Economy: Growth

Lord Bhattacharyya Excerpts

Thursday 16th May 2013 Lords Chamber

[Lord Bhattacharyya]

My Lords, I congratulate my noble friend Lord Soley on securing this debate on economic growth. We all have an interest in this subject, but I should declare my interest as chairman of the Warwick Manufacturing Group at the University of Warwick. For more than three decades, we have been working very hard, helping companies to grow. A week ago the gracious Speech pledged that the Government would focus on, “building a stronger economy”—fine words, even if they are undermined by the recent rows about referendums. Britain’s economic situation is extremely weak. Yes, we have avoided a triple-dip recession and it may even be that the double-dip recession will be revised away, but that is little to boast about. After five years of recession, our GDP remains 2.6% below where it was before the crash. Our productive sectors have struggled, with manufacturing gross value added down 10% over the past 10 years. Construction has fared worst of all, falling into deep decline in 2012, and it is now almost 20% down on 2008. Nor will foreign growth rescue us. The European Commission, the IMF and the OECD all say that the eurozone will decline this year. Finally, devaluation cannot solve our problems. Sterling is almost a quarter below its peak, but many exporters are facing increased costs from raw materials and components, which means that we are not benefiting from the short-term competitiveness we enjoyed in earlier devaluations.

Our problems are deep and significant and they require great attention, but if we take the right decisions, they can and will be resolved. I have spoken many times in this House about the need to take a long-term view. The challenges we face have arisen as the result of years or even decades of too little innovation, too little investment, undercapitalisation and not enough support for the physical and social infrastructure which can deliver lasting growth. We must all pull together to change this. Step by step and day after day, we must follow a steady path that supports innovation, investment and infrastructure. I am encouraged that the leader of my party and the shadow Chancellor speak regularly on these issues, and commissioned Sir George Cox’s excellent report on long-termism. Even the Mayor of London now talks about the need to take a long-term view on growth, but unfortunately the Government seem mostly to be focused on the tactical short-termism that got us into this mess. We will not get a recovery from immigration crackdowns and referendums.

To be fair, the Government are doing some good things, mostly at the urging of the Business Secretary. We share the aim that all young people should take up training apprenticeships or go into higher education on leaving school, and I congratulate the Government on pressing ahead with high-speed rail. It is politically difficult, but necessary. While the science budget is declining in real terms, the Government have at least tried to protect it. However, sadly, this is where their long-term vision ends. Despite all the talk about growth, I searched the gracious Speech in vain for a mention of science, technology or research. In the press briefing that accompanied the speech, we heard much about scraping the barnacles off the boat, but these issues are not barnacles, they are the materials from which the boat is built. I want our Government to take a practical, long-term approach to creating growth.

One way that can be done is by supporting reshoring, which when I put it in plain English means bringing back the jobs that left Britain due to globalisation and cheap labour overseas. In both manufacturing and services, rising wages abroad and technological innovation at home could mean that these jobs come back, and we should make such a return our priority. A recent RSA/Lloyds Banking Group report, Making at Home, Owning Abroad, argues that more than 200,000 jobs could be created through reshoring. The question is less whether jobs can come back to the West, but which countries they will return to. How can we encourage inward investors to choose Britain? The first way is through procurement.

In America, there is an expectation that those who get government help will return their back-office and IT functions to the US. That is why “Buy US” clauses have appeared in many bailed-out companies’ purchasing contracts. Today, a combination of informal pressure, immigration rules, tax changes and US wage competitiveness means that companies such as General Electric and General Motors are creating IT jobs in America, not in India. Indian outsourcing companies are facing tough times because of this. Their growth and profits are down, and the outsourcing market is projected to stagnate or even decline. Yet the UK seems to be uninterested in supporting the reshoring of its own money. The NHS spends millions of pounds on offshoring IT and data management. For example, half of the NHS shared business services staff are based in India. If we were to demand that such direct government spending was done in the home market, we would immediately create many hundreds of thousands of jobs in Britain.

The next rule of procurement is that it should act as a capacity and innovation builder for British business. Many people ask me, “Why can’t we have a Google or an IBM in this country?”. Britain is a small country. The reason those companies succeeded in the beginning was by growing in their internal market. Government procurement must be such that it helps small companies to create an internal market and then grow. If we use procurement to support innovation through a major extension of the Small Business Research Initiative, we would help UK businesses develop new products and services for both the home and the export markets. As I said, we are a relatively small country. We do not have the critical mass to support innovation in the domestic market unless we focus resources on it directly. This is needed to help small companies grow.

