Chancellor Gordon Brown should use next week’s government spending review to address the imbalance within the UK economy by increasing investment in manufacturing, industry leaders said this week.
The call came in a joint report commissioned by a range of organisations, including the Engineering Employers’ Federation, the Machine Tool Technologies Association, the UK Steel Association and the Society of British Aerospace Companies.
The report stresses the importance of solutions which will benefit manufacturing in the long term over quick fixes to solve the export problems caused by the high pound. These solutions are detailed in two approaches aimed at increasing productivity and reducing the damage caused by currency instability.
David Rea, secretary general of the UK Steel Association, says investment is the only way manufacturing industry can deal with problems such as the weak euro. `We are not prepared to take the demise of the steel and manufacturing industries as a foregone conclusion, but we must put in the money to ensure their long-term survival,’ he says.
This year’s Budget, which increased government spending plans by £16bn annually until 2003-4, is exacerbating imbalances in the economy by putting upward pressure on the exchange rate, according to the report compiled by Oxford Economic Forecasting.
The report argues that by increasing investment by 1.5% of GDP, financed through lower current spending, or by introducing 100% first year allowances for investment in plant and machinery, the chancellor could boost the productive potential of the economy without causing a rise in inflation.
According to Mike Legg, president of the Machine Tool Technologies Association, capital allowances would have a significant impact on the performance of manufacturing. `There is enormous potential to turn manufacturing around. There’s never been a better time for the government to admit we have to encourage investment,’ he says.
The five trade organisations, which also include the National Farmers Union, say the two new approaches could increase the UK’s overall GDP by 0.5% in the medium term, and raise output by an extra £5bn a year.
But with a general election likely next year, will the government resist the temptation of adopting policies to attract votes rather than providing a helping hand to industry? `The public knows manufacturing is suffering, and wants the government to do something about it,’ says Legg.
Stephen Radley, chief economist at the Engineering Employers’ Federation, says increased investment by the government would not mean a trade-off between industry and votes.
Areas such as the West Midlands contain a large number of marginal seats, and have a great deal to gain from the country escaping the cycle of falling margins and under-investment. `If we are to break out of this vicious cycle, increased investment is necessary, and for that to take place significant stimulus from government is needed,’ he says.
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