Shadow Chancellor’s speech to the Engineering Employers’ Federation

eef.jpgWe are meeting just a few weeks ahead of the Budget and, more significantly, perhaps just a few weeks from Article 50 being signed and Britain beginning the process of leaving the European Union.

Labour voted to give the government authority to begin that process, but we have not handed them a blank cheque. The next two years or more will involve intense negotiations and scrutiny of the government and other positions. But more than this, I believe they will involve a significant national conversation about the kind of society and economy we want to live in.

Amongst all the many interpretations of the vote to Leave the EU, it is clear to all sides that it was a vote for change. The status quo is no longer an option. We have to now do things differently from the past.

That means a recognition once more that securing the prosperity of our manufacturing sector is the key to securing the prosperity of the wider economy. Labour will place support for our manufacturing sector at the centre of its approach to Brexit, and at the heart of its economic policymaking.

Current failures

It was obvious even before the Brexit vote that our economy was not functioning as it should. Productivity growth has stagnated. Since the crash, it has been too easy for some employers to substitute cheap labour for capital investment. The result has been a proliferation of jobs – but a collapse in wages. Real hourly pay is still 10% below its level of a decade ago.

Mark Carney, governor of the Bank of England, has called this a “lost decade” for living standards. It is unprecedented in British history – at least since the industrial revolution. And with prices set to rise as the fall in the value of the pound feeds into the economy, the squeeze on living standards will get tighter and tighter.

It’s Labour’s belief that if we are to going to prosper as a country after Brexit, we need a sharp change in economic direction. If we are to create a fairer and more prosperous economy after Brexit, manufacturing will have to have a central place. It is manufacturing that reliably creates the well-paid, secure jobs– and not just concentrated in a few hotspots, but spread throughout the country.

Unevenness

Because we have reached the end of the line for the old economic model.

For many of those communities who voted Leave, it has been thirty years of neglect and decline. Of seeing solid jobs in manufacturing and industry replaced by work that is too often insecure and poorly-paid. We shouldn’t tolerate a situation any longer where a few, privileged centres grow at the expense of the rest of the country.

The decade since the financial crisis has drummed home this point. The crisis was centred on the catastrophic failures of a few, London-based institutions. Management was poor, and regulations failed to work as they should. The bonuses paid out by major financial firms didn’t end up spent in Stoke or Hull. They stayed in London. But when the bubble burst, the whole country had to carry the losses.

The profits went to a few. But the pain of austerity has been felt by the many. The injustice of this should be apparent. Parts of the country that had never been part of the good times during the bubble were now being asked to cover the costs. They have paid, and paid again, for nearly seven years.

It should be no surprise that for many in those forgotten places took the chance to give the whole system a kick. That kick contributed to the Brexit vote.

Like yourselves, Labour campaigned to stay in the EU. We argued that the risks of an exit, particularly under this government, were too great. However, the vote was to Leave. Labour respects that decision as a fundamental democratic choice.

But it is essential we fight for the best possible Brexit – one that protects jobs and living standards above all else. People voted to Leave the EU, but I don’t believe they voted to lose their job, or trash the economy.

So we have insisted, as soon as the vote was declared, that the government observe clear red lines in its negotiations with the EU. These are to protect jobs and living standards.

It’s essential instead that we develop a broad national consensus on how the negotiations should be conducted.

If we believe that manufacturing is essential to securing a fairer and more prosperous economy after Brexit, that consensus on negotiations should place the needs of manufacturing at its centre.

Single Market access

Labour is absolutely committed to securing the fullest possible access to the Single Market for goods.

The case for a comprehensive free trade agreement with the EU that would continue to allow manufacturers here to access European markets at minimum cost is overwhelming.

The damage done not only to the markets for final output, but to extended, Europe-wide supply chains from a failure to secure this deal could be enormous. UK manufacturers are tightly connected to European supply chains.

Of the goods and services we export, twenty three percent of their value is accounted for by the imports needed to make them. This is far higher than for countries like Japan or the US, where just 15% of export value depends on imports.

Imposing tariff barriers would tear up those extended supply chains. It could mean a sharp increase in costs for manufacturers, hampering British competitiveness.

Yet the government, and government ministers, appear to believe they can, if pushed, simply walk away from whatever deal is on the table in favour of the fallback option of the WTO.