Next, we must transform our approach to skills so that investors want to create jobs in Britain. The government response to the Richard report was full of warm words but kicked the question of funding for skills into the long grass. We need to find a better response. We do not need government to spend more but our businesses to invest in their people. We should create sector training boards, with the power to issue training levies, as they do in construction, so that all firms have a common incentive to invest in their employees. If we approach skills in this way, we might be able to rid ourselves of our cumbersome skills bureaucracy. Some object that this means a new tax on business. I understand this concern, but if firms train their people they will more than get that money back.

Perhaps I might make a counterproposal. I am no fan of corporation tax. As the IFS says, much of corporation tax is,

“passed on to workers in the form of lower wages”.

Ideally, I would like to see corporation tax fall to 15%. Of course, that would be expensive and people would argue that it cannot be done. So why not reduce or even abolish corporation tax for firms with a tax liability of less than £10,000 which are subject to sector skills levies? Such firms contribute only £2 billion of corporation tax receipts—less than 5% of the total—but they represent more than half the companies that pay the tax and their profit is essential to the future growth of Britain.

The next challenge is to help our businesses secure finance. At the micro level, I have much sympathy with the arguments of the noble Lord, Lord Young, in his report Growing Your Business. I agree that support for small business should be extended, with start-up loans made available to all entrepreneurs, as should the enterprise finance guarantee. But we need to go much further. As the noble Lord, Lord Young, says,

“when banks started to remove the manager from their branch network they inadvertently broke many of their links with SMEs. This has had a disastrous effect”.

I have long argued for a dedicated business bank with real scale, preferably with a regional or sectoral focus, so that lending decisions are made by bank managers who know their businesses. Such a bank could be focused on the sectors supported by innovation catapults, thus making investing in British innovation and British production in key sectors more attractive to both inward and domestic investors. I am delighted that my party has embraced this proposal as part of its policy review.

Next, if we are to reshore contracts in advanced sectors, we need to transform our overall innovation capability. This means reforming our research funding councils and boosting innovation agencies such as the Technology Strategy Board. We pride ourselves on being a great nation for science, but our real-terms R&D budget is declining and we are doing little to get the maximum economic benefit out of what we spend. I am pleased that our research councils are giving more attention to economic impact, but we have to do much more to ensure that the research we fund contributes to economic growth.

Let us compare our approach with America’s. In his State of the Union address, President Obama said:

“Our first priority is making America a magnet for new jobs and manufacturing”.

He announced a $1 billion investment in innovation institutes to encourage the return of manufacturing. In Britain we have to fight for years for an extra few million. Whether it is the huge American investment in innovation, the Canadian reform of research councils to make applied research their top priority or Germany’s Fraunhofer Institutes, KfW and Sparkassen, it is other countries that are trying to secure long-term growth through industrial innovation. We are far behind, and falling further. All parties share the blame for this, yet there are many on all sides of your Lordships’ House who regret these missed chances.

Outside politics, this agenda is widely shared. Last week I attended a seminar at the Royal Society, where scientists, entrepreneurs and business leaders discussed how to bridge the academic-industrial divide to support growth. For the first time the Royal Society has taken on that challenge. There is a real opportunity for growth here, if only we seize it. We should use procurement to stimulate demand and get scale for innovation; push firms to invest in skills, and give tax incentives to smaller firms; use business banks to support innovation investment in sectors and regions with high growth potential for reshoring manufacture and services; and refocus research funding and increase applied technology funding to encourage both inward and domestic investment in innovation. Of course, the obvious question is: how we can pay for such a programme? It is not easy but it could be done.

Today there exists a rare opportunity to borrow cheaply to invest for the future. We should take it. However, that will not last long and we will certainly need to be fiscally very tight for a long time. The key is gradually to switch resources from unproductive to productive spending—what used to be called the costs of failure. That means pay restraint, reducing welfare and housing benefits over time, and perhaps removing benefits from those on above-average incomes. It may even mean more co-payments for public services so people understand the cost of the services they use.

None of this will be easy, but if sustained restraint helps encourage the job-creating, technology-led growth we need, it will all be worth while. Our growth problems are significant and real. But by backing the skills, ingenuity and ability of our people, they can—and will—be solved.