Economy: Growth

Lord Paul Excerpts

Thursday 21st June 2012 Lords Chamber

[Lord Paul]

My Lords, I, too, commend the noble Baroness, Lady Kramer, for securing and initiating this timely debate. I declare an interest as the chairman of Caparo Group, an industrial manufacturing company. While we appreciate the efforts made by the Government to formulate a strategy for growth, the manufacturing industry has seen little progress despite much talk. Many of those involved in UK manufacturing sometimes wonder whether the Government have a strategy for growth, given their enthusiasm for austerity. It is a tribute to the continuing efforts of the workforce and management of British manufacturing that so much has been achieved in the face of economic adversity—our car industry is a shining example. Yet, my overall sense is that this cornerstone of our economy and our future has been neglected in Britain for far too long.

That must now change if we are to reassure those involved in the manufacturing industry of their worth and ensure that our most able engineering graduates are not tempted away by the bright lights of the City and the financial markets. Manufacturing is still a solid activity providing stable jobs and long-term careers that can embrace the latest thinking in design and technology. Furthermore, it is vital that a country such as Britain has a strong manufacturing sector for strategic as well as economic reasons. We therefore need to keep manufacturers busy.

Two of the largest sectors of demand for UK manufactured products are the public sector and exports, particularly to the EU. The Government expect private sector export-led growth to offset public sector austerity and spearhead a recovery. Yet what has happened? Manufacturers that have worked for years to achieve world-class competitive standards for the UK now face not only a dramatically weakened eurozone, but a strong pound. Profitable exports to continental Europe are thin on the ground. By adopting policies that will increase real demand for UK manufactured products, the Government can enable UK manufacturing to play a full part in leading an economic recovery.

The cuts in the new infrastructure projects for roads, schools and hospitals of recent years cannot be quickly reversed. Recent moves to restart many of these projects, although welcome, will take too long in the planning process to be of much help in getting the economy growing again in the near term. Instead, the Government should focus on the backlog of infrastructure repairs and maintenance. This would also engage the severely depressed construction sector in a streamlined and accelerated tendering process to rapidly generate jobs with manufacturers and contractors.

A keystone of recent government strategy has been quantitative easing by the Bank of England. While it may have aided money supply problems—some people of course have questioned this—it has backfired on British business. Quantitative easing has helped to artificially depress UK government gilt yields—the rate which the Government have to pay to borrow money—and they are now at their lowest level for more than 300 years.

That may seem like a good thing, so why is it a problem for business? Indeed, it is a good thing for the wider economy. However, the problem is that the same rate is also used to calculate today’s cost of future pension promises. The lower the gilt yield, the bigger the liability that is calculated. Extremely depressed gilt rates have hugely increased pension scheme liabilities and the deficits of many UK companies. According to the Government’s Pension Protection Fund, more than 85% of the 6,432 private sector pension schemes in the Pension Protection Fund index were in deficit at the end of May to the tune of £312 billion. Many of those schemes are supported by manufacturers.

However, only a year ago, less than 65% of those schemes were in deficit, with a much more modest total of £25 billion. Despite assets increasing by £41 billion, liabilities have risen by a massive £329 billion over the year. This has placed UK companies under increasing pressure to fund artificial deficits at the expense of real investment in growing their business. If business cannot invest and thrive, who will be left to pay the pensions? With the way in which pension liabilities are increasing, many manufacturers cannot help wondering whether their business is a pension fund with a manufacturing company bolted on instead of the other way around—almost the story of the tail wagging the dog.

Surely that cannot have been the intended effect of the quantitative easing strategy. In any event, let us take a longer-term view on evaluation of pension liabilities that matches the longer-term nature of the pension commitment. This would allow businesses the stability to build robust plans to meet their pension obligations to the benefit of all, rather than the highly volatile and disruptive approach that currently prevails and has been a competitive drag on the UK economy for far too long.

I would, however, like to congratulate the Chancellor and the Governor of the Bank of England on their recent initiative to provide funding for business through further support for bank lending. As the Government know well, small and medium-sized businesses have suffered for far too long from a lack of adequate sources of capital, which I am sure has been a contributory factor to the decline in manufacturing in this country over the past 40 years. We have of course seen initiatives in the past which, despite good intentions, failed to help those who were targeted. This time it will succeed only if the Government ensure that industry receives the funding it needs. If the current policies and programmes fail, this country will continue to lose its place in the global economic hierarchy. That is why I urge the Government to take a more realistic approach to economic growth and the sectors that can contribute to it.