A letter to the Editor of the Times which was published on 30th December 2011.

With economic forecasting having rather less predictive power than tips for the 3.30 at Newmarket, one must admire the confidence with which the Centre for Economics and Business Research makes its selections for the league table of major economies in 2020, eight years away (report, Dec. 26th).  Russia and India are advanced to 4th and 5th places in the world, which would require an average annual rate of growth of almost 12 per cent, a figure not achieved even by China during a period – now ending – when the West has displayed an almost inexhaustible appetite for its goods.

Brazil is shown as overtaking Britain for 2011 although the GDP figures for Britain are not in, and official figures for Brazil are usually two to three years in arrears, even if one could rely on their being collected on the same basis to three significant figures as displayed in the Centre’s league table.

Perhaps the CEBR should try horse racing.

Question from Frederick May

Prof says . . .

The short answer is No. You only have to look at the numbers to see this. The deficit for 2009/10 is around £170 Billion, i.e. 170 thousand million pounds sterling, or over 30% more than the government’s income. This giant sum has been borrowed by selling government bonds (called gilts) mainly to foreigners, and will take our total national debt to around £900 Bn.

The process will be repeated in the financial year just starting, and will take the national debt past £1,000 Bn (or a trillion pounds sterling) for the first time in our history. The fear among the people – mainly middle Eastern and Asian funds – who are currently prepared to buy our gilts (i.e. lend us the money) is that only small measures to reduce this enormous deficit are currently being taken or contemplated by the contenders for office after May 6.

These measures are all only one or two billion pounds at best (so-called back office savings) which are insignificant compared with £170 Bn.

UKIP’s policy briefly

In the vast total of government expenditure (£670 Bn) wage costs are overwhelmingly the predominant (70+%) part. Only in Defence is the wage cost a significantly lower proportion (50%) because of its spending on military equipment and ammunition. This means a significant reduction in the deficit must cut labour costs.

UKIP Expenditure Reduction Measures

1. There are a range of government functions we can get rid of altogether – including most quangos, which would yield around £20 Bn per year over a five year period. This would create unemployment among well-paid senior staff, many of whom already have pensions, but more junior staff would redeploy into our new manufacturing economy.
2. Our withdrawal from the European Union would save around £10 Bn per year gross from day one, some of which would continue to be spent on industrial and agricultural support – say £30 Bn over 5 years.
3. The tax and benefits system would be changed so that housing benefit (currently costing £18 Bn per year) would disappear as a separate benefit. Besides the direct saving (around £10 Bn per year net – say £50 Bn over 5 years), it would also have the beneficial effect of lowering rents in the private sector, particularly in the big cities. The only losers would be landlords who would be given a two year transition period to adapt.
4. On withdrawal from the EU we would impose a five year qualification period before those with residence or new citizen status could draw benefits of any kind. This could save £10 Bn over 5 years.
5. Job seeker’s allowance would only be paid in return for community work (i.e. workfare). Idleness will not be an option. All able-bodied single people will be expected to take a job anywhere in the United Kingdom with a living allowance paid for 6 months by the state (savings around £10 Bn over 5 years).
6. As a private view, I would advocate transferring the government’s International Aid programme (currently about £6 Bn but planned to go to £10 Bn by 2012) to the aid charities on a matched fund basis, provided the charities did not transfer cash to poor countries, but only supplied British made equipment and housing provision supported by British-trained personnel to install and maintain it until locals are genuinely ready to take it over. (At present two thirds of our aid – about £4 Bn a year – is spent by the EU, over which we have no real control. This would cease when we withdrew from the EU.) Total savings from government over 5 years would be around £25 Bn made up by a comparable sum from private sources.
7. UKIP would envisage reductions in the 3 year departmental expenditure limits (around £400 billion) of 5% in year 1 rising to 10% in year 5, to be achieved by natural wastage and some salary reductions. This will yield (net of investment in our Long-Term Programmes [LTPs]) £20 billion per annum in year 1 rising to £40 billion per annum at the end of year 5.

