Trade, Exports, Innovation and Productivity

Debate between Kwasi Kwarteng and George Kerevan

Wednesday 13th January 2016 Commons Chamber

[George Kerevan]

I am glad that we have moved on from me being wrong to me merely overstating the case—we are making progress. I repeat: in the depth of a crisis such as this, we will move on from unsustainable debt by moving towards export-led growth. That is what some of the countries that suffered worst in the recession and from the crisis with the euro have done. We have not even begun to do that, and if we do only one thing today and persuade Government Members that that is the case, we might have made progress.

[Kwasi Kwarteng]

The hon. Gentleman makes some interesting points. Does he recognise that those countries have had far more severe fiscal consolidations that we have had in Britain?

[George Kerevan]

I do—that was my point. However, Italy, Spain and Ireland have still managed to double their exports, which is the one thing that the Chancellor said he wanted to do but has not yet even begun.

Why has the Chancellor not been able to rebalance the economy? What has gone wrong? In truth, although previous Chancellors began this, under this Chancellor Britain has a taxation system that favours investment in physical property, rather than long-term investment in manufacturing. It has continued to have a banking and financial system that prioritises gambling—to use an extreme word—money, and foreign exchange markets, rather than supporting manufacturing and innovation.

Let me give Members an example that goes to the heart of the matter. Britain’s premier engineering company is Rolls-Royce, a company we would need to rely on as our flagship if we were to rebalance the economy towards manufacturing and exports. Let us look at the tragic history of Rolls-Royce in the past two years. Just over a year ago, Rolls-Royce sold off its gas turbine business to Siemens for £1 billion. Gas turbines, by the way, are the third largest export sector in UK manufacturing. What did Rolls-Royce do with the £1 billion? Did it invest it in a new wave of innovation? Did it invest it in new technology? Did it do more research? No. The nature of the fiscal taxation system, reinforced by cuts to corporation tax, meant it was easier for Rolls-Royce management to use that £1 billion to buy back its shares.

I am not in favour of raising corporation tax—I think fiscal incentives are good for industry—but the Chancellor continued to cut corporation tax when he knew that most of the money from many companies would actually go on share buy-backs. Rolls-Royce, by dint of buying back its own shares, pushed its share price to something like £10 in the early part of last year. Where is the share price now? It is half that. Our premier engineering company is now in a disastrous commercial state. In fact, the halving of the share price means that the shareholder value of the £1 billion it received from selling off its key turbine business to Siemens has been wiped out.

Meanwhile, the market has caught up with Rolls-Royce. Its key sales of engines for large, wide-bodied jets have started to dry up. The market has moved on to new jet engines for narrower-bodied jets. The Americans are cleaning up because they had the product ready to go into that market. Rolls-Royce is now in serious trouble. In fact, there is now talk in the City of it being taken over.

--- Later in debate ---

[George Kerevan]

I could not agree more that what is clearly missing from the UK industrial structure is those medium-sized Mittelstand companies that export and create a value chain, and instead we have a dumbbell shape, with a small number of very large companies and a large number of small companies. One of the reasons we have been unable to do that is because as companies grow to a certain level, they have consistently needed to sell out, usually to foreign ownership, in order to raise capital.

That brings me to another issue—I shall not be long, Madam Deputy Speaker—which the hon. Member for Bedford raised when he referred to the current account deficit. We have normally been able to fill the current account deficit, even though on a smaller basis, thanks to the financial remits coming in from assets owned by British companies or British citizens abroad outweighing the money from assets owned by foreign concerns leaving the UK. What has changed dramatically since 2010 under the auspices of the Government is the balance between the ownership of assets in the UK and the remit of funds abroad, and UK assets owned abroad and money coming back here. The total value of British-owned overseas assets since 2010 has slipped down to about £1.2 trillion. In that period, the value of UK assets held by foreigners has soared, from £1 trillion to £1.4 trillion. In other words, we are now a net debtor nation. What we own abroad is less than what is owned here, so the net outflow of money will mean in the balance that we cannot cover our current account deficit.

In the last year for which we have figures—2014—there was a bare surplus of £2 billion of positive foreign direct investment coming in versus money going out. That could go like snow off a dyke. That has led the Chancellor into what I think are dangerous grounds. Here we need to link up another aspect of financial wheeling and dealing in the UK with the need for manufacturing investment.

The fundamental way in which we have recently covered our current account deficit is via a huge inflow of money for buying up property in the UK and particularly in the City. Wealth investors have acquired about £100 billion-worth of property in London, using blind overseas companies in just the last six years. Since 2008, something like 28,000 individual purchases of homes, buildings and lands in the capital have been made by corporate structures registered in external tax havens. One in 10 properties in Westminster is owned by an offshore firm. We are funding our current trade deficit by allowing a vast influx of cash from offshore companies coming in to buy property here, yet in many cases we do not know the ownership or where the money has come from. The Chancellor has now developed into an art form the attempt to find ways to get money in to cover the current account deficit, and it is partly connected with his new cunning plan for China.

[Kwasi Kwarteng]

The hon. Gentleman makes a good point about inward investment and foreign capital acquiring assets. Is he proposing some form of capital control? Does he have any suggestions about how to meet the problem that he has identified?

[George Kerevan]

I might start by ensuring that we actually know who the beneficial owner is when anybody buys property in the UK. That might resolve part of the problem—we could find that some of the money coming in previously no longer continues because people do not want to reveal its source.

The Chancellor’s latest wheeze is to open the door to Chinese cash. China has no track record of building nuclear power plants, yet the Chancellor has offered massive subsidies over the next 20 years in the hope of encouraging Chinese state companies to invest in our nuclear power industry. So much for encouraging British manufacturing! I believe that the Chancellor’s cunning plan has little to do with energy security, and everything to do with getting China to cover Britain’s disastrous current account deficit. With Chinese money coming in, foreign currency will stay here and cover the deficit. Unfortunately, China is already eating into its capital reserves in a desperate bid to shore up its own currency and stop its rocky banks from imploding. What I think we are likely to see in the next five or six years is running out of the foreign currency to fill the trade gap, which will have big implications for interest rates and our trade surplus.

What we really need is an industrial policy, which my hon. Friends have mentioned, to revive domestic manufacturing. Instead, the Chancellor has slashed the budget for the Department for Business, Innovation and Skills by 17% in the autumn statement. I chide the Minister on the fact that the budget for UK Trade & Investment is being cut over the next four years by £42 million. Yes, it is going up marginally this year, and if the Minister is selective in choosing which years to look to for the budget, she can pretend that there has been an increase. Over the four-year period, however, UKTI funding announced by the Chancellor in the autumn statement will go down by £42 million.

How can this Government pretend to support exports and promise to double them when they are cutting the budget of the very agency we rely on to liaise with our companies to assist our exports? The Chancellor promised to double exports, and he has form in making similar promises about eliminating the annual deficit—but he did not keep them. This Chancellor has no clothes; if he had, he would have had to import them.