I am pleased to have been given the opportunity to talk about the manufacturing industry for various obvious reasons, so I had better declare my interests now. I am a senator on the board of the Engineering Council, which regulates the engineering profession in the United Kingdom and has about 250,000 members. I sit on the board of the Institution of Mechanical Engineers, which has a membership of about 150,000. I am an adviser for the Institution of Electrical Engineers, which is the largest engineering institution in the UK, and I also advise and support my colleagues in the other 37 engineering institutions that manage the engineering industry in its broadest context in the UK.
You must forgive me, Madam Deputy Speaker, for my indulgence and for the terms that I use to refer to my industry, which I love with a great passion. These are difficult times for us. On Friday last week, most people probably would not have heard that Rolls-Royce announced approximately 5,000 job losses. For those of us who are interested in the business, it was 5,000 more job losses in what has been an exceptionally difficult year.
In addition, last week, the World Economic Forum announced in its annual survey that Finland is now top of the league as the world's most competitive economy, a fact that was validated even after the awful events of 11 September. It was intriguing that such a small country could do so well. The fall of the United States from the top spot, which it shared with Singapore for the past few years, is blamed partly on the collapse of high-tech shares and the resulting slow-down. Much to my dismay, guess where we appearedit was not fifth and it was not eighth. Both Ireland and the UK have now slumped out of the top 10. The World Economic Forum says that that is a result of slow economic growth.
Those of us who have a passionate interest in manufacturing want to know why that has happened. More importantly, we want to know what is going on in Finland, as it has achieved a great prize. Over the past 10 years, Finland has become not only the world's most effective technology-driven economy, but has invested effort and money into social policy. I wonder, as do most of my colleagues, whether Finland has developed a new paradigm that produces outstanding competitive advantage and whether it is, therefore, a country to which we should turn for some valuable lessons.
After my short foray into the European continent, I turn to the United Kingdom. I want, specifically, to examine how our manufacturing industryand our mutual passionis faring. We have been given the impression, particularly by the media, of a manufacturing industry that is in terminal decline and on the road to becoming an ever-decreasing proportion of the UK's economy.
I shall list some of the job losses that we have experienced since last October. For instance, at Vauxhallthere are colleagues present who are interested in the car industry2,000 jobs were lost. The reason for that was over-capacity in Europenothing to do with monetary policy. At Cammel Laird, 189 jobs were lost in a contractual dispute. At British Aerospace Systems 3,500 jobsperhaps 4,000were lost. It has experienced losses and orders are down; we can expect more bad news from that sector.
However, do these figures really matter in the greater economy, which is a mixed and diverse economy? How serious are they for the current and future successes of our world as a whole? Is it time for us to forget manufacturing and rely on the service economy? The answer must be an emphatic no. No one present will forget the MacGregor daysI certainly will not because I come from south Waleswhen, under the direction of Margaret Thatcher, he stepped into south Wales and devastated entire industries without any thought of the impact that such action would have. Those of us who work in that wonderfully creative world were constantly derided. Although others insisted on consigning us to the bin, we understood the value of manufacturing to the gross domestic product. We also understood that we needed and could nourish the culture and intellectual activity of the UK.
Let us consider a few facts. First, manufacturing is still very important in international trade. In 2000, manufacturing industry contributed £156 billion to UK exports, which is a remarkable 59 per cent. of the total of all exported goods and services. The truth is, although it may be unpalatable to some, that output has risen in the long term. In 1961, the index of manufacturing output was nearly 63. By 1995, that figure had increased to 100a rise of nearly 60 per cent. The effects of recessions were felt in the early 1980s and 1990s and there was a further decline in 1998 in the wake of the south-east Asian crisis. By 2000, the index recovered to 105, which is very encouraging. However, I fear that there will be another decline this year after the events at ground zero.
The second fact is that productivity has risen in recent years. It rose by 3.5 per cent. in 1999 and by a further 5.5 per cent. in 2000. Those of us who are critical and realistic about our colleagues who work in
Mr. Philip Hammond (Runnymede and Weybridge): Would the hon. Lady acknowledge that that increase in productivity over the two years that she has cited has been achieved by a reduction in the numbers employed in manufacturing industry, rather than by the preferable route of greater investment?
Mrs. Curtis-Thomas : Yes. That is an extremely valid point. I would not deny the mix of downsizing and the acquisition of new technology. Those factors were essential. Some industries were over-staffed, and I think that a number of industries have failed to develop their asset base.
I shall turn to that very point. Slightly more than 5.8 million people were employed in manufacturing industry in 1982, and the figure fell to 4.8 million in 1987 and to 3.9 million in 1994. By May 2001, the figure was about 3.8 million. The number of people working in manufacturing has reduced dramatically. However, that does not demonstrate the current diversity of the business compared with its nature in the past. It used to rely on heavy utilisation of individuals rather than technology.
Mr. David Drew (Stroud): My hon. Friend makes a cogent and interesting case. Does she accept that one of the problems is that employment in manufacturing is often hidden? In the rural economy, that is more important than people would have us believe. I would not belittle in any way the impact of foot and mouth disease on agriculture and farming, but the loss of manufacturing jobs in my constituency in recent years has been much more devastating.
Mrs. Curtis-Thomas : Yes. Later, I shall come to the pithy issue of the limited definition of manufacturing. The manufacturing that my hon. Friend referred to could be collated under the title of agricultural activities, which need not include manufacturing. As long as agricultural activities are outside of manufacturing, they do not receive the support or recognition that they deserve.
The proportion of GDP accounted for by manufacturing has declined in the past century. In 1990, manufacturing represented 23 per cent. of GDP, but by 1999 it had fallen to 19 per cent.if we use the Government's definition of manufacturing. Manufacturing has not been so unprofitable since 1992, and the Chartered Institute of Purchasing and Supply's index on manufacturing business activity is below 50 per cent. for its seventh consecutive month. August's reading was the lowest since 1999.
The Engineering Employers Federation, which is a difficult organisation to deal with, although its strength is in its valid statistics, declared when it released its quarterly survey that the manufacturing sectors were almost certainly in recession. I lament that, because it is a source of great concern to those of my colleagues who work in these sectors. The EEF has called for monetary easing, as have many other organisations, including the Confederation of British Industry.