Not only are the costs, particularly to manufacturers, likely to be high, negotiation over WTO schedules will still entail a lengthy process of discussion with the EU and others. As a negotiating position, these attempts to play hardball simply do not work. It’s a bluff, and it will be seen as such across Europe.

Far better to adopt the approach that, whilst the UK has voted to Leave, we want the best possible relations with our European partners to continue. It will be a different relationship, of course. But it cannot be one based on mutual distrust.

Later this week, Labour will be hosting a conference in London of European social democratic parties to discuss Brexit and the EU. A process of discussion and mutual agreement where possible is far better than the phony tough posturing adopted by this government. That’s the approach to negotiations we favour.

It’s on the basis of a recognition of mutual interests that we can secure the best possible access to the Single Market for goods. There will be trade-offs, of course.

But if the aim is to protect jobs and living standards in the UK, the widest possible Single Market access for goods is the best available outcome. And that applies for the whole of the manufacturing sector. Labour does not believe in creating special deals for favoured parts of the economy. So we need a trade deal that works for the whole of manufacturing.

Any future deal with the EU should seek to keep tariffs on goods where they are presently: zero, as in the existing Customs Union arrangements. There is no good case to be made in favour of tariff walls between European countries, at similar levels of development, particularly where supply chains might be placed at risk.

We recognise that with more than half the UK’s exports now going to the rest of the world, whatever opportunities exist to strike specific deals would also need government to deal with the risks of leaving the Customs Union. We should maintain a sense of realism about the immediate possibilities.

Signing comprehensive Free Trade Agreements will be a long process, since it is essential to get the details right. Government ministers should not encourage illusions that quick deals will be best for Britain. It is more important to get the right deal, than to get a quick deal.

We want a future trading system that will allow manufacturers the freedom to establish their own supply chains and open new markets, whilst protecting jobs and rights in the UK. And as part of that freedom, Labour will continue to support the right of British manufacturers to employ whoever they think is best for the job.

Migration

EU migrants have made and will continue to make a huge contribution to this country. In particular, we know that many of you rely heavily not only skilled workers from across the Continent, but also on less skilled labour. The ability for manufacturing employers to tap into this pool of labour is an obvious strength for them. But the right to freedom of movement that creates this strength will be directly challenged by Brexit.

Labour backs fair rules and reasonable management of migration in the best interests of the economy and society. They have attempted to use EU migrants as bargaining chips in Brexit negotiations. As a bargaining position, the government’s posturing makes little sense.

There are 1.5m British citizens resident in the rest of the EU whose rights in turn can be put on hold. Our European partners understand this and will not be swayed by attempts at tough talk from London.

The sooner the situation is resolved with a clear and unambiguous statement that EU migrants currently resident here will have their rights protected, the sooner the negotiation process can move on. That’s not only the principled position to take. It’s also popular. And it’s economically the most sensible, since it guarantees those currently in work can remain in work, and plan for the future.

Industrial strategy

The challenge in Brexit is not only in how we approach the negotiations. It is also in how we transform the operations of our domestic economy. It has been pleasing to see some movement in this government’s rhetoric on the economy over the last year.

The recognition that a modern industrial strategy should be central to how governments conduct economic policy is very welcome. The recent green paper, unfortunately, fell far short of what was required. It offered plenty of evidence of the need for a strategy – some of it damning. The major global trends are now clear.

After years of declining manufacturing employment across the developed world, “re-shoring” is now well established. One in six manufacturers now report bringing some production back to the UK. It is clear why this is happening.

Proximity to major markets and access to skilled labour are both prerequisites for manufacturing success today. But the economies that are navigating this switch are those with governments prepared to properly support their manufacturing sector.

When the steel crisis broke out last year, governments across the developed world moved quickly to intervene. The US increased some tariffs on Chinese steel to 266%. Germany increased its subsidies. Italy nationalised a producer. At the EU level, attempts were made to impose tariff barriers against the dumping of cheap steel.

In all these cases, governments recognised the need to move swiftly and defend a foundational industry. It is simply not possible to run a modern, developed economy without a steel industry. And whilst the crisis in British steel has eased, significant uncertainties remain.

A comprehensive industrial strategy would place steel and other foundation industries like chemicals at its centre. It’s no longer good enough, post-Brexit, for governments to hide behind State Aid rules as an excuse for shoulder-shrugging.

