George Kerevan: Time for No 10 to be a bit more proactive on jobs

Published on Tuesday 24 March 2009 20:34

HOW should the government help the manufacturing sector during the downturn?

One idea doing the rounds is a short-term wage subsidy to support employment at companies in difficulty as a result of the recession. The latest heavyweight industrialist to favour this policy is Sir Anthony Bamford – the "B" in JCB, the big construction machinery group.

Bamford has fought the good fight for manufacturing all through the long years when the politicians were more obsessed with helping the City of London con us into believing that making things was an obsolete way of earning a living. He even toyed with the idea of bidding for Jaguar, after Ford put it up for sale. But is Bamford right about the taxpayer subsidising wages for folk making mechanical diggers?

The essence of Bamford's proposal is that the government pays a portion of the wages of employees in manufacturing firms that have had to put workers on short-time working due to temporary fall in demand. The same idea has also been advanced by the Engineering Employers' Federation and the Society of Motor Manufacturers and Traders. Note: this is not a blanket subsidy (which would be illegal under EU rules) but a short-term measure designed to safeguard skills that might otherwise be lost if the employees were made redundant.

The first question to ask is: what is the extent of the problem we are trying to solve? The economic situation for UK manufacturers is grave. Some 23 per cent of British engineering firms have already introduced short-time working and a further 19 per cent are considering it.

The number of new cars produced in the UK fell by a record 59 per cent in February, year-on-year. That is the largest drop in a single month since records began in 1970, and the fifth straight monthly decline.

For once, the crisis is not down to having the wrong products or even the wrong prices. UK manufacturing is lean, efficient and (thanks to the cheap pound) highly competitive. It is just that demand has dried up on a global scale, thanks to banks not lending. As a result, inventories have built up to excess. Until stocks are run down – which usually takes about two years – production will remain low and workers will be on short time.

The strategic danger in this situation would be for the UK to close factories and disperse the workforce. If we did that, Britain would not be in a position to recapture sales during the upturn. Instead, market share would then be captured by those countries with a manufacturing base ready and waiting to seize the main chance.

How expensive would it be to subsidise manufacturing wages till the economic corner is turned? One estimate suggests that it would cost around 3.3bn in subsidies to give 600,000 engineering workers 60 per cent of their previous wages, for between three and six months.

However, the net cost to the Treasury would shrink to only 1.1 billion, because of savings of 1.2bn in unemployment benefit and the return of another 850 million through tax revenues. There would be the added benefit that this money would act as a fiscal boost in areas of the country that will be hard hit by the recession over the coming winter. A real financial burden would arise only if the recession dragged on and politicians were tempted to turn emergency aid into a long-term boondoggle.

How feasible is such a wage subsidy? In fact, the Welsh Assembly has already introduced its own version (called ProAct) which gives a 2,000 wage subsidy for employees on short time, plus a 2,000 subsidy for each worker to train during the days not worked. ProAct is costing 68m, which includes a 38m contribution from the European Social Fund.

The Welsh first minister, Rhodri Morgan, explains the genesis of ProAct: "When the downturn started to bite in the autumn, we initiated our economic summits involving businesses and trade union leaders.

"The basic idea for ProAct came from those summits… It is far better to keep people in jobs and prevent them from being made redundant and far better, if the orders just aren't there, to use the short-time working for upgrading your training than to be paid to sit at home."

According to the Welsh Secretary of State, Paul Murphy: "(ProAct] could be replicated elsewhere. I know that the Prime Minister is very interested in it and has given the details to the Secretary of State for Business, Enterprise and Regulatory Reform (Lord Mandelson]."

However, despite Murphy's prompting, there seems to be no move from Downing Street to replicate ProAct across the UK. Ministers seem to fear that firms would take advantage of any payments by rushing to threaten job cuts, or using the subsidies to protect "uneconomic" jobs.

Or it might be that the Treasury is in a panic about the ballooning public deficit. Alistair Darling is already dropping heavy hints that his Budget on 22 April will not be offering another stimulus package.