Manufacturing and engineering are in recession. They have suffered two consecutive quarters of negative growth. The contraction in manufacturing outputabout 4 per cent. in manufacturing and 9 per cent. in engineering between December 2000 and July 2001suggests that negative growth will soon stretch to double figures, and beat the decline seen throughout the 1992 recession.
These are grim times for our engineering industry, but we should not be perturbed by facts alone. After all, the picture is the same across most of the developed world. In a successful modern economy, our challenges and priorities will vary. We must ask where those lost to manufacturing have gone. One of them is standing in front of us today.
Mr. Graham Brady (Altrincham and Sale, West): The hon. Lady is right to say that we face the common challenge of loss of employment in the manufacturing sector. Is she not concerned that Britain adds disproportionate costs to our manufacturing sector? I speak particularly of the climate change levy, which is a higher cost than that faced by competitors in, for example, Germany.
Mrs. Curtis-Thomas : I wish it were that easy; I wish that it were just one tax structure, such as the climate change levy, that prevented us from having a level playing field. I know many engineers who work in Germany who talk about the myriad initiatives of ours that they do not have. They envy us the research and development investment that we have introduced in the past few years. They realise that although it does not bring us short-term gains, we will reap long-term benefits.
Some of my fellow engineering colleagues are in the House; we appear everywhere, much to the betterment of other Members. By and large, we are straight, factual people, not given to the fantasies that sometimes infiltrate such a political environment. That does not necessarily make us good politicians, but it makes us a safe pair of hands.
Some of us engineers, and some businesses, have transferred to growth areas in manufacturing which, until recently, included electronics, aerospace, machine tools and motor vehicles. In these areas, inward investment and growing global markets have played a major role. Engineering and technical skills are in great demand, but unfortunately there are too few of us to satisfy the diversity of that demand. There has been an increase in employment in the construction industry in recent years; for that, we must thank God for the Labour Government and their commitment to rebuilding our dilapidated transport and health infrastructures, which employ many of my erstwhile colleagues and fuel their innovative and practical skills.
Mr. Hammond : To pick up on the hon. Lady's last comment, which related more to the construction than the manufacturing industry, what impact does she believe sustainability in public spending will have on the viability and competitiveness of the manufacturing
Mrs. Curtis-Thomas : The hon. Gentleman will recall that in the 1980s and early 1990s his party introduced several environmental-led pieces of legislationfor example, the Environment and Safety Information Act 1988 and the Control of Substances Hazardous to Health, or COSHH, Regulations 1988. For someone working in the chemical industry, the COSHH regulations were extremely onerous. As someone responsible for undertaking audits and compliance with the environmental legislation passed by that Government, my experience was that it was not only an arduous task to comply, but hellishly expensive. For example, when I worked for Shell Chemicals, we did not discuss whether it was morally right to comply with good environmental policy, but whether we could afford it. The answer was no, so we had to shut down previously profitable activities.
If I were asked whether that was the correct thing to do in the long term, I would say yes. It forced my colleagues in the R and D department to work out how to create a clean and sustainable production environment while still making a profit. If we step outside the UK, we see that we have engendered respect for our environmental competence. I will speak later about the money that engineering companies are making from consultancy, which is partly because of the legislation passed by the previous Government. They said that certain changes had to be made for good reason. That was done at a short-term cost, but the long-term gain was the development of world-leading technologies and intellectual capacity. Under the Kyoto agreement, which I hope will resurface, there is a worldwide requirement to produce in a sustainable way, which looks damn good for my colleagues in environmental and sustainable consultancies.
Until recently, the high sector growth, to which I referred, has been growing dramatically. Between 1990 and 1998, output in the electronics sector grew by 60 per cent., and the sector is worth about £30 billion. During the same period, manufacturing output fell by 4 per cent. After its peak in December 2000, the high-tech sector has fallentell me about it, for those with shares in the businesses have suffered the consequencesby almost 14 per cent. in five months, but the structural impact is unlikely to have a long-term effect in that consumer-driven market.
It must surely be time to rethink radically our definition of the manufacturing industry, using the interventions that have been made today and the comments that I have already made. We should have a more inclusive definition, which would assist policy makers in understanding the kaleidoscopic nature of a sector that requires essentially a common skill base and managerial and operational structures. We have all witnessed the shift in the UK and industrialised world to a service-based economy, so let us understand what that means for UK manufacturing.
Earlier this year, Warwick university's Institute for Employment Research forecast a net fall of 315,000 jobs in engineering manufacturing between 1998 and 2009, a drop of 17 per cent. with the bulk of it taking place between 1998 and 2004.
The paradox in the success story that manufacturing is today is that employment reductions will be due mainly to technology change, which brings about improvements in productivity through the more flexible use of labour and changes in working practices and organisation. Changes in markets and the effects of price competition will encourage such trends.
When I worked for Shell, I visited a factory that employed about 150 people. By the time I had traversed the length of the factory, I had estimated that 140 staff could be laid off without any loss in productivity. That was tremendously sad, because those people were using skills and doing work that they clearly enjoyed. However, we cannot ignore developments in technology and the opportunity to improve profits, because we all benefit from that.
Mrs. Curtis-Thomas : Yes, it is. However, I said earlier that people leaving a particular businessthe factory to which I referred manufactured lost-wax metal components; a great process, fantastically fiddly and marvellousleave with a certain skill mix. All the employees at that factory were men, I am sad to say. I told the managing director that he could lose 140 of his employees, get money at preferential interest rates and make a good return on his capital investment. However, what do we do with the people who have gone, bearing in mind that they support families? What was missing in the past was an opportunity to retrain; I am pleased to say that it now exists.
The parlance and curricula in further education suit old and not new industries. That is largely because we underpay staff in that sector and do not provide them with the investment in their asset base to allow them to produce the type of services that their clients need. Many of them know what the demands are, but they are simply not equipped to meet those demands.
Future economic success will be based increasingly on quality of labour, and we in the engineering community are acutely aware of that. We have rested on our laurels for years. We were shocked to learn from a study that we undertook that UK engineers were not rated the best in the world; unfortunately, our colleagues in Germany were. I do not wish to involve the House in the tribal warfare that exists between engineering communities of both a professional and a craft nature. However, it does not sit terribly well with British engineers to find that, in world opinion, we lag somewhat behind our German colleagues. Therefore, the race is on to try to improve the ability base, not of our academic engineers only but of our skilled technicians as well.
