While industrial production in the UK is growing at its fastest pace for six years, and there are some signs that manufacturing is anticipating an upturn, the long term trend is far less buoyant. As a share of national income manufacturing remains in long-term decline, as does Britain’s share in world production of manufactured goods.

How should government respond? Certainly not with direct intervention, for the dwindling size of manufacturing in the UK economy is paralleled in many other western economies.
While no-one would welcome the economic disruption caused, such long term trends suggest that artificial means of countering it such as government subsidies are not only costly to the taxpayer, but also futile. 

Italy is a case in point. Manufacturing still occupies a significant place in the Italian economy, yet this could very well be seen as indicative of a lack of economic dynamism.

Arguably the Italian economy is shackled by its overdependence on manufacturing: any embrace of economic protectionism, or yet more government intervention, would mean stifling growth in other areas of the economy. The Italian government has, for example, put in place employment protection laws to safeguard manufacturing jobs, but conversely the red tape also discourages the creation of new employment opportunities in the services sector and prevents economic growth in this area.

The danger for the UK is that such policies creep into wider thinking in the European Union. Fortunately most of the commissioners in Brussels appear to hold fast to liberal economic principles. That’s why it was so regrettable that our own commissioner, Peter Mandelson, was responsible for curbs to stop shoe imports from China and Vietnam. This may provide some comfort to Italian manufacturers, but it means higher prices for EU consumers, and bad news for UK firms investing in China.

That makes the increasing attempts by Labour ministers to intervene all the more worrying. The sad decline of MG Rover serves as a prime example of where UK government subsidies and intervention have been not only wholly inappropriate, but also completely ineffective. The questionable timing of the £6.5m bridging loan, prior to the general election, is proof that direct financial subsidies are no substitute for the kind of foresight and economic planning that have been the hallmark of car manufacturers like Toyota and Honda, producing successfully in the UK.

So what’s the alternative? Surely the challenge is to make the UK an attractive environment for business from the macroeconomic perspective and reduce unnecessary costs.

Energy costs are a topical and obvious example. Rising energy costs have hit industry, particularly as it has been such an unexpectedly rapid change. On average, power accounts for about a tenth of total manufacturing costs. Manufacturing businesses have therefore taken the brunt of gas price increases resulting from the failure to open up the European energy market. The Liberal Democrats have highlighted this problem on numerous occasions, and without liberalisation of the market, energy costs will restrict UK competitiveness.

 That also makes the energy review all the more significant. All the evidence shows that nuclear power is amongst the most expensive, despite 50 years of subsidy and massive state intervention in terms of research and development. If this was a technology that was ever going to deliver affordable energy for business, it would have done it by now. For even when the relative carbon costs of different fuels are factored in, nuclear is still the expensive option. If the government opts for nuclear in the energy review, British manufacturing ought to be leading the extra-parliamentary opposition.

Yet far more is needed. Taxation and regulation are obvious examples. Most businesses understand the need for taxation and regulation. What they can’t abide is when it becomes so horrendously complex. There are so many examples. The way the Working Time Directive was introduced in the UK compared to the rest of the EU, is a recent classic, but the sheer volume and web-like intricacy of Gordon Brown’s tax policies are another.

Just as it was critical to provide macroeconomic stability by changing the system with an independent Bank of England, Liberal Democrats believe it’s now time to seek greater stability over tax and regulation by changing the systems. That’s why we favour a range of radical changes such as the abolition of the DTI, independence in the system of regulatory impact assessments, sunset clauses for all regulations, and moves to ‘one in, one out’ for all departments proposing new regulations. Moving away from the annual Finance Bill to a Tax Reform Bill every other year would bring much-needed stability to tax, and drive attempts to simplify.

Any long-term future for UK manufacturing is far more likely to be secured by policies that reduce input costs and promote stability and free trade than any attempt to rig markets or back so-called national champions.