EEF blog

The government can promote business growth and investment by improving access to finance

SMEs in particular are still struggling to access the funding they require, so it is encouraging that the Prime Minister noted in his speech on Monday that opening up access to finance and getting banks lending will be crucial to drive growth. Government should promote access to finance through facilitating greater transparency around lending policies; encouraging increased competition in the banking sector; and promoting alternatives to bank lending.

The government could take better advantage of green opportunities if more resources are given to the Green Investment Bank

The scale of investment needed to really capitalise on the opportunities in green technologies will not be met by the current plans for a £1bn Green Investment Bank. The government should be more ambitious: estimates suggest that the development of a low carbon infrastructure and low-carbon technologies will require £5bn of funding over the next five years.

The government will maximise the returns to its investment, if it is clear about its plans, and the kinds of support that will be available.

In many areas of government spending, greater details are required. Particular areas the government should clarify include which types of adult apprenticeship will be funded by the £250mn announced; and how funding to help firms commercialise their innovative ideas will be allocated. 

Martin Wolf believes the government's Spending Review plans are like going climbing without a rope:

If businesses are to invest so strongly, they need to believe that demand will remain robust, come what may. In sum, a credible Plan B is not an optional extra. It is a necessary condition for a successful Plan A

Yet it remains depressing that investment spending was slashed at a time of slack demand, when the government can borrow so easily. That is classic Britis short-termism.

The decision to leave its “Plan B” to the Bank of England is another gamble. When the long-term interest rate on government bonds is down to 3 per cent, the impact of more “quantitative easing” is likely to be minimal.

This government has, in essence, decided to go political rock climbing without ropes.

We agree with his two key points: that business investment has to be part of a credible 'Plan A' on the economy, and that the benefits of additional QE are likely to be minimal.

All this week, we've been setting out our 'Plan A' for the economy - simple, targeted ways the government could help ensure we see a boost to [rivate sector investment in the coming years (see the links below).

But the QE point bears discussion.

Essentially we have two concerns about additional QE. The first £200 billion didn't have a great impact on the wider economy or money growth (in psuedo-eco speak, the transmission mechanism wasn't operating properly), so what makes either the Bank or the government confident that a ride on the QE2 be anymore successful?

And while the benefits of further QE are likely limited, the risks may not be. More QE could help push up asset prices, either here in the UK or abroad via carry trades. And this would just store up problems for the future.

So our view isn't to rule out QE altogether, but to pursue a proper 'Plan A' that will help boost investment and rebalance the economy.

Going for growth in the UK  

Monday: A 'Plan A' for growth 

Tuesday: The UK is OK (for now): Putting growth into context

Wendesday: Growth Plan Part I - A better partner to business

Thursday: Growth Plan Part II - A stable and predictable business environment

Friday: Growth Plan Part III - Investing in the future of growth

The government can spur on regional and sub-regional growth if it sets out clearly what LEPs will do; how they will operate; and how they will be funded

If LEPs are going to drive economic growth then the government will have to:
- get the right balance between central and sub-national government
- ensure LEPs have a clear remit and are focused on the right issues
- achieve a critical mass for LEPs
- secure engagement from business
- deliver value for money

The government can reduce the burden on business by providing greater stability and predictability in the tax system

If the UK is going to have an internationally competitive tax regime, the government must provide a road map for which corporate, environmental and personal tax reforms it will seek over the next few years and explain how these changes will rebalance the economy by supporting investment.

The burden on business can also be reduced through pursuing alternatives to regulation

The government has made a good start by introducing a “one in one out” policy on regulation, but it must recognise that the cost of regulation is also a cumulative effect from the layers of regulations that have built up over time.  For this reason the government should consider seven-yearly sun-setting reviews and consultations with business and use these to discuss alternatives to regulation.

The government can only ensure that businesses will receive the support they need in the coming months if changes to business support are properly communicated and managed

The need to reduce public spending along with the transition from RDAs to LEPs will inevitably lead to changes in business support, but the government should do everything it can to smooth this transition. Businesses will need clarity over which services will continue to receive funding even if the delivery mechanisms, brokerage and costs are still to be determined.

The government can work better with business if it develops a more nuanced understanding of the contributions to growth from different sectors of the economy.

The forthcoming manufacturing framework must demonstrate an understanding of manufacturing’s contribution to the economy and recognise that, given manufacturing’s high capital intensity and global exposure, certain policy levers will have a differential impact on the sector compared with the rest of the economy.

The government can catalyse private sector investment by targeting funding more strategically.

Government investment in port infrastructure, for example, would help attract additional foreign investment in the UK low-carbon economy. Similarly the £1bn commitment for carbon capture and storage should enable the development of low carbon industries in the UK, though experience from Canada suggests that the government needs to move more quickly.

The government can get more from its suppliers by engaging with business at an earlier stage, and becoming a more collaborative partner.

Rather than focus on short-term cost savings, changing the culture of procurement and upgrading the skills, expertise and experience of public sector procurers will help bring long-term value for the economy.

On Monday, we launched our 10-point plan for growth designed to complement the government's commitments on tax and spend.

And in response to the Prime Minister's Speech on growth, Stephen Radley, EEF's Director of Policy, said:

"Industry will have been encouraged to hear the Prime Minister talking about the government's plan for growth and moving beyond the tired old belief that economic success is somehow a choice between laissez faire and interventionism. For years other countries have recognised and supported industries where they have an economic advantage.

"The Prime Minister is therefore right to say that government policy can be used to support growth in areas like advanced manufacturing and offshore wind where the UK is already strong and could be stronger. This isn’t always about money, but more about all parts of government pulling together to back growth sectors."

The plan would ensure manufacturing and the rest of the private sector are ready to take much greater responsibility for creating jobs, generating wealth through new businesses and delivering the infrastructure needed for a modern economy.