There is a plethora of academic engineers in the UK, but they cannot translate dreams into reality; only a good technician can do that. I ask those who are interested in house renovation to try to find a good electrician. It is very difficult to find a good, reputable electrician, in whom one can have confidence. Such people are not easily to be found because we as a society do not sufficiently reward them, not in a material or financial sense but in acknowledging that they are important to our infrastructure.
I have lost count of the number of undergraduates that I have heard of who were keen to study law or work in the media. The number of graduates in the media in the north-east last year was 30,000 whereas the number of individuals doing engineering had declined to approximately 1,000. There is a complete mismatch between graduates and the demands of the local economy, which leads to industries moving away. In the north-west we have low-level technology activities, and the strength of the pound is forcing some of those businesses out of business. In other parts of the world, salaries are £1 an hour or, worse still, £1 a week. We cannot continue to engage in low-value technology activities, but we do not have a sufficient skill base in the north-west to underpin the development of alternative high-value technologies. Such assets are the product of years of sustained investment by a Government who are committed to diversity within the economy but who understand that diversity requires money at the front end, with very little return in the short term.
I took great pleasure in being a member of the Select Committee on Science and Technology, which considered the UK R and D budget. It was appalling when we took power in 1997, I suppose because the previous Government did not understand the relationship between R and D investment today, bottom line return tomorrow. We have put £1.4 billion into the R and D infrastructure in the UK's academic provision. We will not get a return on it immediately, but we are sitting on an enormous asset base that will be realised in 10 years' time. I say to the Minister that in these difficult times we should not forget the long-term impact of R and D investment. We must continue to invest at that level if we are to resume our dominant world position in productivity and innovation.
I shall now bring my remarks to a close, sparing hon. Members another 10 pages of statistics and interesting facts. I make no excuse for being well prepared, as I represent a wonderful business that is keen to do its best but which needs our assistance.
The Secretary of State for Trade and Industry has announced several new initiatives and is committed to taking full advantage of the fact that the UK has some of the best scientific and academic brains, and the best practical skills, in the world. My right hon. Friend said that she is committed to ensuring that "invented in Britain" becomes "made in Britain", which is fantastic. At a manufacturing summit in November, she will unveil plans to help to build a manufacturing industry of the future and I am glad that I will be part of those discussions.
I am wedded to a Government who want us to do well and to support industries in our environment to help them to achieve their best. They cannot do so in a vacuum of silence. We are a capable group of individuals, but we are not yet telepathic. We need to make our views known in writing at the very least but even more by our physical presence.
Investment in R and D and capital is essential. I shall leave my hon. Friends to talk about R and D investment and the tax incentives that are needed to make investment in capital more realistic for those who are struggling and having to reduce margins to remain viable. When the Chancellor announced R and D tax breaks for small companies in the 1999 Budget, I was the only Member in the House to jump up and shout. I thought it was absolutely fantastic. I have run a small, struggling business and the notion that one has money to do anything other than the job one is doing is farcical. One wants to do more, but needs an incentive to do so.
The tax incentive for development is extremely important, but let us not limit it to small companies. Large companies now need tax breaks for development. I want to see products developed in this country, not in other countries. It is essential to keep innovation here. Let us export the operational sectors if we must, but let us keep the R and D function here. High value means high returns means better profit margins.
I look forward to hearing the Minister, who has a difficult job. Manufacturing in its broadest context falls under many Departments and Ministers, not him alone. I mentioned that I have worked with the Engineering Council and other organisations, and they are keen to hear what he has to say. We want to hear him acknowledge the benefits that engineering and manufacturing bring to our economy and the value that they constantly bring to our gross domestic product. We also want him to acknowledge their contribution to the cultural development and intellectual capacity of this country. We want him to support us in these difficult times. We are the innovators and the doers. We remain a prized and coveted commodity, worthy of this Government's great protection and support.
Mr. Kelvin Hopkins (Luton, North): I am pleased to contribute to this debate and I congratulate my hon. Friend the Member for Crosby (Mrs. Curtis-Thomas) on her excellent introduction. I have a great interest in manufacturing and believe that it is a vital component of our economy, which has been sorely abused over the past several decades.
In my first year as a Member of Parliament my constituency was hit by the closure of Electrolux with the loss of 700 jobs. More recently, Vauxhall has announced a plant closure with several thousand jobs lost. Our problems go back much further. My first
We have serious problems in Luton. The small firms in the supply chain for the motor manufacturing industry, especially those dedicated entirely to providing for Vauxhall Motors, are in serious trouble. These are desperately hard times for such firms.
I want to focus on the main problem faced by manufacturing in Britain at present: the high pound. I have some trade statistics relating to trade deficits in finished manufactures, at current prices. Between 1991 and 1993 the trade deficit rose from £2.5 billion to £9 billion. Between 1993 and 1995 it fell from £9 billion to £6.2 billion. Between 1995 and 2000 the deficit rose from £6.3 billion to £23 billion and it is continuing to worsen. The first two quarters of 2001 has seen an annualised extrapolation of a deficit of £27 billion or £28 billion in finished manufactures. Our trade problem is serious.
To explain the significance of those dates, from 1991 to 1993 we were suffering from the delayed inertia J-curve effects of the exchange rate mechanism disaster, the overvaluation of the pound, which caused desperate problems for our manufacturing. Unemployment rose and large sections of our manufacturing industry closed down. From 1993 to 1995 we had the benefits of the substantial depreciation of nearly 30 per cent, which gave a tremendous boost to our manufacturing and improved our trade deficit. That meant that we reduced the problem of our deficit in respect of manufactures. After 1995, however, the pound started to appreciate rapidly and strongly against other currencies, particularly those of the euro zone. During that period, the desperate trade balance and much more serious difficulties for our manufacturing sector emerged.
There is no sign yet that the pound will reduce, although we have yet to see what happens when the euro really gets started next year. I suspect that there might be a change then. The parity of the pound is critical for the UK's competitiveness. We constantly talk about the need for education and training, investment and consideration of our skills base and supply side components, but we always seem to ignore the desperate problems faced by manufacturing when the pound appreciates, especially by more than 40 per cent.a stunning figure.
