Manufacturing Matters 94: Intervention need not be interference: Government involvement is essential to UK industry's future, argues Graham Mackenzie

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THERE is a real danger that recovery from deep recession will be seen as evidence that the British economy is healthy and that no further policy changes are needed for it to grow stronger.

This danger is exacerbated by people who argue that government intervention equals interference and that it is neither ideologically nor practically desirable for the Government to take steps to boost industry.

However, the real argument is not whether government should be involved in industry, but how. It is involved. That is the nature of government.

Government necessarily regulates the markets in which we operate, especially in the case of the regulated utilities - gas, electricity and telecoms - in transport, including the non-privatised transport infrastructure, and in defence equipment. It sets and collects taxes. Government is also a big customer, directly controlling specifications and requirements in an increasingly customer-focused marketplace.

Disengagement by government has as much impact on industry as 'interventionist' policy changes. Foreign governments intervene to support specific industries in their technology development in export markets.

Support which is not matched by the British government puts us at a great disadvantage. If we sit back and accept the results of other governments' intervention our policy will result not in market forces deciding the shape of our industry but in foreign governments doing so.

Total disengagement could also result in the loss of industrial and technological capabilities crucial to long-term economic growth - a danger particularly acute in times, such as now, when other countries' governments are supporting their industries in particular sectors, while the British government does not.

Government alone can set the national scene, stimulating and co-ordinating strategic thinking and specifying its own medium- and long- term intentions so that firms can respond to the needs of their market through their own strategic decisions.

This places its role far above interference in day-to-day management and includes neither support for 'lame ducks' nor 'picking winners'. It also demands more than disparate 'initiatives'.

Large-scale infrastructure development - in such fields as transport, communications and energy - requires long- term planning and large-scale investment, which inevitably involves the close attention of government.

Even where infrastructure is planned and built in the private sector there remains the crucial factor of government regulation and legislation, which in effect determines how and where private sector investors and operators can act.

Government can also act to overcome fiscal factors inhibiting growth. The recent White Paper on competitiveness admits: 'A country's tax regime affects its competitiveness. While the prime purpose of taxation is to raise revenue to fund essential services, a burdensome regime can stifle growth.'

The existing tax regime inhibits savings and investment. Already Britain has the lowest level of investment relative to the size of the economy of any of the main industrial countries. Unless we increase our spending on investment for the future we cannot expect to achieve lasting economic growth rates that will provide high employment and prosperity.

For example, mainstream corporation tax amounts in effect to a tax on investment. It is a tax on profits reinvested in the business. The Government must recognise that investment is a legitimate business expense which should receive the same full tax relief as other business expenses such as wages, materials, advertising and maintenance.

Although the Government is unlikely to introduce the 100 per cent capital allowances for which the Engineering Employers' Federation has been asking for so long, it is important that the Budget acknowledges the burden corporation tax is placing on investment in industry.

To prevent inflation eroding the real value of capital allowances the existing capital allowances should be indexed to inflation, which means that when tax relief is given in future years it is allowed in full, not in 'devalued money'.

The first pounds 200,000 of plant and machinery expenditure should be allowed 100 per cent first-year capital allowance, primarily to boost investment by the smaller firms which are providing more jobs while larger companies are still shedding labour.

The Government is also uniquely positioned to act against short-termism. If the capital gains tax rate on longer-term holdings were reduced, investors would have a real incentive to take a longer- term view. Such an incentive is clearly needed to counter the short-termist culture that has become entrenched in almost all our financial and business decisions.

There is no doubt that the British economy is recovering from recession, that the recovery is increasingly based on exports and investment rather than consumption, that the investment climate is more favourable now than for many years and that companies operate efficiently only if they are free from day-to-day interference by government.

These factors alone are far from a sufficient basis for sustained growth and prosperity. What is needed is a strategic partnership between government and industry to create a national understanding of how technological progress can be harnessed to create employment and growth.

One crucial result of past failures by British governments of both main political parties to take a long-term strategic view is the inadequate size of our manufacturing base. Today's manufacturing industry is internationally competitive in quality and cost but too small to support our economy, as shown by our national deficit in international trade.

If we are to avoid yet another boom-bust cycle, industry and government must look beyond the immediate situation towards the challenges and opportunities of the 21st century. Industry cannot do this alone. Active support and partnership from government will be essential.

Graham Mackenzie is director-general of the Engineering Employers' Federation.

(Photograph omitted)