The decline in British industry means that the government's hope that it can start a private sector revival by reducing public sector spending, cutting tax and easing regulation is misplaced, according to a new report from the think tank Civitas.
The coalition is "solving the wrong problems", Civitas said, and needs to take urgent steps to address the productivity and capacity in British industry, which has been "hollowed out" over the past 30 years.
Despite a small number of high profile investments in the automotive industry in recent months, the long term trend in the country has been towards deindustrialisation. Manufacturing now makes up 11% of the UK's gross domestic product (GDP), agains 20% in 1997. A report earlier in November from the Work Foundation showed that former industrial towns are experiencing high and persistent youth unemployment.
The think tank advises the creation of an "industry bank" modelled on the USA's Small Business Administration and the German state development bank, KfW. Both increased funding during the global downturn, driving job creation and productivity.
The government's ideological resistance to subsidising investment is out of step with the need, according to the report, which said: "If it's OK for capitalist America to subsidise business investment, it should be OK for us." Branches of the nationalised RBS could be converted into outposts of the industry bank, Civitas said.
Exchange rate fluctuations are harming the country's producers, acting as a disincentive to investment, according to the report, which advocates using the country's monetary policy framework to ensure stability, instead of focusing on managing inflation.
The think tank also advised that corporation tax should be lowered to 15%; personal tax should be cut to encourage investment and entrepreneurship; domestic industries that replace imports should be subsidised and exporters should be supported; employment tribunals should be replaced by arbitration "to eliminate avaricious no-win no-fee lawyers"; and EU state aid rules should be exploited.
More controversially, Civitas calls for "over-priced" wind turbine projects to be scrapped. These developments are "weakening the manufacturing sector" by driving up the cost of electricity, the report said.
The government had hoped that stimulating renewable energy would create a new growth sector for the UK economy, but wind turbine projects will fail to stimulate industry or deliver a meaningful reduction in carbon emissions, according to the report.
"Imposing costs on high-energy users will drive them overseas where they will continue to produce carbon emissions," Civitas said. "The global-warming debate provokes strong feelings. But both sides should be able to agree that reducing carbon emissions should not take priority over job creation."