If a company is trying to export motor cars, as Vauxhall was from Luton, and over a few years there is a 40 per cent. appreciation in the currency relative to those of our major competitors, that company has desperate problems. Indeed, Vauxhall had a wobble three years ago, when there was a possibility of its closing. Many Labour Members and one or two Opposition Members lobbied the Government, manufacturers and General Motors, and we managed to save Vauxhall.
During those discussions, I told Nick Reilly, Vauxhall's then managing director, that there was a problem with the strong pound, and he agreed. I said that it could not stay like that for ever because it was obvious that it was massively overvalued and that it
It is much cheaper to manufacture General Motors cars, which are called Opel on the continent and Vauxhall here, on the continent and export them here. The cars are identical. We are talking not about second or third world countries, but about Belgium and Germanyplants in other prosperous, developed countries.
With the all-party rail freight group, I recently visited the SNCF in France, where we looked at rail freight facilities and investment. With a straight face, the French told us that they had a little problem with their rail freight going to Britain, because all the trucks were full of goods going into Britain but empty coming out, which was not good for their business. The reason is obvious: we do not export enough and we import too much.
When we talk about trade, we should not focus only on exports. They can increase over a period, perhaps slowly or too slowly, but imports are the problem. We have an enormous propensity for importing too much, because our currency's value is too high. Foreign goods are cheap and domestically produced goods are expensive, whatever we do in other respects. Adjusting the pound downwards to a sensible level would overcome that problem and at least give manufacturing a fair chance.
Mr. Hammond : I have listened carefully to the hon. Gentleman. Given his clear view of what is needed, what are his recommendations for the Chancellor of the Exchequer and Prime Minister on future public spending plans if the objective is to bring down the value of the pound?
Mr. Hopkins : As the hon. Gentleman will know, managing the macro-economic economy depends on monetary and fiscal factors. If we need a fiscal stimulus in a recession, I am happy with that. However, if there is a fiscal stimulus when the value of the currency is too high, it will draw in imports but not promote development of the domestic economy. Therefore the two go together.
I would focus on getting the pound down to a sensible level first. Indeed, I have said this publicly and written to my right hon. Friend the Chancellor several times, saying what I think we should do. The Government must intervene in the currency markets and the long-term bond market. Others have proposed a technique for bringing down the value of the pound relative to the euro zone currencies in particular, where we have a false parity.
My hon. Friend the Minister cannot answer for the Treasury, but I ask that he speak to my right hon. Friend the Chancellor about the problem of the pound and press him to do something about it. The value of the pound is far too high and is causing desperate damage to our manufacturing industry. We must address that before we can start to win.
I live in a town that was built on manufacturing and where relative living standards have fallen over recent decades. We are a great manufacturing nation with a great tradition of manufacturing, which is a vital component of our history. If we do not do something about the macro-economic environment in which manufacturing now struggles, we will do serious damage to our economy and future generations.
Adam Price (East Carmarthen and Dinefwr): I am grateful to the hon. Member for Crosby (Mrs. Curtis-Thomas) for initiating the debate at a time that is critical for manufacturing industry, right across the United Kingdom. As is apparent from my accent, I, like her, am from south Wales. I echo many of the points that she made.
We heard last night a slightly complacent passing comment from the Government on the resilience of the UK economy. I look forward to their considered approach. The Government seem unable to grasp or even admit the gravity of the current crisis. We have heard examples of some of the problems that we are facing across the UK. The British Chambers of Commerce this month warned that manufacturing was in a critical condition, with domestic orders and export sales down, further job cuts in the pipeline and confidence ebbing away. Last month there was a 0.2 per cent. decline in factory prices, which is the largest since records began in 1958. This is a serious crisis.
Professor Steven Nickell, a member of the Monetary Policy Committee, has talked about the dangers of a two-speed economy. Of the 300,000-plus manufacturing jobs lost since the Government came to office, almost two thirds have been the wrong side of the north-south divide, in the most disadvantaged regions of the United Kingdom. Scotland has reported the largest fall in business confidence since 1980 and in Wales more than 25,000 jobs have been lost in manufacturing since the Government came to officean average of just under 23 jobs per day. Another estimated 20,000 jobs are at risk because of deteriorating economic conditions. I shall listen intently to the Minister's response.
The global economic slowdown is certainly a factor in the deepening problems of the sector, but it is important to recognise that, as has been said by the hon. Member for Luton, North (Mr. Hopkins), manufacturing has been in crisis for many years. Indeed, in the second half of the 1990s, manufacturing output hardly grew at all. At the heart of that failure has been the Government's inaction on the key question of the exchange rate. For the third time in 20 years, the high pound is decimating our manufacturing base.
One of the fallacies that cloud the debate is that it is about not the strength of the pound but the weakness of the euro. I remind hon. Members that the biggest rise, in the exchange rate, pre-dated the launch of the euro, so the issue is clearly more structural.
Mr. Frank Cook (in the Chair): Order. I should have informed hon. Members earlier that by convention we commence winding-up speeches, of which there are usually three, 30 minutes before termination of the debate. That means that, in order to get everyone in, right hon. and hon. Members must take account of the need to be concise and clear and for any interventions to be brief.
Anticipation plays an important part in the action of currency markets. Rationality unfortunately plays a far lesser role. The hon. Member for Luton, North pointed out that a remedy to the problem of the high pound is available to the Government. It has been pointed out by a fairly distinguished list of economists, including Roger Bootle and Gerry Holtham, former director of the Institute for Public Policy Research, who is now the head of Britain's largest investment fund, Morley Fund Management.
The Government could lower the pound by buying euro-denominated Government bonds, which would offset the pressure on sterling to appreciate. They could do that in a way that was at least neutral in terms of its costs to the Exchequer, and they could even make a small profit. The notion that the Government should never intervene, regardless of the market rate, is bizarre. The tools are there. It could be done overnight. It would have a marked impact the viability of manufacturing business across the length and breadth of the UK. The Government's stubborn refusal to do that has led to the loss of more than 100,000 saveable manufacturing jobs this year alone.
The Treasury and the Bank of England have shied away from currency market intervention, in part because of the debacle of 1992, when the Government intervened to prop up sterling by using, or indeed losing, all our foreign exchange reserves. As a general rule, it is easier to temper a rising currency than to prop up a falling one. There is a precedent, of which I am sure the Minister will be aware, of the United States in September 1985, when the G7 Finance Ministers approved the Plaza agreement to puncture the dollar bubble. A fortnight later the dollar had fallen by 10 per cent. against the yen.
