we have large numbers of people in work in poverty. In some senses, all the other factors I have mentioned feed this, the biggest imbalance of them all.

If we are to turn this ship around then manufacturing has a key role to play. It might account for just 10% of national economic output but it contributes disproportionately to UK research and development and our exports. 70% of R&D investment is in our manufacturing sectors; goods produced in the sectors account for 44% of all UK exports. Importantly, it employs 2.6 million people – around 10% of the workforce – and they have the potential to create more better paid jobs which will go some way to reducing in work poverty. This is where my interest lies.

It is not true to say the UK doesn’t make things any more – we do. We are the 8th largest manufacturing nation in the world with world leading companies in sectors such as aerospace, automotive, pharma and many others. These sectors are already providing highly skilled, well paid jobs. But the point is, if we want a build better balanced and sustainable economy, we need that success to continue and to increase manufacturing’s share of national output.

A strong domestic supply chain is crucial to the success of UK advanced manufacturing sectors. That is why, during the last Parliament, Ed Balls and I - as Shadow Chancellor and Shadow Business Secretary respectively – we commissioned Mike Wright, Executive Director of Jaguar Landrover, to carry out an independent review into advanced manufacturing and its supply chain in this country.

As Mike said in his report, the proximity of good domestic suppliers to our key advanced manufacturing sectors will help them innovate in terms of their products and processes, be more flexible and responsive to customer demand, and be more efficient. 
Suppliers are now often very involved in research and co-development with the major producers – without those suppliers, its will be harder to have world beating large manufacturers. In turn those large customers will be important anchor clients for those suppliers seeking to expand into export markets and will be a powerful spur to small company growth. 

The development of these supply chains relies on number of factors, including skills, innovation, finance, a good infrastructure and a business environment that is patient and looks to the long term as opposed to the fast buck. Government impacts on all of this and should act in a strategic co-ordinated fashion to improve that environment with a comprehensive industrial strategy.

Let me start with skills. Training especially through high quality, degree level, apprenticeships in areas like advanced manufacturing and coding and for engineering and construction skills at all levels is crucial. 

There has been a welcome expansion of apprenticeships in recent years. The issues is who pays and what is the incentive for companies to do more. I welcome the government’s mandatory levy to pay for more apprenticeships but the levy is supposedly for big companies only, most of whom already do apprenticeship training. And, still the focus seems to be on quantity as opposed to the quality of apprenticeships.

More generally, what will be done to incentivise the 90% of companies, almost all small, who underinvest in training? And what will be the future of Further Education colleges as a vehicle for technician level training under a government which appears not to value them. The outlook is bleak here – an emergency situation . House of Commons library figures which Labour obtained this week suggest that sixth form and FE colleges face cuts of £1.6bn putting half of sixth form colleges and a third of FE colleges at risk.

A second key area is innovation. As Sir Vince Cable and I said in our joint intervention on these matters in September, the UK does well at basic science. We are however far down the class in innovation (the D in R&D). 

R&D tax credits are welcome and I know popular with you but are arguably financially wasteful – because of ‘deadweight’ – relative to direct interventions via Innovate UK, notably the growing network of Catapult Centres (including this one!), loosely based on the German Frauenhofer. That programme attracted private finance and international interest and is having a significant impact in advanced manufacturing ,space applications and cell therapy among others. This is precisely the kind of programme which is at risk from a salami-slicing approach to public spending which I fear we are likely to see in the Comprehensive Spending Review and which characterises Treasury behaviour.

A third key area is finance. The banking crisis may seemingly have passed but innovative small and medium sized companies still struggle to access the finance they need. It is still much easier to raise money to buy a home than it is for a builder to raise a loan to construct it or for a company to export. Some good, recent, initiatives have sought to address this. The government’s Business Bank should have been launched sooner and on a bigger scale but has been doing invaluable work alongside the private – bank-funded - Business Growth Fund. The Green Investment Bank is also a success. 

Both have attracted risk averse private investment which would otherwise not have been made. A key test of the seriousness of the government will be how creatively and positively they build on these initiatives. I fear they are set to return to the usual backward Treasury orthodoxy that resists activism of this type – I hope not.

Then there is infrastructure investment. Before the General Election we pledged to establish an independent Infrastructure Commission based on recommendations made by Sir John Armitt, to take the politics out of infrastructure decision making and end dither and delay.

They say imitation is the sincerest form of flattery so I'm pleased to see the Chancellor adopt our proposals on set up an Commission – he has even poached the Labour Lord Adonis to head it. However, there is no point having a Commission to produce plans if you don't provide the capital to fund them. They have pledged £100bn of funding for infrastructure projects this parliament but we’ve heard such commitments before and since 2010 there was a 5.4% drop in monies allocated to such projects.

Lastly, there is the elusive but crucially important element of ‘long termism’. UK equity markets are notoriously short term which is detrimental to the development of industries which require long term capital to develop the next generation of product. It is why so many of the industries demanding a long term perspective are foreign owned and why the owners of so many of our new, hopeful, technology companies sell out. 

Professor John Kay did a good report for the last government on the role of financial intermediaries in long termism and some useful action has followed: reforming the takeover code, abolishing compulsory quarterly reporting, clarifying the legal obligations of directors (Sir George Cox wrote a parallel report for the Labour Party.) Long term thinking is in the DNA of the industrial strategy.

In order to drive forward the different elements of industrial strategy I've outlined, you need a strong Business department which is a powerhouse and the engine room of government. But in the last Parliament the BIS budget was cut by 32% and is projected to have been cut by 53% by end of this one according to the Resolution Foundation. 

I accept the need to reduce the debt and deficit – it is a waste to be spending over £30bn this year servicing our debts instead of investing it in people. But doing so by raiding growth inducing budgets like that of BIS – where for every pound you invest you get a multiple return in growth and tax receipts to the exchequer - is an utterly false economy. So, as he puts the finishing touches to his Comprehensive Spending Review, I say this to the Chancellor: don't cut off your nose to spite your face because it will be our economy which suffers in the end.