2016 12 – UK manufacturing declining

Jobs, Welfare and Austerity

How the destruction of industrial Britain casts a shadow over present-day public finances.

Christina Beatty and Steve Fothergill. Sheffield Hallam University. Centre for Regional and Social Research.

We publish below key points and concluding comments from the above report. The full report can be accessed here: www4.shu.ac.uk/research/cresr/sites/shu.ac.uk/cresr30th-jobs-welfare-austerity

Key Points

UK manufacturing employment has fallen from 8.9 million to just 2.9 million over the last fifty years, and 500,000 jobs have disappeared from the coal industry. This has destroyed the economic base of many communities, especially in the North, Scotland and Wales.

The main effect of this job loss has been to divert vast numbers of men and women out of the labour market onto incapacity related benefits, these days Employment and Support Allowance (ESA) which accounts for almost 2.5 million adults of working age. The highest claimant rates – 10 per cent or more of all 16-64 year olds – are nearly all in older industrial areas.

ESA and the additional benefits received by ESA claimants – Housing Benefit and Disability Living Allowance for example – are a £30bn-plus annual claim on the Exchequer.

Low pay in former industrial areas depresses tax revenue and inflates spending on in-work benefits. Spending on Tax Credits, for example, exceeds £850 a year per adult of working age in much of older industrial Britain – double the level in parts of southern England.

The Treasury has misdiagnosed high welfare spending as the result of inadequate work incentives and has too often blamed individuals for their own predicament, whereas in fact a large part of the bill is rooted in job destruction extending back decades.

The welfare reforms implemented since 2010, and strengthened since the 2015 general election, hit the poorest places hardest. In effect, communities in older industrial Britain are being meted out punishment in the form of welfare cuts for the destruction wrought to their industrial base.

Across most of older industrial Britain the loss arising from welfare reform is expected to exceed £750 a year per working age adult by 2020-21.

There is an alternative – a genuine rebalancing of the economy in favour of industrial production and a revival of regional economic policy.

Policy makers need to take a long-term perspective, look at the differences between places, and stop thinking in silos.


Concluding comments

Is there is an alternative?

Our argument is that for many communities the pain caused in the past by industrial job loss and the pain suffered today as a result of welfare reform are inextricably linked. By taking a long view of economic change, and by drilling down to evidence at the local level, these connections are all too apparent. But if welfare cuts represent the orthodox Treasury-driven response to the budget deficit, is there an alternative? The re-creation of the past, or more specifically of the levels of industrial employment last seen in Britain two generations ago, is not really an option. Technology has moved on, so that even if Britain did produce vastly more cars, machinery, electronics or whatever, far fewer men and women would be employed in these industries than would once have been the case.

That in 2016 the new Prime Minister, Theresa May, has finally inserted ‘Industrial Strategy’ into the name of the Department for Business is perhaps a sign that all is no longer well with the Treasury orthodoxy, though critics might argue this is a case of too little, too late. But if the name change does indeed signal a change of direction the new way forward still remains to be defined. This is not the place to try to set out the details but two principles should perhaps be central to an alternative to the Treasury’s traditional approach.

First, the rhetoric about rebalancing the economy needs to be turned into reality. In the wake of the 2008 financial crisis there was much talk of the need to move away from an over reliance on financial services towards an economy based more on exports and investment. The former Chancellor, George Osborne, called for “the march of the makers”. This hasn’t happened. If anything, the UK economy is now more imbalanced than before the financial crisis and if growth has returned – for the moment – it is because the old economic model based on debt and the housing market has been rekindled one more time

A genuine revival in industrial production would be central to any rebalancing of the UK economy. This should not be regarded as impossible, even against the backdrop of competition from China. It is salutary to remember that in Germany, where labour costs are generally even higher than in the UK, the share of GDP accounted for by manufacturing is twice the level in the UK. In no small part as a result, Germany has a large trade surplus and a far smaller budget deficit. The UK needs to become more like Germany. A rebalancing of the UK economy in favour of industry would be of direct benefit to much of older industrial Britain because, even after years of job loss, that is where so much of what remains of UK manufacturing is still located.

The other principle central to an alternative to the Treasury’s welfare cuts is a revival of regional economic policy. The places where welfare claimants are concentrated, out-of work or on low wages, need to be grown fastest. This doesn’t necessarily mean the creation of new administrative structures or adherence to any specific geographical scale of action – regional, sub-regional, city-region. Rather, what is important is that policies are in place to channel economic growth to the places that need it most, where in turn the welfare bill can be reduced most.

At the present time, the UK probably has its weakest regional economic policies since the Second World War. Indeed, what masquerades as regional policy is more often the promotion of competition between places, which in practice often widens the differences in economic well-being, or the devolution of powers to local authorities, which is really about governance and has the most tenuous connection to prosperity. The dominating position of London, in particular, has gone unchallenged even though the downsides of the capital’s success – congestion and stratospheric property prices – are all too evident.

The starting point needs to be that the economies of older industrial Britain can be rebuilt. The prize is lower spending on welfare, higher tax revenue, and a reduction in the budget deficit that is not based upon hitting the poorest place hardest.


Lessons for analysis and policy

In conclusion, let us return to the theme at the very start of this paper: that the focus on the short term obscures longer term issues and trends. We have endeavoured to explain here how the destruction of industrial Britain in the 1980s still has profound repercussions for present-day public finances. What does this tell us about the way policy makers should go about understanding issues?

First and most obviously, it underlines the importance of a long-term perspective. Where we are now, as a society, is the product of long and still evolving economic processes. The financial crisis of 2008 is not the defining event in Britain’s recent economic history, nor even the main cause of the present budget deficit. The source of many current problems lies much deeper in the destruction of Britain’s industrial base in the 1980s and all that has flowed from it.

Second, it is hard to understand what is happening to the economy or society without looking at the differences between places. It is disturbing that the Treasury and most of the economics profession rarely if ever look beyond national data and national trends. They end up failing to grasp causality and misdiagnose problems. A good example is the rise in incapacity numbers and spending, which has been wrongly identified as an issue of work incentives, not as the consequence of job destruction in specific parts of the country.

Third, there is a pressing need to stop thinking in silos. Jobs, or the lack of them, and public finances are profoundly interconnected. The Department for Work and Pensions cannot hope to create jobs for all merely by adjustments to benefit payment rates and conditions. Nor can the Treasury deliver full employment simply by eliminating the budget deficit. Where we are now is the result of astonishing negligence and short-sightedness. Allowing Britain’s industrial base to wither so dramatically has not been costless and it has certainly not been absorbed by the smooth operation of market forces. It has resulted in persistent worklessness, low wages, an inflated welfare bill and an alarming trade deficit with the rest of the world