Government Income under UKIP’s policies

Point 1

UKIP’s manufacturing expansion programme of 5% per annum over 10 years and its Long-Term Programmes (LTPs) [see the Jobs and Enterprise paper “Produce and Prosper” under “Policies” on ukip.org] would add around 1% to growth, making in all about 1.5-2% in the economy’s GDP in year 1 (2010/11) to about 4% in year 5. Government revenues (at about 40% of GDP) would grow on these figures by around £10 billion in year 1 to about £105 billion per annum in year 5 (2015/16).

Point 2

On these figures, the 2009/10 deficit of £173 billion (my figure) would fall to £120 billion at the end of year 1 (2010/11) and to zero at the end of year 5. The accumulated national debt would rise from about £900 billion at year zero (2009/10) to around £1330 billion (about 83% of GDP). After that the national debt would be reduced if no additional government spending was allowed.

The Labour government’s target reduction to one half of the present £170 billion over 4 years from now would add about £580 billion by the end of 2015/16, bringing the total national debt to £1,480 billion (about 92% of GDP) and continuing to rise at a rate of £70-80 billion after that (on present declared plans).

Comment

Public sector average pay is now higher than in the private sector, much higher if you add in the public sector’s final-salary pensions which now have a funding deficit of over £1,000 Bn.

As a personal view I favour salary reductions for senior staff in the public sector, particularly in local government and the police, pegging their salaries to those of the appropriate grade in the civil service. Middle and lower salaries would be frozen for a three year period to bring them into line with the private sector. Together with “natural” turnovers of staff (currently 8% in the NHS) some net reductions of about 5% in the public sector wage bill would yield around £30 Bn per year, effectively closing the gap.

A paper written during the 2010 General Election campaign as the UKIP candidate for Suffolk Coastal.

To read the text please click on “Economic Effects of Immigration” which will take you to the paper on the Britain Watch website.

Article published in the Parliamentary Monitor: Blue Skies supplement, June 2005

S F Bush

The loss of around 600,000 jobs from manufacturing in the last 8 years has created a void filled not so much by the private services sector (where employment has fallen in the last two years) but by the creation of around 700,000 jobs in the public sector paid by the taxpayer. At the same time, the goods trade deficit has ballooned from £12 billion in 1997 to over £40 billion in 2004, the £30 billion difference being almost exactly the added value output from those lost 600,000 manufacturing jobs.

Trade in goods is crucial to a country like Britain, where imports plus exports amount to over 50% of GDP (less than half this proportion in the USA). Manufactures account for over 60% of our exports with another 5-10% in technical services dependent on them, mirroring pretty well the world trade pattern. Among those countries where trade is of the order of 50% of GDP or more, export sales of goods is a good marker of the added value of all production.

The graph Annual Export Sales shows annual export value divided by annual industrial R&D expenditure over a period of 25 years.  As may be seen, three main competitor countries including the UK have converged to a value around 20.  (The USA is much the worst on this measure because only a relatively small proportion of its GDP is exported.)  Evidently Britain has a massive goods trading deficit not so much because its present manufacturing industry is uncompetitive, but because it is too small for the goods appetite of its population.

Moreover, manufacturing industry is not just the principal means by which we pay our overseas creditors, it is also the leading performer in terms of labour productivity.  Of the three output components of GDP – labour productivity in industry has consistently been around 35-50% above the average for the whole economy, while public services are around 20% below, with private services about 5-10% below.

What can be done to arrest and reverse the dramatic shrinkage in manufacturing of the last 8 years or so?  To recover the £30 billion of lost output would require at current labour and capital productivities about an additional 0.5 million people, additional capital of around £30 billion (or about three years of current investment), matched by about £1.5 billion of additional annual expenditure on industrial R&D.  Like the people and the investment, this increase would have to take place mainly in the SME sector.

