The State of Britain: Business and the British Promise - John Denham


John DenhamLabour's Shadow Business Secretary, John Denham MP speaking to IPPR North in Newcastle today (26 May 2011) said;

I’m delighted to speak here at IPPR North in Newcastle. After this I’m on the way back to London, and then to Southampton, having spent yesterday in Aberdeen - four cities whose differences prove that one size does not fit all.

And I will talk about regional economic issues and challenges in a moment. But first the wider economic and social challenges facing our country.

Over the past few months, Ed Miliband has set out the three great challenges facing the country.
The squeezed middle – that large group of people working on low and middle incomes who feel that the rewards of hard work, paying taxes and playing by the rules are too little, and in stark contrast to both those who enjoy stellar salaries not matched by results, and those who claim benefits too easily.
The British promise – that nagging and deep seated fear that our children will not enjoy better lives than we have done because we cannot pay our way in the world and create opportunities for them.
Strengthening our communities – recognising that in myriad ways, not least in the way workplaces and working lives have changed, our sense of communities with strong social institutions and common institutions, is being eroded.

But Ed believes, as I do, that they are much more than reflecting back what people are saying to us.
When we ask, how could we resolve these challenges? Those questions lead us to radical conclusions about what needs to be done.

We embarked on our policy review a few months ago. Having lost an election badly, time is needed to engage fully with voters and many different organisations and interest groups as we develop our more detailed policies for the future.

But the Business and Enterprise Review will make a significant contribution to each of Ed’s three challenges.
We cannot deliver for the squeezed middle without an economy which looks and feels very different, with more opportunities to get better jobs.

The Resolution Foundation has shown how real-term median earnings flat-lined between 2003 to 2008.  The Governor of the Bank of England has warned of six years of falls in living standards.
These are not passing short term pressures. 

Low to middle earners – the squeezed middle – have seen their share of earnings fall from around 30 per cent in the late 1970s, to closer to 20 per cent today.

Even more worrying, our economy is simply not making best use of the skills and talents of our people.
In 1986, around 30 per cent of workers said they had qualifications at a higher level than needed to get and do their job. By 2006, this was 40 per cent, by 2009 a half of employees said their skills were under used.
The most recent available evidence suggests that at least a fifth of graduates do not work in graduate jobs several years after graduation.
Some short-sighted people will conclude that we should have fewer graduates, and that it is not worth studying or improving skills.

But the real conclusion is that we have developed an economy that is dangerously dependent on too many low skilled jobs. 
Growth of employers demanding more qualified and skilled staff is among the lowest in the OECD.

We have an economy which is betraying the hopes of the young generation. It is failing to create the skilled well paid jobs which make the most of, and properly, reward their skills and abilities.
These are the warning signs of an economy which will not be able to compete in tough global markets, which will rely on ever more competitive companies operating at the highest level of productivity and innovation.
We cannot promise a better future for the next generation, unless we can pay our way; competing successfully in global markets which are increasingly difficult. 

We will not create a sense of strong communities unless the workplace is part of it. Unless work for most people is a place where you are valued; respected; have opportunities to develop your own abilities to the full; and which gives fair chance to provide for a secure future and bring up your children.
These are deep seated issues about the nature of our economy.  They cannot all be blamed on the actions of this Tory-led government, although – as I will go on to explain - their actions are only making the problem worse.

Where will these good jobs and better opportunities come from? What can be done to ensure our economic competitiveness? How do we foster more companies where work is about more than pay and survival for more people? Companies whose model is based on a skilled workforce to grow and thrive. And how do we ensure that these opportunities are in every region, not just a few?

In the wake of the banking crisis, there’s a consensus that our economy needs greater relative strength outside financial services. Advanced manufacturing must be part of this, but so must other sectors with huge growth potential: across a range of green technologies - which includes huge opportunities for greening traditional infrastructure as well as low carbon industries and innovation - and in the life sciences; our creative industries have a strong position in global markets, as does higher education and increasingly further education; business services from design and architecture to law and accountancy have global reach.
This economy needs both the world players and the SMEs in these sectors. We need to be country where the global companies feel they must be part of, and a country where smaller companies can innovate, grow and prosper.

These are indeed, huge opportunities, that are within our grasp.

It’s not mawkish nostalgia to talk of our long national traditions of innovative and ingenuity, of engineering and scientific excellence, of our creativity and our global engagement.
If we can be confident of success in these sectors then we can tell a strong story of what Britain will look like in the future.  We will be able tell young people what jobs and opportunities will be there for them if they aim high enough.

