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“We want to rebalance our economy. We need to make sure we invest in our infrastructure. That means making sure we have regional investment right around the country as well. And that means we rebuild our manufacturing base so we balance out our finance sector and our manufacturing sector.”
The Shadow Chancellor John McDonnell set out his view of what economic policy should aim to do on this morning’s Today Programme. There’s a lot to unpack in those four sentences and the Labour Party’s new ‘Build it in Britain campaign’ – much of which has popular appeal, but would actually do little to support growth across the country.
Here are five issues arising from McDonnell’s comments which are worth reflecting on:
Firstly, despite concerns about the decline of the UK’s manufacturing sector, we do still make a great deal. As Jonathan Portes of King’s College London points out, UK manufacturing output has been fairly stable over the last four decades.
But two things have happened over that period that alter people’s perception. The first is that other parts of the economy have emerged and grown over that period, so we’re not as reliant on manufacturing as we once were – the industry now accounts for 10 per cent of GDP today compared to 31 per cent in 1970.
The second is that the number of people working in manufacturing has fallen sharply, so it is not the source of jobs that it once was (as it has done in other developed economies). Moreover, if it is to remain competitive on the global stage, it will be productivity driven and jobs light.
A trap people from across the political spectrum often fall into is assuming that we only export goods. The reality is that services account for 46 per cent of UK exports, and play an even larger role in some cities – in Milton Keynes they account for half of all exports, and in Edinburgh it’s four-fifths.
A focus on exporting industries is important, particularly from a productivity perspective – it is these businesses that drive productivity and wage growth. But it’s wrong to mistake this for being goods producers only, which misleads us into false trade-offs around financial services and manufacturing.
Much is made of the concentration of financial services in London. But it plays an important role in other cities across the UK. For example, it accounts for 58 per cent of exports in Edinburgh, 12 per cent of private sector jobs in Ipswich and is the most productive sector in Cardiff’s economy.
And while finance plays an important role in London’s economy, it isn’t the capital’s only economic driver. Instead, its success is built off the back of strengths in other areas such as law, media and advertising. These strengths should both be celebrated and understood better – the benefits that London offers to such businesses explains why they have chosen the capital to locate within, and other places need to address the barriers which do not make them as attractive.
The big challenge for most cities outside the Greater South East is their ability to attract, retain and grow high-skilled exporting businesses, both in manufacturing and services. Crucially, it is the distinct lack of these businesses in these cities has contributed to the widening divide in terms of wages across the country.
Despite this, term ‘rebalancing the economy’ has been used by Nick Clegg, George Osborne and the current Labour leadership as shorthand for boosting manufacturing in the North as a counterweight to London’s financial specialism. But in the same way that London isn’t about finance alone, the idea that northern cities are where manufacturing happens is an outmoded view based on the politics of nostalgia. The focus needs to be on attracting in higher-skilled work in a number of sectors.
In some instances this may even require an explicit rebalancing away from manufacturing, not towards it, if the fortunes of these cities are to improve. Burnley currently has the highest share of jobs in manufacturing of any British city, with one in five being in this sector. Despite this, it performs poorly on a range of economic indicators, principally because its manufacturing base is relatively low skilled and it has a lack of higher-skilled service exporters. Both issues will need to change if the economic opportunities available to the residents of Burnley are to be greater in the next four decades than they have been in the previous four.
One of the proposals offered by the Shadow Chancellor to support manufacturing is for local public bodies to preference local businesses. As we’ve written before, this is a form of protectionism in the same way that tariffs are a form of protectionism. And it raises a number of troubling questions. For example, if Blackburn or Burnley adopts this approach, how exactly do they distinguish which businesses qualify for a contract? Will a firm respond to having competition restricted by upping its prices, costing the taxpayer? And what will the reaction from places elsewhere in the country – will they start a trade war?
Most cities outside of the Greater South East need to see an upturn in their fortunes if they are going to improve the opportunity available to their residents, make a larger contribution to the national economy and to address the UK’s poor productivity. The politics of populism and nostalgia will fail to deliver this.
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