But how exactly?  Business expenditure on manufacturing R&D by industry is around £9 billion (depending on definition) employing about 140,000 people, of whom possibly 60,000 are qualified scientists and engineers (QSEs).  The lion’s share of QSE employment in business R&D is in the 2,500 firms with over 250 employees; possibly 5,000 firms in the medium category may have one QSE in R&D.

Of the 114,000 firms in the small category (under 50 employees) possibly one in 20 firms may have one QSE in R&D.  While R&D employment in industry fell along with general industrial employment by about 15% over the 10 years to 2002, publicly funded employment of QSEs in higher education R&D rose by over 50% in the same period, to around 50,000, approaching if not now exceeding the 60,000 QSEs in Manufacturing industry R&D.

The Centre for Manufacture with its partner consortium company NEPPCO Ltd have conducted around 80 R&D projects with SMEs (small and medium-sized enterprises) over the last 8 years, split about 2:1 between processes and products.  Of those 50 projects which have reached some sort of maturity, the lifetime added value to R&D investment multiplier has averaged about 15, which is consistent with the export multiplier on the graph.

This demonstrates that this model of an inner university-based core of permanent QSEs plus an outer ring of temporary research engineers passing through, plus a permanent network of businesses supplying the expertise which a university centre won’t normally have (marketing, prototyping, actual production facilities) can offset the scale disadvantages which 122,000 SMEs suffer from by comparison with the 2,500 large firms.

Our experience shows, as does that of many international studies, that only R&D directed on a continuing basis at commercial objectives has significant economic results, wherever the initial inspiration comes from.  Of all the competitor countries in the graph with the exception of Italy, Britain, however, devotes the highest proportion of its national R&D expenditure to the public sector (over 50%).

To support the postulated £30 billion recovery of lost output, manufacturing industry R&D needs to have around 10,000 more QSEs devoted to it, principally in the SME sector.  Arguably this effort should be organised around the product pipeline concept (as employed in pharmaceuticals) with matching process optimisation.

Given the present distribution of QSEs between the private and public sectors, the people for this endeavour can only come from the universities.  For this to happen, there needs to be an extension of the research assessment (RAE) criteria to allow original unpublished work in industry by university researchers to count alongside published work.  Without this shift in emphasis for at least part of the publicly funded research, the taxpayer will be less and less inclined to pay for it.

A letter to the Editor of the Daily Telegraph which was published on 3rd August, 2001.

David Litterick is right to suggest that manufacturing accounts for about 20 per cent of the cost of our GDP (report, Aug. 1st), but what he didn’t say was that industrial products account for about 75 per cent of our exports.  Moreover, a substantial proportion of the remaining 25 per cent – service exports – depend on industrial products or expertise derived from them.

It is remarkable that the opposition parties have allowed the Chancellor to acquire the reputation of a good steward of our affairs, while the trade deficit has risen remorselessly under his administration to the present awful £30 billion per annum.  There is a similar silence about the Government’s apparent acceptance or even encouragement of a drop in agricultural production.

Since we have to eat, every £1 billion drop in agricultural output adds straight on to the trade deficit.  For the most part, this can be put right only by the men and women in the already hard-pressed manufacturing industries.

A letter to the Editor of the Times which was published on 7th October 1991.

It is a pity that Sir Peter Hordern (October 1st) should subscribe to the view that central banks control inflation through their supply of the currency.

The massive inflation which we are only just recovering from was not due to the Bank of England’s printing a large over-supply of bank notes, but to the vast expansion of credit by the commercial banks.  This expansion of credit in 1987-9 expressed as a proportion of GDP, more or less accounts for the inflation rates of 8 to 11 per cent during those years.

A central bank per se, whether independent or not, is an almost total irrelevance so far as inflation is concerned in a world dominated by thousands of different monetary agencies able to switch assets and liabilities across the world at the touch of a button.

For continentals the drive for a European central bank is seen as a vital step on the way to a European state and government.  Monetary and political union are inseparable as everyone, except the British political centre, with its overwhelming wish to avoid hard choices, recognises.