But the underlying fear and pessimism we hear across the UK reflects a public sense that today there is nothing given about these strengths. There is nothing automatic, to be taken for granted, about making the most of our potential.

In just a few years time we could easily see the UK losing its position in advanced sections of the world economy where we are currently strong, while failing to foster successful companies in the technologies and services which will grow in the 21st century.

The challenges we face from China, India and the other BRIC countries are stark; and in turn these countries are also shaping the way business is and will be done.

The recent Experian and NESTA reports show the growth of innovative SMEs is critical in driving forward economic growth. There are companies in all areas of the country in all sectors -the challenge is to identify them, and provides the conditions for growth, not hold them back.

Let’s be very clear about one thing. The growth we need, the jobs we need, will be private sector growth and private sector jobs. We will compete in the world but only if private companies win market share and successfully seek profits in tough global markets.

The next Labour Government will have to be relentless, a single minded focus, in creating the conditions for private sector growth. That means, without any ambiguity, creating the conditions in which companies compete within fair markets; and in which companies make profits by being the best in those competitive markets. The only companies which will succeed will do because the market challenges them to be better, more innovative, and better able to deliver what their customers want.

It’s a long time, thank goodness, since Labour was seen as anti-business party. Our record speaks for itself, with over 1 million additional small businesses successfully established. And we want to see more businesses, more people leading business and more people working in business.
But if market based growth and competition are the key to future economic success, there are two dangerous fallacies to be avoided.

Firstly, the idea that deficit reduction should be the only aim of economic policy.
Like every other country we need to get the deficit down and that means cuts – but the Tory led government is cutting too far and too fast – hitting families and costing jobs. The Tory led government is getting us into a vicious circle – more people out of work and on benefits, will make it harder to get the deficit down.
Labour’s balanced deficit plan puts jobs first – getting people off the dole and back into work is best way to get the deficit down. The government said they would cut the deficit by cutting waste but they are cutting the police and jobs instead - putting young people on the dole doesn’t save money, it wastes money. Instead of giving the banks a tax cut this year the government should repeat the bank bonus tax to get young people back to work, support small businesses and make our economy work better for the future.
Secondly, that supporting free markets means that the ideal state is one in which government does as little as possible. If the banking failure teaches us anything it is that unrestrained free markets can lead to catastrophic economic failures.
In truth markets are inevitably and unavoidably shaped by what governments do, and by what government doesn’t do. The trick is to understand the impact of what government does, and to make sure it foster the right type of markets.
Given that Vince Cable repeatedly called for the abolition of the old Department of Trade and Industry, it’s perhaps no surprise that he is leading a weak department which shows no sign of understanding the potential power of intelligent government activism to shape the economy.
Labour came late to effective active Government policies to create a balanced economy, less dependent on the financial services sector.
But the Tory led Government does not grasp how active Government policies can foster the right conditions for successful private companies to grow, including in the crucial new sectors of the economy.
The Government will claim it’s not doing anything. The recent Growth Plan did include measures which will do something to help.
But overall, we are seeing a badly managed retreat from an active government strategy – with business support dismantled, incoherent policy making n the green economy, uncertainty over key infrastructure like broadband, confusion over planning policies, reduced investment in regional growth and in the high-tech economy, and universities focused entirely on the new fees rather than working with business.
It is an approach rooted in a dismal and pessimistic view of Britain’s future workplaces, where any growth depends on making working lives less secure and less well rewarded.
The Government has scrapped RDAs with reckless speed leaving no effective organisations in place. RDA assets, built up for economic development, like business parks, are being sold-off in a fire sale, while Local Enterprise Partnerships are hobbled by the Government’s decision to leave them powerless – a failure that’s dismayed many LEP participants as well as key business organisations.
The Strategic Investment Fund, and Grants for Business Investment have both been scrapped, while the government has effectively cut regional funding by two thirds. It is clear that the Government has turned its back, in principle, on the type of launch aid and strategic investments which have enabled the UK to secure key foreign direct investment in this country. In the North East, Nissan has been explicit about the importance of such support to its investment decisions.
No wonder the RGF was 10 times oversubscribed; it would have been more if they had allowed SMEs to bid. In truth there were more losers than winners.
But an active government strategy is neither defined by the amount of public money which is spent, nor just on the public investments which are made.
When Vince Cable told the FT ‘growth is not something concocted by the state’ speaks both a self-evident truth, and a profound and dangerous misunderstanding of how the most competitive economies will succeed.
Self-evident truth in that Government cannot substitute their own activity for the growth that must come through the numerous decisions of private sector entrepreneurs and businesses. Nor can or should Governments try to pick and foster individual companies for protected and special treatment.
 But they can and should act as enablers and shapers as the condition for that growth.
Vince Cable is profoundly wrong to believe that Government action does not have a profound effect, for good or for bad, on how markets work, and the sectors of the economy which succeed and which fail.
The powers of Government go way beyond establishing the right fiscal conditions for the macro-economy, or supply side measures like investment in skills and infrastructure. Indeed, without the effective use of all the tools available to government, supply side measures cannot have their full impact.
Government policies determine to a significant extent the size and shape of key domestic markets, the sectors which attract investment, the opportunities to ensure that research is exploited within the UK economy to development successful companies with new products which can achieve world markets.
Government policies can shape the balance between short term pursuit of profits and the long term growth on which greater profits and greater tax income can be based.
Government can create market certainty, or uncertainty. For years, uncertainty about nuclear power depressed investment in nuclear technology and nuclear related skills. As certainty grew, private investment grew and investment followed in the skills and technologies we need.
Competition and pricing policy in energy more generally determines which technologies attract investment, and determine the opportunities for domestic companies to develop new and internationally competitive strengths in green technologies.
More generally, competition policy will set the balance between the smaller and the larger company – between banks and small businesses, between supermarkets and farmers, between the innovative insurgent company and the established market leaders.
Government procurement will play a significant role in deciding whether the benefits go only to established companies, or whether there is a guaranteed flow of funds – albeit on a small scale compared with overall investment – which can provide the opportunity for new and innovative companies, technologies and services.
Government regulation can create markets for new businesses and new solutions, as the establishment of the 3G standard for mobile phones gave the European mobile phone industry a significant market advantage over its rivals in other countries.
The establishment target for zero carbon homes fostered whole new markets across a range of business activities – from architects to building technologies, from renewable energy supply to carbon offset mechanisms, and the demand for new skills – which would not have otherwise existed.

