EEF blog

Today, the Chancellor announced that he would allow businesses to defer (or up to two years) part of the planned 5% increase in business rates.

This is welcome news. Businesses were faced with a perfect storm on business rates: a 5% increase in the rate, the restriction of empty property relief, revaluing properties based on their prices at the peak of the property boom, and the introduction of the 2p supplementary business rate.

Today's announcement only addresses the 5% increase in the business rates they pay to local authorities. The amount of business rates companies pay is determined by the value of the property (called the rateable value) and the 'business rate multiplier', which is linked to RPI inflation in September of each year.

But because rising oil and commodity prices pushed RPI inflation to 5% businesses were faced with 5% increase in their business rates from 1 April 2009 (that's tomorrow!).

EEF have been calling for business rates to be frozen...the commodity boom pushed RPI up last year and the economic bust will drag it down this year (we're forecasting RPI inflation to be -3.4%!). So rather than subject manufacturers to this see-saw in business rates, we thought a simple freeze would provide businesses with the predictibility they needed while not permanently eroding the health of the public finances.

In the end, the Treasury have agreed that a 5% increase in business taxes in a recession is a bad idea and that they needed to smooth out the business rates increase, while maintaining a degree of predictability. So they are allowing businesses the option of defering the majority of the increase in business rates.

Businesses will have to pay 2% increase this year and can choose to pay the other 3% in 2010-11 or 2011-12, by which time, their bottom lines will have hopefully improved. But the Treasury have also kept the link to RPI this year and next, providing a bit of predictability over future changes.

All welcome news, but what about movement on restoring empty property relief? Or on the revaluation?

For the past three years, the government has been working to simplify the morass of government-sponsered business support schemes. The goal was to turn the incomprehensible 3,000 schemes into a manageable 100 that businesses could understand and use.

Today, the government announced the launch of the first 30 business support products. They've been rebranded under the single banner of Support for Business and can be accessed through Business Link.

The new and improved products are grouped under 7 main categories:

• Starting Up
• Finance and Grants
• Employing People
• Grow Your Business
• Exploit Your Ideas
• Environment & Efficiency
• International Trade

Simple enough, but the real question is whether they work.

Not all of the specific government-funded support is provided in each of the regions. Neither is the rebranding a guarantee that Business Link has improved the quality of its service or that real businesses can access the support they need easily and quickly.

If you are an EEF member and have tried successfully or otherwise to access these new products, get in touch. We want to make sure that you are getting the support you need.

Today's final statistics for GDP in the last three months of the year confirm what we already know - the UK is in a serious recession.  

Behind the headline contraction of 1.6% in the economy, equivalent to an annual fall of about 6.5%, was particular weakness in consumer spending and investment. Though exports fell by nearly 4%, net trade actually made a positive contribution with imports down by 6%.  The gloomy readings from a range of business surveys suggest that the economy will have contracted by a similar amount in the first three months of this year.  

The question is where we go from here.

The economy is now receiving massive amounts of stimulus. Very low interest rates, interventions to support bank lending and to expand the money supply, last autumns's fiscal boost and a significantly more competitive exchange rate are all playing their part.

In time, the large fiscal boosts aanounced by the United States, China and other major erconomies will start to benefit UK exporters. We can see the odd positive sign. Some industries are reporting that the destocking phase looks to be over, though customers are not necessarily buying again. Companies in the car industry are also starting to see the benefits from the scrappage schemes introduced in other EU countries.  The early signs from the Bank of England's quantitative easing are also encouraging.

Despite this, the best we can hope for is a slowdown in the pace of decline, with the economy stabilising towards the end of the year. In particular, the downward forces on the consumer are strong - rising unemployment, falling house prices and wealth levels and a growing understanding that they built up too much debt in recent years.   

It is too early to be talking about green shoots but we can at least see that the roots of recovery are developing.

This week's Economic Update:

It's been a busy couple weeks for us, so we thought we'd give you a quick round up of some of the intersting stories that you might have missed:

Stephen Radley's latest column in The Manufacturer looks at a very Taxing Problem facing manufacturers.

In the FT on Tuesday, Brian Groom wrote up our report on taxation and competitiveness.

And in today's Telegraph, Richard Tyler looks at the political implications of our tax report.

We published a new report this week looking at how the tax system prevents manufacturers from investing in for the long term. We've had the camcorder out again and you can watch one of the manufacturers who helped us produce the report, talking about it...

The report - A Manufacturing Future: Competitiveness and taxation in the UK - has a fairly simple message: the UK needs a tax system designed to deliver a diverse economy.

While bankers pocket proifts (and taxpayers' cash) as bonuses, manufacturers are successful because they plough every pence in profit back in to their business, in to productive, long-term investments.

Yet, the UK's tax regime continues to constrain manufacturing investment, compounding the credit crunch and limiting the extent and benefits of balanced economy.

The UK is in a funny position where the immediacy of political and economic pressures is obscuring the need for a new strategy and framework to deliver a better, more competitive and more sustainable economy in the future.

