Labour honeymoon is over

IT IS hardly surprising that a four-and-a-half-year-old marriage should be going through a sticky patch. There was always something suspiciously facile about the warm relationship between industry and New Labour. Now the strains are out in the open.

The alarming drop in industry's output in September, taking the underlying annual fall to 2.9%, was a gloomy backdrop to the CBI conference in Birmingham. It gave an added edge to the delegates' sometimes passionate pleas to ministers not to make matters worse by loading on more red tape and costs.

Tony Blair repaired some of the damage, reaffirming himself as 'deeply committed' to 'the partnership we have tried to build with you'. He pledged to fight terrorism, maintain economic stability, invest for the long term and cut red tape. He was backed by a large supporting cast - Chancellor Gordon Brown, Trade Secretary Patricia Hewitt and Education Secretary Estelle Morris. Transport Secretary Stephen Byers brings up the rear today.

The CBI said it was 'reassured' by Blair's speech and liked his promise to speed up EU reform. Bosses also acknowledge Brown's promise of further tax cuts, though they suspect most of these have been aired before. But there were unmistakable signs that the honeymoon is over.

Hewitt got a rough ride from the conference floor. One delegate, reflecting a widely-held view, asked her: 'Why should government be loading more costs on to business at this time?'

When she cited a CBI/TUC report suggesting that over-regulation was not a concern, she was quickly slapped down by CBI director-general Digby Jones. He said: 'The government brought in 3,800 regulations last year - 10 a day. You are a regulatory-minded government. We are the hidden payers.'

Loud applause followed this riposte, showing that businesses that are wondering which staff to lay off in the downturn have little appetite for the climate change levy, the measures to help mothers return to work or the surging claims to industrial tribunals.

The Prime Minister's solution is yet another piece of legislation, the Regulatory Reform Act. As for stemming the tide of rules from Brussels, he admitted: 'There is a battle going on.'

Industry cannot afford to lose it. Even before the September attacks, the downturn was deepening. CBI chief economic adviser Ian McCafferty warned: 'We are in for a difficult winter.' The purchasing managers' pessimism suggests he is right.

Manufacturing is growing so slowly that this downturn has pushed output back to where it was in 1998, unravelling the gains the last three years. Over 35 years, manufacturers' output has risen by a crawling 1.3% a year. In such a slow bicycle race, it does not take much to knock you off.

During the technology boom, industry was gaining momentum from 'new economy' sectors - telecoms, optical networks, computers. Now these are on the floor, the momentum is lost. The manufacturing workforce, which 20 years ago was 6m, is heading for 3.5m. Some 120,000 jobs have disappeared in a year, and the next year could be worse.

Some CBI delegates raised the question of why successful new companies, such as chip designer ARM, remain so small while in the US they grow to giant size, like Cisco.

The CBI is unsure of the answers - short-termism, City wariness of industry, over-regulation? Blair's answers are to boost productivity and nudge towards euro membership.

The one area where business loved Labour unreservedly was its willingness to open up the public sector. Though the Public Private Partnership and the Private Finance Initiative were cloaked in gobbledegook, PFI delivered a stream of profitable projects for companies, and an army of consultants grew fat on the pickings.

Byers' dismembering of Railtrack threw all this into doubt. Like some dreadful outburst of domestic violence, it has shaken the business-government relationship to its foundations. Blair did his best to limit the damage, saying shareholders will 'receive what they are entitled to' (whatever that means) and 'we could not justify pouring ever more public money into a business that was going bust and failing to deliver'.

But if this is the third way, the private sector does not like it much. It will take a long time for confidence to be rebuilt.

All told, the shine has worn off the Labour-business partnership. The CBI is giving Blair the benefit of the doubt, while warning him not to let Labour's regulatory instincts carry it away. Not that, with the Tories at a low ebb, business has anywhere else to turn.