These green technology examples also underline how little the current government understands of the impact of its policy decisions on the private sector. The zero homes policy has been abandoned,  feed in tariffs for photo-voltaic installation have been slashed. The inability to create market certainty only damages private entrepreneurs and deters investors. The Severn Barrage was abandoned, ensuring that when tidal power is finally exploited we will be dependent on foreign technology and companies.
Government’s also shape the institutions which support private companies. One of the tragic side effects of the bungled reform of Higher Education finance, is that so many vice Chancellors have been diverted from forging the business links and knowledge transfers which are so vital to growth, to trying to work out how to survive in the new regime.
 In considering the future structure of banks, we will need to look at whether competition alone will meet the long standing gap of long term finance for regional economies and smaller companies – the Federation of Small Business has backed for Regional Equity Funds to help SMEs. Can we learn from the USA and European countries how public and private together can create successful new lending institutions
At the heart of an activist approach to business and enterprise policy is the recognition that, used wisely and intelligently, these areas of government influence can be used to create the markets which foster the successfully companies, in the key sectors, which we need.
Crucially, an activist approach means understanding what business needs, and making sure that public policy is properly aligned, properly coordinated, to deliver the confidence and certainty business needs.
Getting bits of it right is not good enough. It’s the coherence that counts.
The current Government appears to believe that the headline rate of corporation tax is the only significant factor influencing global decisions on location.
But a global company looking 15 years ahead will want to confident about future investment in research in the right technologies and fundamental science. They will want to be confident about future. Does the UK offer a level playing field on launch aid and industrial support. Are we fostering markets into which they can sell. Will visa policy support their business?
An emerging innovative company may have other preoccupations: availability of long term finance, high quality business support services; effective protection of new IP; the benefits of being located close to other firms trying to innovate - the skills, know-how, and tolerance for risk alongside a skilled workforce; the proximity of a world class research centre and using research and university funding to encourage the flow of knowledge and information; and the willingness of government to use its procurement power to create demand as an early adopter.
An active government also encourages collaboration between companies in the same sectors, as we did with the Nuclear Forum and the Automotive Council. By bringing rival companies together common interests for skills and technological development can be identified, opportunities to develop a UK supply chain serving all companies can be highlighted.
In Government we had considerable success creating some new institutions the Government machine, like the Technology Strategy Board, and inside Government, like the Office of Life Sciences. Others did not fare so well. RDAs were not always successful.
Part of our review will look at how the institutions of government need to be overhauled to make them more business friendly, and more capable using he considerable influence of government more effectively.
Not all business are the same.
A sectoral strategy is essential to support the key sectors in which we need to compete globally. For many businesses, perhaps the numerical majority, an active government approach means getting the basics for businesses right; like regulation – at which we will take a fundamental fresh look  -  finance, and a reliable planning system.
  There is though an artificial debate about whether we need sectoral strategies or simply good business policies. Some like to characterize sectoral strategies as inherently damaging state interference.
But let me talk about yesterday's visit to Aberdeen. We need to extract as much as when economically can from the north sea, we need to install off shore wind generation and avoid an energy  policy which means one is at the expense of the other. Offshore wind could generate huge orders for steel from Teeside, but only if energy policies and other measures ensure that high energy using industries can survive in the UK.  Unless you take the fundamentalist view that neither the extraction of mineral resources, the development of renewables, or the maintenance of steel jobs is of any concern to government, and should all be left to the global markets, then sectoral strategies are not only essential, they are an inescapable part of good government.