As Damon De Laszlo says in the video, the future of our economy depends, in part, politicians recognising the UK needs long-term strategy on taxation and investment.

An economic storm is brewing and the recession (and the public) are just the innocent bystanders.

The battle over the merits of another significant fiscal stimuls has been engaged. In the corner representing prudence is the Governor of the Bank of England, Mervyn King, and in the opposite corner is prudence's previous champion, the Prime Minister Gordon Brown.

As a small, relatively open economy, the UK is exposed to the sometimes harsh judgements of the markets. And that's what happened today: the health of the public finances has been wieghed, measured and found wanting.

The recession has taken its toll on public finances by draining revenues and ramping up public spending. Government borrowing is needed to finance this deficit. But given the current and expected levels of debt and that the BoE's quantitative easing is (as intended) driving the market for government bonds, the markets raised the alarm about growing government debt levels.

Dan Brown at the The Guardian captures the tension between monetary and fiscal policy:

"Within hours of him telling Brown not to blow the budget, the gilts market has produced a ringing endorsement. An alarming report from the Debt Management Office shows that investors are already shunning government gilt auctions - in effect questioning the creditworthiness of the nation.

There have been failed debt auctions before and the Germans struggled relatively recently, but they are pretty rare. Given that the Bank of England is meant to be supporting the gilts market by pumping in money through quantitative easing, this is doubly alarming. The sharp fall in wider bond prices caused by this auction news is exactly the reverse of what this policy was intended to achieve.

Critics of Mervyn will no doubt point out that his recent caution may have caused the auction to fail, by giving investors the impression that he was going cold on the idea of quantitative easing. I think on this occasion, it is more likely the weakness in the gilts market is a symptom of what he was talking about, not an effect. We really are dangerously close to the edge."

EEF are not in favour of another stimulus...through quantitative easing, the Bank of England has already pumped £13 bn into the economy. That's more than the VAT cut, but without the corresponding increase in business taxes.

After falling by almost 1% in the three months to January, EEF's latest pay figures show that although pay growth in manufacturing continued to slow in the three months to February, the pace of decline eased. 

The three-month average pay settlement slowed to 1.7% from 1.8%. More than half of pay deals were negotiated below 2%, partly reflecting the sharp decline in RPI inflation which is linked to many wage contracts. 

The survey showed a higher proportion of companies froze or deferred wage contracts indicating manufacturers continue to do their utmost to retain skilled workers. We have been stressing for some time that the government must also provide support to help firms hang on to workers, one solution being aid for short-time working.

These calls were echoed by JCB's Chairman who said wage subsidies for workers on short-time working would be "a better way of doing things".

Today's inflation figures show the Retail Price Index (RPI) inflation - a measure widely used in wage negotiations - fell to zero in February. 

Consumer Price Index (CPI) inflation rose to 3.2% in February, up from 3.0% in January.

This prompted the Governor of the Bank of England to write a letter to the Chancellor explaining why CPI is more than 1% above the 2% target.

David Smith provides a good summary of the data...

Despite cash constraints and the ongoing recession, manufacturers invest for the long term. So despite cash constraints and the ongoing recession manufacturers are looking to the future, knowing that the investments they make now will determine their competitiveness in the future.

But the corporate tax system needs a strategic overhaul if investment in manufacturing investment is to drive the upturn and help build a better balanced, high value UK economy.

According to the report ‘A Manufacturing Future – Competitiveness and taxation in the UK’, much of the UK’s business tax system remains rooted in the past and is actively constraining manufacturers’ investments, compounding the credit crunch and limiting the extent and benefits of a balanced economy.

Politicians of all stripes must match their commitment to promoting a more balanced economy in which manufacturing plays a greater role by addressing the current failings in our tax system. We need a system which continually evolves to reflect the realities of rapidly changing technologies and global competition. In particular, the government must ensure that the taxation of investment reflects the true costs of high-value manufacturing investment.

NOTE: To help us set out a long-term tax strategy for manufacturing and a better balanced economy, we set up EEF’s Business Tax Panel, a diverse group of our members. Supported by PricewaterhouseCoopers and working with a range of government officials and independent experts, the group believes the UK needs a more coherent tax strategy, one designed to deliver a diverse economy.

Commenting on the report, Andrew Churchill, managing director of JJ Churchill and a member of EEF’s Business Tax Panel, said:

“Running a sub-contract precision engineering business, surviving the recession will be painful.  The much more substantial challenge will be surviving the upturn.  In a high-labour cost economy, the only reason we remain in business is through process innovation that is inseparably hitched to the rapid evolution in machine tool technology. Quite simply, if we fail to aggressively re-invest in capital equipment we are accepting a rapid erosion of our competitive advantage – in essence we increasingly compete on our cost of labour, a battle we know we can’t win.

“Currently, our tax system fails to recognize the importance of capital investment to manufacturing or the advanced technologies and short lives of modern machinery. In buoyant times, this puts a hidden brake on the abilities of companies to re-invest; in recession it positively discourages the one thing the government must catalyse if, in the upturn, we’re to have a balanced economy.”