08/10/2018 18:23 BST | Updated 08/10/2018 18:23 BST

Don't Blame Brexit For Britain's Manufacturing Slump

It's not Brexit's fault the UK economy is in a rut - the truth is we've been performing poorly for decades

Daniel Limpi / EyeEm via Getty Images

The British Chamber of Commerce says the UK economy is “stuck in a rut” because of uncertainty over Brexit. Actually, the truth is that the British economy has been performing poorly for decades.  Brexit is not the cause. For the past decade, the average rate of growth of the UK economy has been no more than 1.1% per annum.

But if it’s not Brexit that is causing our slow growth and huge trade deficit, then what is? The truth is that successive governments in the UK, both Labour and Conservative, have decimated our manufacturing heartlands, destroying well-paying, stable jobs. We are, sadly, only now starting to wake up to the long-term consequences. 

Nor does it look likely that our performance is going to improve. If we are lucky, we might chalk up an annual growth increase of 1.5%, still far slower than the 3.5% per annum world average. This makes a huge difference. It means that it takes about 50 years for GDP to double with our growth rate compared to 20 years for the rest of the world. With our slow growth most people see no increase in their living standards year after year. Elsewhere, on average, living standards double roughly every generation.

Our politicians have failed to get to grips with this problem because they simply do not understand it. This is made worse by organisations like the British Chamber of Commerce using the figures to grind their own axe, rather than looking for the real explanations of why we are doing so badly.

The standard left-of-centre explanation for our poor performance is that our education and training systems are poor. They also say that banks lend money to the wrong people, the City is too short term, and that we don’t spend enough on R&D. The right-of-centre explanation is that taxation is too high, there is too much regulation, and the state is too big.

My view is that these explanations are both wrong, and the real reason for our slow rate of economic growth is that we invest much too low a proportion of our GDP, and what we do invest produces very little economic growth. As a proportion of our national income, we invest about 17% per annum. The world average is 26% – about 50% more than in the UK – and in China it is about 45%.

There is also a big issue on what we invest in. This is because some types of investment produce much greater returns than others – typically expenditure clustered round machinery, technology and power. Think of a combine harvester replacing a sickle, a computer instead of a multiplication table, a 44-tonne truck instead of a wheelbarrow or a new machine which produces twice as much with the same inputs as one it replaces.  

Our problem is that we spend very little on these key types of high-powered investment – less than 3% of our GDP per annum – and by the time you take off depreciation, virtually nothing is left. This is why our economy grows so slowly.

And why don’t we spend much more money on the high-powered types of investment which do make a big difference to output per hour? It is because nearly all this investment finds a natural place in the private sector, typically in light industry, where it is also subject to intense price competition.

To materialise in the private sector this investment needs to be profitable. This is where we fall down. The overhead costs of manufacturing in the UK which we charge out to the rests of the world are so high that it is nearly always cheaper to site new manufacturing facilities outside the UK; in places like China, Vietnam and elsewhere in Asia. This is why we have deindustrialised to the extent we have.

The reason why manufacturing costs in the UK are so high goes back to the policies pursued over the last 40 years. Our exchange rate has been much too strong for manufacturing. During the 1970s and 1980s the cause was the very high interest rates involved in the battle against inflation. During the 1990s and 2000 it was because the UK liberalised capital movements unlike no other country, causing huge capital inflows as we sold off national assets like no-one else.

A very high exchange rate does not bother exporters of services or high-tech manufacturing very much because neither are very price sensitive. For productivity and economic growth, however, too strong a pound is lethal for the highly price-sensitive output which high powered investment in manufacturing produces. Until we learn this lesson, our growth rate will continue to languish.