Only a major expansion of manufacture and developing new indigenous energy will solve Britain’s economic problems

As we have pointed out many times, right back to the first posts in 2008, and this author in TIME (The Importance of Manufacture to the Economy in 2000), at £110 billion per annum the goods trade deficit is an even bigger problem than the government’s fiscal deficit of about the same size. Why is this?

Firstly the goods deficit is made up basically of imported manufactures, raw materials, and foodstuffs, offset to a degree by net services exports (principally technical and financial), aerospace, and oil goods, none of which the government feels it can do much about. Oil exports have declined by over 50% since the peak years 1998-2002 to a still very significant £30 billion or so, but as a result we are now, for the first time in our history, net importers of energy, getting worse as North Sea oil and gas production continue to decline.

This makes getting hold of new indigenous sources of energy, the single most important UK national goal we should have, more important than further expansion of the NHS or building HS2. Without cost competitive energy delivered to industry and commerce, economies just die, and the desirable things like the NHS will suffer.

Two Candidates only for indigenous energy

There are only two practicable candidates: nuclear power and gas fracking and they are needed from now.

As this writer and co-author David MacDonald presented to the 2014 Sustainable Nuclear Energy Conference in Manchester last April, we need no new nuclear technologies for this. The government’s choice of EDF’s Hinckley Point nuclear project at a guaranteed £92 per MegaWatt hour price of electricity generated, using the still unproven Areva European Pressurised Reactor (EPR), is the worst choice from the three systems offered to it, fastening an outrageously high price on industry and the consumer (current wholesale prices are around £55 per MWh).

Some of us dared hope that the EU Competition Authorities would decide to block this deal on illegal state aid grounds, but on Wednesday (24th September 2014) they confirmed that they would let it through.

Manufacture the key to Productivity

The key point about manufacture in the UK is not that it is uncompetitive, but that there is not enough of it. Whole swathes of industrial equipment and consumer goods manufacture have simply disappeared. There are some partial exceptions: cars, owned by foreign companies and with high levels of imported components; Dyson cyclone cleaners, not now manufactured here; the family business Ebac – now heroically expanding from their world class dehumidifier and water-cooler business into washing machines, with an emphasis on British components; and of course aerospace, represented by BAe Systems, GKN, Rolls Royce Aero, and a supply chain of some thousands of smaller companies.

Modern Manufacture increases productivity

Manufacture adds typically £50,000-100,000 per person employed to national output and requires about £100,000-200,000 capital per job. So had the drop of half a million in unemployment over the last three years been accounted for by manufacture, £50 billion, or about 3%, would have been added to UK GDP, with a comparable increase in national productivity.

UK Productivity languishing in the self-employed economy

Instead, as numerous commentators have observed (e.g. Jeremy Warner in the Daily Telegraph on 26th September 2014), productivity has languished, even fallen on some measures. The reason is not hard to find – look around you. There has been a huge expansion in the self-employed as people have been made redundant by employers paying salaries of £30,000 plus. But most people (not all) in self-employment scrape a living – in mainly household services using relatively little capital. These account for below average additions to GDP, and thus productivity which is GDP divided by the working population is reduced, not increased. To increase productivity you need to deploy much more new capital on the scale indicated above, a continuing and singular failing of British industry and finance.

An expansion of 0.5 million jobs in increasing the range of manufactures would need about £50 billion in new capital. Better by far for the government to concentrate on seeing how this could come about, with its help, than spending £50 billion on HS2, the vanity railway project from London to Manchester, which will make no discernible difference to productivity and exports, the two things most needed by the British economy.

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