We have heard two propositions against those arguments from the Bank of England and the Government. Sir Edward George has consistently said that interest rates would be significantly higher were it not for the high level of the pound. A strong pound keeps import prices down and depresses borrowing costs. A weak pound necessarily imports inflation and, other things being equal, forces interest rates to rise. The key phrase is "other things being equal". The Government could change their fiscal stance and use fiscal rather than monetary measures to stave off inflationary pressures. That would allow the Bank to set lower rates than it otherwise could.
Over the summer, the Chancellor claimed that higher productivity in competitive firms would help offset the impact of an adverse exchange rate. There is almost a Thatcherite feel to this: the medicine might not taste nice but it is doing good. The problem here of course is that higher productivity is essentially a long-term policy. Welsh manufacturing firms are being hit in the here and now, and simply may not be around to enjoy the benefits of higher productivity, higher research spending and better skills in the future. Even for those that survive, the high pound will wipe out productivity gains and prevent the investment needed to improve their competitiveness.
There is a deep-rooted historical problem of lower productivity in British industry linked to lower skills and under-investment, but productivity growth for most of the past 20 years in the UK has been quite impressive; it has been similar to that of the US and other advanced economies. It is output growth that has been negligible. That is the key point. Since 1970, manufacturing output per head of population in the US has risen by 108 per cent., whereas the UK figure is 15 per cent.
The greatest weakness of the UK economy has been the failure to translate productivity growth in manufacturing into output growth. One of the main reasons for that has been the poor macro-economic environment. During the crises of the early 1980s and 1990s, and now in the millennium, we have seen wave after wave of gradual de-industrialisation of Britain. As the hon. Member for Luton, North said, our manufacturing trade balance has deteriorated massively, which has been hidden to some extent by the high exchange rate. We have ceased to be a manufacturing economy. There is an inherent danger in that because many of the higher value-added services in the so-called knowledge economy are embodied within manufactured goods. For example, I draw the attention of hon. Members to design and its relationship with manufacturing.
The long American boom of the 1990s was as much a manufacturing-based phenomenon as a service-based phenomenon. We can ill afford to lose our manufacturing industry. Such matters are particularly worrying for us in Wales because manufacturing industry represents 27 per cent. of our economy compared with 20 per cent. for the United Kingdom as a whole. In the past five years, the strong pound has caused much damage to our economy. It may become a handicap in the difficult times that could lie ahead. The Government need to accept their responsibilities and to take action. The tools are there to enable them to intervene in the currency market. There are undoubtedly risks involved in taking such action, but doing nothing will incur incomparable greater danger.
Mr. David Chidgey (Eastleigh): For the best part of a decade I have attended debates on the decline of the manufacturing industry. The arguments about the lack of investment, loss of market share and employment have been well rehearsed yet again today. I shall not dwell on them because time is short. However, Governments come and they go, and whenever they are forced to deal with the decline in the manufacturing industry, they come up with a five or 10-year plan that
I shall cite two examples to show how the Government's actions are threatening yet more manufacturing jobs in aerospace and railway engineering in my constituency of Eastleigh. This month, about 100 skilled craftsmen have lost their jobs at Hamble Aerostructuresa firm that I have known well for many years and which is a major supplier to Boeing for its 737s. As a direct result of the atrocities of 11 September, the firm's order book has been slashed from 17 aircraft a month to eight, and 25 per cent. of its export sales are now going at a stroke. The Government are not to blame, but they are failing to ensure that Hamble can compete successfully under their programme to secure future work.
I turn now to the A380 airbus. Hon. Members will know that the Government have provided £530 million of assistance to Airbus Industries UK on a preferential loans basis. Airbus Industries UK is now placing invitations to tender on that programme throughout Europe, the far east and elsewhere. However, the rub is that Airbus Industries UK is expecting its suppliers to finance the upfront, non-recurring development costs. That will increase the tender costs and prices of Hamble and other United Kingdom firms and make them less competitive. Their competitors in Italy, Belgium and Holland do not have the same problem. In Italy, the Government's assistance to the A380 programme has been split; 50 per cent. goes to the prime contractor and 50 per cent. to the subcontractor and the supply chain. Hamble Aerostructures is competing against suppliers in Italy that have the benefit of direct Government assistance. That cannot be sensible and it is a direct result of the Government's policy.
If the UK's aerospace firms such as Hamble are to receive their fair share of the programme, the Government must change their policy and either restructure the assistance to Airbus Industries so that 50 per cent. of it goes to the supply chain and 50 per cent. to the main contractor, or insist that Airbus Industries absorbs the upfront, non-recurring costs itself. After all, it is taxpayers' money.
My final point, in the short time that I have, is about the rail industry. The Government have appointed the Strategic Rail Authority, which is charged with increasing rail-rider numbers and improving and expanding our rail industry. However, at the same time, the Government have decided not to proceed with renewing 20-year franchises but, instead, to extend them for two years. That has an enormous impact on the rail industry. Nobody has the confidence to invest or to confirm orders for new rolling stock or for renovation. That has a direct effect on my constituency and Alstom's railway works, on which Eastleigh was built, which is waiting more than six months for confirmed orders while jobs are shed week after week. There is an answer. The SRA has the powerunder section 54 of the Railways Act 1993to underwrite investment that is required to give clients the protection to make orders firm and, simultaneously, to stop jobs leaching from my constituency month after month.
Andy Burnham (Leigh): I congratulate my hon. Friend the Member for Crosby (Mrs. Curtis-Thomas) on securing the debate and on her thoughtful and convincing speech. This is a time of great change in the United Kingdom's manufacturing base, and the human cost of that is sharply felt in the communities that we represent. I wish to put on record the experiences of my constituents who work at the Ingersoll-Rand portable compressor plant at Hindley Green. I shall draw out two lessons from them, which I ask the Minister to address.
Four weeks ago, Ingersoll-Rand announced that it was to move the manufacture of compressors from Hindley Green to the Czech Republic, thereby breaking a long-standing association with my constituency. Two hundred and fifty jobs are expected to be lost over next year and in the early part of 2003. The factory is based at the heart of a former coalfield area, and it is a tragedy that many of the people who will lose their jobs were previously employed at local pits. It must be extremely difficult for such people to face the situation and to try to find new employment.
