WEEKLY COMMENT 26-01-2017
By Barry Edwards
The paper published by the government earlier this week setting out the plan for an industrial strategy was a big step in the right direction but it was a small step in preparing the country for the potential there is to make a real difference. The paper did say that this is the first stage and that further discussion and contributions will be listened to before the final draft is presented in the summer for comment by everyone.
Although there has been a need for some proper planning by government and industry to set out an objective for business and commerce similar to many other counties, in my view it was not comprehensive enough and the overall concept presented will have little impact on improving industry in the UK in the long-term. The first point to make is that it is difficult to plan solely for industry without an economic growth plan for the whole economy since industrial production is only 10% of Gross Domestic Product (GDP).
The second point is the amount of money allocated to achieve this transformation is £170 million which is tiny even though the private sector is expected to contribute four or five times that sum in conjunction with government. As the UK is almost certain to leave the EU in March 2019, the need to plan for the reshoring of supply chains from continental Europe to avoid tariffs is absolutely vital. The companies that would undertake the investment to build the factories to supply onshore would probably be medium sized companies since the large companies that already supply from Europe would not find it economic to set up small plants in the UK.
The problem is that these medium sized businesses would struggle to find the funding from the banks without government support which involves another kind of plan from the one outlined in the industrial strategy announced this week. The reality of leaving the EU has not really sunk in yet and government will be fully occupied negotiating the terms of departure which will include substantial payment to cover the commitments and guarantees that all countries agree to as a member of the EU. Therefore there is not going to be vast sums to spend on revitalising the economy which will certainly be required.
These commitments and guarantees are for pensions, loan guarantees and a wide range of other commitments that governments take on as funders of last resort which are often never called upon. However, when you leave a union such as the EU these must be taken account of and a value placed upon them. Clearly that will not be an easy agreement to reach but nobody is talking about what these payments will amount to other than Michel Barnier who has mentioned around €60 billion. If this sum is roughly correct, it will probably be paid over a period of time, maybe 10 years, assuming the EU survives in its current form.
Discussing whether the EU will survive is for another time but you can see why the government has not proposed larger sums for an industrial strategy. Therefore, to really make sure that the UK has sufficient finance to develop and re-establish a thriving industrial base it has to be done another way. The next few paragraphs explain how that can be achieved.
One way of achieving this investment is using quantitative easing (QE) which we discussed recently, which you can read if you click on it in Recent Posts in the right hand column of this page, but governments in developed countries are reluctant to print money for investment purposes. However, they are prepared for their central banks to purchase government bonds to help out in a crisis and hold these bonds on their balance sheets. Therefore, using the bonds as collateral to issue guarantees could be acceptable as a method to support all kinds of investment in infrastructure, companies and research and development. I posted a plan PROPOSAL FOR A “COLLATERAL GUARANTEE SYSTEM” (CGS) in the comment on the ‘Autumn Statement’ on the 24th November 2016 which you can read if you click on November under archives in the right hand column.
In effect, the CGS issues guarantees for the construction of projects and then issues bonds on completion for asset managers to purchase for pension and investment funds. Also the CGS itself can issue 30-50 year bonds to finance an industrial strategy and other investment which removes substantial funding commitments from tax revenue allowing government to finance long-term research and development (R&D) and early stage funding until the private sector can confidently invest in the ventures that are created from the R&D. You have a very flexible strategy to counter Brexit and a comprehensive economic growth plan without increasing government debt.
In the ‘Autumn Statement’ the Chancellor proposed that £22 billion should be spent on infrastructure. The CGS could take this over and the government would only have to pay a small sum yearly which would be adequately covered from the extra tax revenue created from the much larger CGS plan. QE currently stands at £420 billion allowing plenty of room for large commitments. The economy would be transformed and grow at a steady pace generating substantial tax revenue in the process and most likely achieve a surplus budget for the country continuously. It is all perfectly feasible but it is unlikely to happen unless some very powerful people get behind the plan and that is where the problem lies.
That’s all for this week, more observations next week.