Dominic Lawson: Cameron can't have it both ways

Manufacturing has been steadily declining relative to other sectors, but that is a function of the great success of our service and financial sectors over a sustained period

Last week the Prime Minister declared that Britain suffers from "economic apartheid". No one noticed. David Cameron made this provocative remark last Friday; but within hours the news began to leak of David Laws' catastrophically ill-judged expenses claims and the PM's speech sunk without trace.

So, let me rescue Cameron's observations from oblivion: after all, this was, as he put it, "my first major speech as Prime Minister". Speaking to an audience of businessmen in North Yorkshire, the PM's theme was that "our economy has become more and more unbalanced with our fortunes hitched to a few industries in one corner of the country, while we let other sectors like manufacturing slide". Cameron proposed to "rebalance our economy" and thus end what he termed "economic apartheid".

Some might think that to compare the relationship between British manufacturers and the City of London with that of the black population of South Africa and their Afrikaner oppressors is in somewhat poor taste; but the problems with the PM's argument go beyond mere choice of rhetoric. He is right that the South-east is richer than the country's other regions: that is a commonplace. On the other hand, I know of few countries, if any, which have a smooth equality of wealth across their entire landmass; and if the North of England is less affluent than the South, this is less marked than the disparity in wealth between, say, the north and south of Italy: that country, moreover, demonstrates that centrally directed attempts to "rebalance" the economy can lead to fantastically misdirected investments.

To be fair to Cameron, he is not suggesting direct industrial subsidies; in fact, it's not at all clear what he is proposing as a means of "rebalancing" the economy. He talked with characteristic enthusiasm of cutting red tape and reducing tax on businesses. Fine; but that would not be of particular benefit to the manufacturing industry, as opposed to the service and financial sectors.

I can understand why the Prime Minister should tell an audience of Yorkshire industrialists that they are the unjustly neglected sector of British industry – it won him a grand ovation. But there is a danger that in so doing, he is perpetuating a form of conventional wisdom that borders on myth. As that formidable economist Tim Worstall points out, the official Index of Production shows that, in real terms, the value of our industrial output is more than twice what it was in the 1950s, when, as he puts it, "absolutely everyone, to hear the stories told, was gainfully employed making whippet flanges".

It is true that the manufacturing industry has been steadily declining – more rapidly under New Labour than Margaret Thatcher, as it happens – relative to other sectors of the economy, but that is a function of the great success of our service and financial industries over a sustained period, rather than any absolute decline in manufacturing output. It is also true that employment in manufacturing has shrunk, even as its output has increased, but as Worstall observes: "This is another way of saying that we've got rising productivity, and as Paul Krugman, the Nobel Prize-winning lefty economist is known to point out, productivity isn't everything, but in the long run it's almost everything."

President Nicolas Sarkozy recently sneered that Britain has "no [manufacturing] industry at all"; but by this he can only have meant that much of that industry, such as our car manufacturing, is owned by foreign companies, notably Honda and Nissan. Does anyone in this country really yearn for a return to the days of British Leyland? Besides – and this might come as a shock to those attuned to the notion that our nation is an industrial dead zone – 14 per cent of our gross domestic product is still attributable to manufacturing output. This is a higher proportion than in America and – sorry to bring it up, M Sarkozy – France: manufacturing in both of those great countries accounts for no more than 12 per cent of GDP. Here's another fact to challenge the conventional wisdom: our manufacturing sector is much bigger than the allegedly dominant financial services industry: the latter has never contributed more than 8 per cent of GDP.

Yes, those revenues suffered a colossal reverse in the credit crunch, which resulted in the taxpayer being asked to bail out a number of large Scottish and northern financial institutions (the London-based banks and building societies had expanded their balance sheets much less incautiously), but when the recession came, it was manufacturing output that seemed the least stable part of all the modern economies, for all the reassuringly visible solidity of their products. Germany and Japan, which rely on such forms of industry more than we do, were anything but sheltered from the storm.

I understand why there is an almost romantic attachment to the idea of producing things which, if they landed on your foot, would hurt a lot; there's certainly less national pride in financial services, which seem unsatisfyingly ephemeral, and even unmanly. Yet all nations, as Adam Smith observed, do best by concentrating on industries in which they have a competitive advantage. London and Edinburgh have long enjoyed such an advantage in finance and, as the English language increasingly dominates the world, our media (like America's) also benefit from competitive advantage.

Naturally, we can't all be employed in the creative and financial industries; apart from anything else, not everyone is suited by intellect or inclination to working in such fields. So the issue is this: how do we help to give British manufacturing a competitive advantage, or at least ensure that it suffers from no avoidable disadvantages? The two most significant factors – given that we are already competitive technologically and in the ability of our skilled workforce – are currency and energy costs. We can do very little to control the level of sterling, although its recent falls have been of benefit to our exporters. We can, however, try to ensure that energy – the biggest single cost for "heavy" manufacturing – remains as cheap as possible.

Now, what does our new coalition propose to do about that? What they propose is to make our industry pay the highest energy costs of any country in the world: they fully support the previous government's "world-leading climate change policy", which demands a surcharge on industrial energy bills of at least 55 per cent by 2020. Indeed, in Chris Huhne, we have an Energy and Climate Change Secretary who seems to believe we should strive to be entirely dependent on intermittent renewable energy – to save the rest of the planet, apparently. Last year, we glimpsed into our industrial future when 540 jobs were lost at Anglesey Aluminium Metals, which could no longer find a competitively priced energy supplier in the UK.

The tragedy – or farce – is that, as emerged at the Copenhagen climate change summit last December, the world's most populous nations have no intention of inflicting similar costs on their own manufacturing industries. Thus, as the director of the trade body representing the British steel industry observed: "The climate change agenda won't affect the amount of steel consumed, but will determine where it is produced."

The Prime Minister must make a choice. He can continue to impose ever greater energy costs on British industry – otherwise known as "Greening the economy" – or he can stand up for our manufacturing sector, as he declared he would last week. No speech, however glib or well-delivered, can disguise this dichotomy.

d.lawson@independent.co.uk