The work force mounted a magnificent campaign to try to save the jobs, and I pay particular tribute to the union convenors, Ian Bryant and Mike Hughes, for their leadership, energy and resourcefulness in trying circumstances. I also thank the Minister for Employment and the Regions for his work to try to keep the jobs. Negotiations continue to keep an after-sales centre on the site.
I raise two points after having gone through all the stages of the campaign and reflecting on it. Do we need greater protection of existing employment in this country? I realise that there are two sides to the coin, and the last thing that we would want is an environment that does not encourage companies to invest here. However, I ask Ministers to examine the matter again and to ascertain whether more can be done to tie companies more firmly to the UK after they have located here. That occurs in other European countries.
I turn to the impact that the enlargement of the European Union may have on some of the oldest industrial areas in Europe. During the period of job losses at Ingersoll-Rand, it was suggested that the removal of trade tariffs for the developing economies of Europe, as part of the Nice treaty, makes it more attractive for companies to locate in countries in eastern Europe and to move away from countries such as ours. I know that labour costs are the main economic driver for the decisions, but I would be interested to hear from the Minister the extent to which the removal of the tariffs contributes to the problems suffered by British manufacturing.
Few peopleif anyin Hindley Green would oppose the development of a strong and united European Union, and they would not question the need to help developing economies in Europe. However, they would reasonably ask why they have to pay the price for that.
Dr. Vincent Cable (Twickenham): I congratulate the hon. Member for Crosby (Mrs. Curtis-Thomas) on animating the debate with her clear personal commitment and experience. I think that we crossed paths in industry without having been aware of it.
The remarks of the hon. Member for East Carmarthen and Dinefwr (Adam Price) were a useful point of departure, which brought us up to date with the painful reality that manufacturing is in a severe and critical state. Reports are coming in more or less daily illustrating the seriousness of the situation. The most recent CBI study suggested that there is more spare capacity in the manufacturing industry than at any time since the early 1990s. A report published a few days ago by the Machinery and Metal Trades Federation argued on the basis of a survey of its members that investment is likely to fall by 40 per cent. over the next 12 months. In addition, a recent survey by the Item Club, which is one of the more reputable mainstream forecasting outfits, suggested, on the basis of an optimistic picture of the British economyabout 2 per cent. growththat manufacturing industry would decline by about 1.5 per cent. this year and next year, with much greater falls in employment.
The outlook in the short run is therefore difficult. There are two basic reasons for that, which have been touched on at various points in the debate. As the hon. Member for Luton, North (Mr. Hopkins) expressed clearly, manufacturing industry has been struggling with a seriously overvalued exchange rate. The figures are all too clear. The key measure is called the real effective exchange rate, which is the overall measure of competitiveness of the UK economy as against other economies, given relative inflation. That suggests that the competitiveness of the UK economy, because of the exchange rate problem, has declined by about 30 per cent. since 1996. It has remained at roughly that level ever since.
Over the past two or three years, manufacturing industry has got by, essentially by accepting low profit margins but keeping the volumes going. That has been stopped because of the incipient global economic recession, which predated the events of 11 September. There are plenty of signs that east Asia, the United States and parts of western Europe are in serious economic trouble. As my hon. Friend the Member for Eastleigh (Mr. Chidgey) described in relation to the aerospace industry, that is compounded by all the special problems arising from events in September. British manufacturing industry is being hit by the double whammy of an overvalued exchange rate, which has existed for three or four years, combined with serious problems on the international front. All that is superimposed on the long-term problem of relative decline in British manufacturing. Those of us who are a bit long in the tooth will remember the 1950s and 1960s, when endless tracts and books about the problems of British manufacturing industry were written. Similar tracts were written in the 19th century. We have therefore been living with the problem for a very long time.
How much does the relative decline in manufacturing industry matter? One can be philosophical about itin all industrial or developed countries, manufacturing is in relative decline. In developed countries as a whole, the
Manufacturing industry is important, although probably for more subtle reasons than is often acknowledged. One of the most important reasons is that manufacturing industry is the best source of productivity growth. In an ideal world, one would have lots of productivity growth combined with stable employment. I listened with interest to the interventions of the hon. Member for Runnymede and Weybridge (Mr. Hammond), who was trying to make that point. There may have been a way of achieving that, but the Conservative Government whom he supported did not discover it. I concede that their productivity performance in manufacturing was exceptionally goodbetween 1980 and 1995, productivity growth in manufacturing was about 4 per cent., as opposed to 2 per cent. in the rest of the economy. On the other hand, manufacturing employment collapsed from 6.8 million to 4.1 million. Therefore, there was growth in productivity without employment stabilityit is very difficult to get both.
Looking to the future, what could the Government usefully do? I shall make three points in that regard. First, it is important that the Government do not rush into all sorts of clumsy and unhelpful forms of intervention. We went round that circuit in the 1960s and 1970s. The Minister of State recently made the unfortunate remarkI hope that I quote him correctlythat any half-decent bird watcher can tell the difference between a lame duck and a bird that can fly, heralding a much more active process of subsidising and bailing out failing enterprises.
I suspect that all Governments experience that state of hubris in which they imagine themselves to be entrepreneurs. If that is the Government's new policy, I fear that their public expenditure priorities will be badly distorted in the next year or so, with no obvious benefit. Perhaps the Minister will make it clear what his Department intends to achieve at the proposed manufacturing summit. It could be an exercise simply in hot air and public relations, or a serious process of examining what the Government should and should not be doing in this context. It would be helpful to hear a little more about what they have in mind.
The second aspect in which the Government's role is relevant is tax policy. Everyone to whom I have spoken in the various manufacturing federations always starts with the climate change levy. They, and I, object not to the principle of environmental taxation or of it being used to curb carbon emissions, but to the extraordinarily complicated, cumbersome and abrupt way in which it has been introduced. Manufacturing industry has been hit up front with a large levy with numerous and rather arbitrary exemptions. It could have lived with a form of climate change levy bearing on carbon emissions throughout the economy, phased in gradually, but being hit with the tax in the way that it has, and at the time that it has, has been extraordinarily onerous.