The interests of the innovative entrepreneur are not the same as the established market leader.
The need of growing companies for long term finance is not the same as the desire of investment companies to make short term profits.
Open market policies on mergers and acquisitions have helped make Britain an attractive place for foreign direct investment. But they have eroded the number of clearly British companies – companies which through ownership, leadership and culture identify their own success with the national interest. It has also helped foster a prevalent short-termism in investment and returns which some argue work against the long term interests of UK based companies and the UK national interest.
Government policy in this area is never neutral; it is not ‘letting the market decide’. It represents a conscious choice about what sort of market we believe is in the national interest.
And it matters what type of company we try to foster in the future.
Growth is essential. But it has to be for a purpose.
It must enable us, as a country, to pay our way in the world.
It must create jobs for the rising generation in particular.
But it must do more than that.
It must ensure, so far as is possible, that work offers more than the means of survival.
Work must offer fair rewards, the opportunity to get on, the ability to enjoy family life and a secure retirement.
For too many people in work today, that is not the deal on offer.
We achieved a great deal for family incomes with tax credits, and this government is about to make families much worse off.
But we cannot in future put more and more weight on the state redistributing through taxes to compensate for the need to create good quality jobs in well run companies offering fair rewards. If labour markets create more and more lower skill jobs at the bottom, and reduce the size and security of the middle, compensating families through redistribution becomes an ever more expensive and impossible exercise in running up the down escalator. If poor corporate governance and weak investor action allows unjustified rewards at the top, state action alone cannot force the gap
In future, Government must do much more to create the conditions for private sector growth, using all the tools at its disposal.
But, at the same time, government needs to work with the private sector to ensure that business can provide more – and let the state do less – to provide fair rewards at work, the chance to gain skills and get one, and enjoy a secure retirement. This government is compounding the problem. Stripping away support from those who get a bad deal at work, while doing too little to ensure that there are more, better jobs.
There is a more optimistic future than this that Labour must stand for.
We need to understand better what encourages a company to identify its own success with national success; why some companies investment more in their staff than in other; why some choose business models which reward long-term commitment and service, and other not. To what extent is this about company culture, corporate governance, and active investors; to what extent is shaped by regulation?
Finally let me draw out a few conclusions from what I’ve said for regional economic development.
If we believe that active government policy can influence the overall shape of the economy and its strengths, than surely it can influence the balance between regions too.
The aim of private sectors growth must be at the centre of regional growth too. The problem is not that the south east has too much private sector but the other regions have too little.
But here, the government’s belief that the retreat of the state is automatically matched by the expansion of the private sectors is going to be tested to destruction. It is a huge risk with the lives of every family in the North East and other relatively deprived regions.
According to NESTA and Experian, the relatively deprived regions have more SMEs with growth potential, and across a wider number of economic sectors, than the more prosperous areas. Unlocking this innovative and entrepreneurial potential is essential.
Public investment is bound to play an important role in regional development, but the stress must be on creating the regional institutions which can support private sector growth often in partnership with the private sector.
Higher education, a much more ambitious programme of TICs in partnership with the private sector, and ensuring that the UK banking system is able to support regional investment.
Ensuring that competition supports the innovative and insurgent company is likely to have a particular impact in these regions.