News & Views

Boosting production could help "restore the UK economy"

Britain should use the opportunities from Brexit to expand its manufacturing operations and so circumvent a tightening financial straitjacket, says an influential report.

The UK's heavy reliance on foreign income to offset its huge trade deficit risks becoming unsustainable and could end up throttling the economy, according to a study by the ERA Foundation, an engineering and technology research group. 

One way out of this would be to promote a new reliance on export-led manufacturing to help reduce the UK's soaring deficit on trade in goods that reached £120bn in 2014, double the 2008 number. 

In spite of the risks to Britain's decision to leave the European Union, the move could ease some of the constraints on the country's ability to boost specific sectors such as production.

“There is no doubt that the realisation of Brexit will be challenging, so it is all the more important that we take advantage of the opportunities that it affords,” the report says. 

“The creation of conditions conducive to the resurgence of productive industry in the UK, free of earlier constraints [from Brussels-imposed rules] can be a prime target of government in seeking to create a better-balanced and sustainable economy.”

Made Here Now supports ERA's conclusions on the need for a resurgence of modern, skills-based manufacturing. We want to make the sector more attractive both to investors interested in new projects and also to the young people who form the potential workforce of the future. 

Hopes have risen in recent months that the government's new industrial strategy might help on both fronts.  For more on this, please read our January story "A new map for manufacturing" .

At the root of the financial problem is Britain's worsening current account deficit. The current account measures whether a country is a net lender or borrower from the rest of the world. A deficit means it must borrow from overseas while a surplus means Britain is increasing its holdings of overseas assets.

In 2014 the current account deficit reached £92.8bn - making the UK's position on this score far worse than for other comparable nations - though it declined somewhat to £88.2bn in 2015. In 2011 the deficit was £29.1bn. 

The deficit on the current account is built up from several factors, one of which is the balance of trade in goods. In 2014 the UK's large goods deficit - with imports greatly exceeding exports - was partly compensated for by a healthy £80bn surplus on services. 

But the resulting overall £40bn trade deficit left a big gap that - even after netting off receipts from areas such as foreign inward investments - meant Britain was forced to borrow massively from overseas. 

Most mainstream economists have in recent years been relaxed about the current account deficit. They have argued that Britain is a strong enough economy to allow it to borrow on good terms from the rest of the world. 

However Mark Carney, Bank of England governor, has warned that Britain is relying on the “kindness of strangers” to fund its current account deficit. The lead-up to Britain's EU exit in 2019 could test their willingness to lend to the UK. If for instance Britain's credit rating was to slide dramatically that could force up government borrowing costs significantly. 

Increasing manufacturing output as a way to cut the excess of goods imports over exports is not the only way to reduce the current account deficit. 

Other ways could involve a big increase in the services surplus, for instance through attracting many more foreign tourists. Or Britain could step up its already large sales of domestic assets - such as football clubs or companies - to overseas buyers. 

But ERA points out that manufacturing already provides almost half the UK's total exports. So expanding this sector “remains the most effective means of reducing the deficit in trade and thereby restoring the UK’s economy”. 

One way to help manufacturing would be to cut energy costs for the sector perhaps through an expansion in domestic shale gas production, while also boosting help for small and mid- sized production companies. 

Photo by Adrian Waine