Mr. Hopkins : The hon. Gentleman is talking about the tax environment in which companies operate, but is that not relatively small beer compared with the massive overvaluation of the pound? Given a correct valuation for the pound in competitive terms, could we not live with the tax changes and might we not need support such as we had in the past when we had similar problems with an overvalued pound?
Dr. Cable : I do not disagree. The complaints that industry has had about tax measures such as the climate change levy and the framing of R and D tax incentives are that they are irritants. The hon. Gentleman is right that, compared with a 30 per cent. change in the real value of the exchange rate, the matter is indeed rather small beer.
The central role of the Government in the matter is to get the basic macroeconomics right and achieve stability. In terms of monetary policy, interest rates and basic fiscal policy, they have done that to a remarkable extent. However, the big lacuna at the heart of the matter is the exchange rate, as the hon. Member for Luton, North suggests. Having said that, I recognise that these are not easy matters. In the current world of floating exchange rates it is not possible to decide arbitrarily to have an exchange rate that is 10 per cent. or 15 per cent. lower. It does not work like that. Intervention is not easy to secure, which is why my colleagues and I have always argued that it must be done in the context of a big long-term decision about euro entry. It is significant that a few weeks ago the Prime Minister chose, even in the midst of the present crisis, to make it clear that that big choice must be faced, and probably soon. That can be done in a way that secures a stable, sustainable, long-term exchange rate.
Mr. Philip Hammond (Runnymede and Weybridge): I, too, congratulate the hon. Member for Crosby (Mrs. Curtis-Thomas) on securing this debate. As we have learned this morning, she is eminently well qualified to speak on these matters.
All hon. Members will agree that changes in the shape of a dynamic economy are inevitable and, indeed, welcome. Equally, however, a healthy economy is a balanced one. The sometimes dramatic growth and spectacular successes of parts of the service sector have appeared to be at the expense of our manufacturing base. Despite some of the Labour party's rhetoric in opposition, the Government appear not to have reversed the cultural bias against manufacturing, but often to be obsessed with the so-called new economy.
Most people agree that our manufacturing competitiveness in 1979 was at a pretty low ebb. A high price was paid in the early 1980s for achieving a leaner and more competitive industrial base. That was essential, but I agree with the hon. Member for Twickenham (Dr. Cable) that we did not go far enough. We failed to achieve the holy grail of improving productivity not only absolutely, but enough to ensure that the employment growth that resulted from the expansion of the manufacturing base outweighed inevitable employment losses. The US manufacturing economy has managed that, but we have not.
Put bluntly, the debate must, when taken in the context of anything but the shortest term, be about productivity. All other things being equal, our manufacturing industry will grow in the long term if our productivity increases faster than that of our competitors; however, our manufacturing base will shrink if productivity increases more slowly. We are talking about a relative gain, not an absolute one; the issue is how we perform in relation to our competitors. This might not have been apparent in the past, but it is now recognised across the political spectrum that the long-term issue is how we ensure that British productivity gains are in line with, or better than, those of our competitors.
Our manufacturing industry finds itself in condition red. I will not repeat the data that the hon. Member for Crosby outlined in some detail, but historic data tell only part of the story. Anyone who is in touch with manufacturing industry and the associations that represent it understands that many businesses are clinging on by their finger nails. If the situation does not improve in the relatively near future, we shall see a step change in the rate of decline in our manufacturing base. Confidence is at an all-time low, projections for inward investment are dramatically down, uncertainty pervades industry, our international competitiveness is falling, we have a huge and rising trade deficit and crucially, profitability in manufacturing industry is at a record low. The CBI quarterly trends report will come out later this morning. I do not know what it will say, but I confidently expect it to show that demand is weakening further.
The Chancellor has recognised that the issue is one of competitiveness. Government support for improved competitiveness in the manufacturing industry can be effective, but I caution the Minister that it is likely to be only an expensive short-term palliative measure if it is not targeted at improving competitiveness over the longer term. Budget after Budget, we have heard the Chancellor pay lip service to improving Britain's productivity and closing the productivity gap. However,
Manufacturing is on the rack. High exchange rates, weak world demand, a faltering domestic economy and loss of confidence by the manufacturing sector, as well as heavy burdens of taxation and regulation, have hammered the competitiveness of our manufacturing businesses, and have led to a squeeze on margins that will inevitably lead to abandonment of investment plans.
The situation that we face demands a short-term response from the Government, but also action to prevent long-term damage to our future productivity growth caused by the reaction that business inevitably makes to short-term problems. To put it bluntly, we must not allow the margin squeeze faced by business to become the seeds of a downturn in the next economic cycle due to cancellation of investment, as that will translate into failure to maintain productivity in the next cycle. The Minister must stand up to the Treasury and insist that no more tax burdens are piled on business. He must stand up to Brussels, which has a not-so-secret agenda of costly burdens on British business that will erode our competitiveness further.
In the long-term, competitiveness is the key issue, and it can be achieved in several ways. Low wages are not desirable and not possible in an economy in which manufacturing makes up less than 20 per cent. of the total. Low profits are not desirable either, as they inevitably lead to low investment and the lack of a future for our manufacturing industry. Artificially set exchange rates are also not a long-term sustainable solution, although I agreed with hon. Members who emphasised the need for macroeconomic management to ensure a realistic exchange rate, so that manufacturing industry was not unfairly and inappropriately disadvantaged.
Growth of productivity is essentially an enterprise-level issue, a business management issue, but one in which the Government have a large role to play. Investmentbringing the capital-labour ratio of British industry up to the levels of its international competitorsis crucial. It is self-evident, to me at least, that the Government's piling of burdens, expenses and taxes on business takes money away from investment that would improve the competitiveness and productivity of British industry.
The Government have a large role to play in flexibility and rapid responses to changes in demand through alterations to the labour-output mix. They must ensure that regulation is not over-prescriptive and that regulations intended to protect employment and employees do not have the perverse effect of preventing employment growth. The Government must also foster innovative research and development; other hon. Members have spoken about the relevant tax credit proposals and I share the concerns about the mechanics of the project, but its objectives are clearly positive.