This government, like others in the developed world, should be prepared to intervene to support essential production. That means action on procurement to sustain supply chains and create markets, using government’s own purchasing power to buy domestic steel and industrial products. But it’s not just defending existing and essential industries. It means supplying the cheap, long-term loan finance that meet the potential of our smaller firms.

That’s why Labour is committed to setting up a National Investment Bank and regional development banks, charged with delivering financing to small and medium-sized firms in particular. The inability of smaller firms to access the finance they need for growth has held back their potential.

And the concentration of lending by our existing financial system in London has meant the rest of the country has lagged behind. Labour will correct this bias. We want to see smaller firms, especially in manufacturing, across the whole of the country.

We can build on the success that is already out there and develop a ‘British Mittelstand’: high-investment, high-productivity smaller firms that provide high-quality employment in those sectors where we have the greatest potential, like high-value added manufacturing.

There is the potential here, as the fourth industrial revolution gets underway, for a manufacturing renaissance that can transform the potential not of those places and regions already succeeding, but of those areas that have been left behind for too long.

Training and skills are an essential part of that. Over a third of manufacturers are still struggling to recruit because applicants lack the relevant qualifications.

We have supported the Apprenticeship Levy because we recognise that high-quality training requires funding. But like you we have raised concerns both about how it has been applied and, more generally, about the quality of training provided.

There are steps to be taken here in tightening up the provision and monitoring of apprenticeship training, including ensuring the new Institute for Apprenticeships and Technical Education is up and running promptly.

More generally, the approach from government has to recognise that vocational and more academic training enjoy a parity of esteem. There is no place in a modern economy for the old blue collar versus white collar distinction. This isn’t simply a point about equality. It’s a hard-nosed recognition of the fact that advanced manufacturing requires advanced skills.

Labour is developing its own industrial strategy as part of our new economic offer. The response to the consultation has been overwhelming, and positive. As we move forward and develop policy, we want to make sure you are involved at every step of the way.

Budget

This years’ Budget, due in just a few weeks, could be an opportunity for government to address the concerns of our manufacturing sector. Unfortunately, the signs so far are not promising.

A small amount of additional funding was pledged for public investment by the Chancellor at the Autumn Statement. This was not even close to matching the levels required to drive up research and development spending to the levels of successful advanced manufacturers like Germany or Sweden. And it scarcely undid the damage of the £1bn real-terms cuts in R&D spending the previous Chancellor had allowed.

Labour is committed to achieving the OECD target of 3% of GDP spent on R&D, from all sources. We’re committed to keeping in place those mechanisms that help the private sector, like R&D tax credits. And we’ll make good any loss in EU funding for research, whilst pushing for a deal that maintains essential Europe-wide research and safety arrangements, including UK membership of Euratom.

But we also recognise that serious, long-term commitments to research and especially on the development and application of scientific research will require public funding. That commit to invest goes further.

Broadband provision in Britain remains inadequate for a modern, developed economy. It has to be considered an essential part of modern infrastructure. Labour has committed to the delivery of a fully-fibre optic broadband connectivity, across the whole country.

As part of our commitment to investment, we will in government deliver the funding needed to accelerate fibre to the premises, prioritising areas of clear business need.

Business rates

The business rates system is frankly a mess. The revaluation of rates has been exceptionally poorly handled, landing unfair and unsustainable increases in business rates on smaller businesses.

The instability of periodic, sudden revaluations creates instability that is debilitating for many businesses. Rates need to be adjusted in a way that gives business more predictability.

The current system penalises businesses for investing in the machinery and other capital that our economy desperately needs is self-defeating and out of line with other countries.

This is the very opposite of what a tax system should do. The clamp down on appeals is unfair as leaves businesses without recourse when rates are valued unfairly.

The government have repeatedly cut corporation taxes while leaving our business rate system in disarray. This disproportionately helps the largest businesses and harms the smallest.

Labour is calling for an overhaul of business rates to help manufacturing. We’ll be bringing forward our own proposals ahead of this year’s Budget.

Conclusion

The years ahead will be challenging for this country, but they will also contain opportunities. But if we are to take them we cannot settle for the status quo. If we want to continue to prosper as a society, and make sure that prosperity is more fairly shared, the old rules of the economy have to be written.

Manufacturing will be central to that transformation. It is where the high-quality, secure, well-paid jobs will be found.  It is the lever by which we can lift all parts of the country into sharing wider prosperity. It will need a government prepared to intervene and support the sector. Where a renaissance in manufacturing can deliver prosperity for all.


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