One of the Government's most important rolesindustry alone cannot take responsibility for itmay be in skills and education. We hear much about the knowledge-based economy, but manufacturing is a knowledge-based economy as well. The Government
Before 11 September, manufacturing was already in recession. The tax burden was rising on the economy as a whole, and certainly on the manufacturing sector. The climate change levy was introduced at the worst possible time, with a hugely disproportionate burden on the manufacturing sector. Manufacturing needs a breathing space, a chance to regroup to recover from the burdens that it faces as a result of what the Government have imposed on it and what is happening in the world. We need not more summits and tsars, but solid policies that will allow manufacturing businesses to ride out the storm and ensure that they continue to grow and improve their productivity in the future. The real danger for our manufacturing economy is that the squeeze on margins today will jeopardise investment in capital equipment, training and innovation and will undermine future productivity growth in the next economic cycle. It is only by maintaining that investment that manufacturing industry will maintain its competitiveness and stabilise its share of overall output in the next cycle.
I hope to hear the Minister's proposals for tackling the immediate needs of manufacturing industry, including lightening the burden of regulation, and in due course I hope to hear from the Chancellor what he intends to do in his next Budget to underpin the future growth in productivity and competitiveness of the manufacturing sector.
The Parliamentary Under-Secretary of State for Trade and Industry (Nigel Griffiths ): I congratulate my hon. Friend the Member for Crosby (Mrs. Curtis-Thomas) on securing this debate on manufacturing, which is the bedrock of our economy. Manufacturing and engineering matter. They matter to the Government, to our economy and our people, to those who work in them and to all of us who enjoy their products.
I do have a cultural bias in favour of manufacturing, which accounts for more than a fifth of our national income and almost £150 billion of output every year. The sector employs about 4 million people directly, and millions more depend on manufacturing for their livelihood, including 2.5 million people in the service sector. A strong manufacturing sector is the backbone of our economy, and the manufacturing summit will reinforce that message.
As the Minister with responsibility for small and medium-sized enterprises, I have visited manufacturers whose forebears were pioneers 200 years ago. These manufacturers are innovators, at the cutting edge of competition. Manufacturing is led by some of our most innovative businesses, which invest heavily in research and development. It drives innovation in the rest of the economy and creates jobs and prosperity. It is the crucible for production improvements across the economy through advances in technology and new goods and processes, but most of all through a highly skilled, highly flexible and dedicated work force.
In the past month I have visited factories in Norfolk and the east midlands, where new technologies are transforming every product and service in every part of the production process and in every sector of the economy. The companies that I visit and the directors and the workers who I meet tell me that the challenge for the UK is to shift the focus from competing on the basis of cost alone towards high skill, high value added products and processes based on quality, innovation and know-how.
Many of our manufacturing companies in the textiles sector, for example, are responding to that challenge. Leading textiles firms have transformed themselves from companies making traditional textiles into leading-edge manufacturers of technical textiles and engineering materials. Brintons began in 1820 and is now the largest yarn manufacturer in the northern hemisphere. Based in Telford, the company is the world's largest manufacturer of woven axminster. Hamilton's paintbrushes and Hudson's whistles span three centuries of manufacturing in Britain. Both are leaders in their sectors in the new century.
That is the direction of manufacturing in this country, but it does not mean that we will lose our traditional industries. Investments in the UK by Jaguar, BMW and Nissan demonstrate our continuing strength in global industries such as vehicle manufacture. Component suppliers are equally important. By investing in technology and most of all by creating the most highly skilled work force, HR Adcock of Loughborough, employing 50 people, has beat off the world and supplies the suspension components for all Ford Focuses.
The Government have a clear role to play in helping companies face the challenges of globalisation, technology and varying states in the business cycle. That can be achieved by helping businesses to become more productive, to innovate and to cope with change successfully, by helping people when changes of jobs are required.
Change is inevitable, driven by technological innovation and globalisation, and the Government can help UK industry to manage that change. We are investing £15 million in a new manufacturing advisory service to spread best practice, which will include a centre for manufacturing excellence in every region. The new manufacturing advisory service and centres of excellence will provide the main point of contact for manufacturers who want to raise their game.
Our Faraday partnerships initiative is helping innovative companies to turn research into new products and services for British industry. We are enabling firms to access high-quality research and the expertise of industrial research organisations. We are helping established industries to modernise and compete in new markets. Faraday is helping the United Kingdom textiles industry to exploit the growing market of technical textile products in the medical, automotive, construction and defence industries.
We can support manufacture by encouraging sustained investment in research and development. Industries need to keep ahead of the game. Even during a slowdown, companies must maintain research and development investment. When the world economy picks up, those who have invested in R and D will be ready to succeed.
I assure the hon. Members who have raised the matter today that the Government know the importance of R and D, which is why we are introducing a new R and D tax credit for industry. We are supporting the manufacturing jobs of the future by strengthening our science base and ensuring that the knowledge and technology coming out of our universities goes into our industries. That is why we are putting more than £1 billion into sciences in addition to the £1.4 billion that we have already invested in partnership with the Wellcome Trust. We are providing new incentives for commercial application of research, with a fund of £140 million to get more of that science and technology out of the labs and into the factories.
We can support the manufacturing jobs of the future by creating strong regional economies. That is why we pledged £1.2 billion, rising to £1.7 billion, to our regional development agencies to support innovation and enterprise. In raising the game of every region, RDAs are working in partnership with the public and private sectors, with businesses, universities and local authorities. We support manufacturing jobs of the future by investing in a skilled work force, and are investing in the skills people needin schools, the university for industry, the learning and skills councils and the technology institutes.
The job transition service and the rapid response units will provide an intensive and personalised response to large-scale redundancies. At Fujitsu in County Durham, a rapid response unit helped to ensure that about 94 per cent. of the work force found new jobs in 12 months. At Siemens in north Tyneside, the Employment Service played a major role in helping about 90 per cent. of the work force to find new employment. In future, instead of providing retraining when people lose their jobs, we shall retrain them while they are still in work, so that they can move straight into new, higher quality work.
Our aims can be achieved only by the Government and manufacturing sectors working in partnership. We must continue to improve the UK's skills base, promoting closer links between education and industry and providing a supportive framework for technological advance. We must look to the long term, delivering a framework of stability and steady growth and delivering our strategy for supporting manufacturing and British industry in a global and competitive economy. In that way, we are optimistic that British manufacturing and business can rise to the challenge and match the best in the world.