All this week we're going to be taking an in-depth look at growth, putting the UK's performance into context so that we can clearly set out what manufacturers and the government can do generate jobs and investment.

Any comments on the posts - or the plan - can be made via our twitter account @EEF_Economists, or via email.

Going for growth in the UK  

Monday: A 'Plan A' for growth 

Tuesday: The UK is OK (for now): Putting growth into context

Wendesday: Growth Plan Part I - A better partner to business

Thursday: Growth Plan Part II - A stable and predictable business environment

Friday: Growth Plan Part III - Investing in the future of growth

Today’s GDP figure, showing quarterly growth of 0.8% may look a little below par compared with second quarter growth of 1.2%, but there are three things to note here.

The first is that 0.8% is a good figure:

The long term average growth rate (between the end of the recession in the 1990s and the start of the recession in the 2000s) was 0.68%. Compared with this, 0.8% is actually slightly higher.

Figure 1: GDP growth compared with long-term (non recession) average

The second point is that growth tends to be a bit bumpy coming out of recession:

In the few years following the recession in the 1980s quarterly growth rates oscillated between -0.7% and 1.5%; similarly in the few years following the 1990s recession growth rates swung between -0.2% and 1.4%.

In addition, the last quarter’s strong growth was in part due to the economy catching up from a low base. This sort of rebound cannot be expected to continue over a sustained period. In fact, if we allow for the impact bad weather in Q1 had on Q2’s growth figures, underlying growth in Q3 was broadly similar to the second quarter.

Finally, the cumulative figure looks good:

Compared with previous recoveries, the economy has gained more ground at this stage than was the case in the 1980s or the 1990s. GDP is now 2.8% higher than in was at the end of the recession. At this stage in the 1980s this figure was 2.0% and in the 1990s this figure was 0.5%.

Figure 2: GDP index (last quarter of recession = 100)

However, forecasts suggest that, after this quarter, the pace of growth will be slower than it was following the 1980s and 1990s recessions. This reflects significant downside risks to the recovery, including the possibility of a global currency war, and domestic consumer caution following public sector cuts.

For this reason, the government must deliver on its growth strategy to ensure that manufacturers and the rest of the private sector are able to create jobs, generate wealth and make the investment needed to rebalance our economy.

A strong rebound in manufacturing is driving the broader economic recovery.

In large part this is a result of the range of strategies that manufacturers have been undertaking before, during and after the financial crisis and global recession.  Increased innovation, capital investment and penetration into export markets have contributed to improved productivity, competitiveness and ultimately ensured a strong growth path out of recession.

But there is considerable uncertainty in the air: the effects of public sector cuts and reform on business and the wider economy are, as yet, unknown.

If it persists, this uncertainty could hamper the ability of manufacturers to invest, grow and support the economic rebalancing that the government wants to achieve. Just as cuts without reform would not address, cuts without growth will not deliver the rebalancing our economy needs.

Never mind a ‘Plan B’, we need a ‘Plan A’ for growth.

Business has already started to drive growth forward by increasing investment, expanding exports and creating new jobs. The government can now help industry to sustain this by setting out a framework that explains clearly how it will work with the private sector to grow our economy.

To do so, the government must ensure that its strategies fit together to create the right environment for private sector growth. This will mean more than just getting out of the way. Rather, a private sector recovery requires the government must become a better partner to business; build business solutions to last; and invest in the future productive capacity of the UK economy. As it begins to cut spending, the government will be looking to the private sector to drive the economy. But if the private sector is going invest and grow then government needs to be a better partner to business.

Even in an era of cutbacks, the government can catalyse private sector investment by strategically targeting scarce funding. Government investments in port infrastructure, for example, will help attract foreign investment in the low-carbon economy in the UK. Similarly the £1 billion commitment for carbon capture and storage technology will enable the development of low carbon industries in the UK. Yet the government needs to commit quickly to next round of CCS funding. A Canadian CCS pilot took 16 months to complete a competition to allocate government funding. In the UK we are three years on from announcing the competition and the government has yet to award the money or to commit to much needed future pilots. Increased collaboration between government and business would also help to create a more stable and predictable business environment.

Another part of this will be ensuring that new frameworks for business are built to last. Constant reorganisations of business support can create uncertainty that reduces businesses’ ability to invest and grow. This is not to say that changes should not be made, but major changes to the support infrastructure must be approached in a consultative manner, and they must not be rushed.

For example, the government should be prepared to take its time over the development of Local Economic Partnerships (LEPs) and accept only those that have a credible plan to address the issues in their economy. Crucially, the LEPs must be given the chance to work. In the interim, it is imperative that Business Support is maintained, particularly as the economic recovery is still fragile. A stable support base for business is the best foundation for growth.

While stability is crucial for businesses, the government will need to go further to ensure the investment that is necessary if the UK is to achieve sustainable, long-term and balanced growth. Deep cuts to capital investment and capital allowances were disappointing, but businesses are aware of the financial strain that the government is under. However, the government must consider the impact any further cuts or changes will have on the incentives it provides to business, or it will risk undermining the potential the economy has to grow.

There is also more that can be done to encourage investment in the productive capacity of the UK. For example, grand challenges and X-Prize style competitions linked to orders can stimulate private sector investment of 10-40 times the prize or contract on offer. This kind of initiative could provide just the spur that companies need to make investments at a time when the economic outlook remains uncertain.

The government has to deal with the aftermath of the recession. This means cutting spending to reduce the fiscal deficit, but it also means supporting growth.

The government needs to put policy in place to restore the confidence of businesses in the face of an as-yet fragile recovery. As the government cuts back, the UK will be increasingly reliant on the private sector for growth.

It is therefore imperative that these cuts are combined with the structural reform and a framework for growth that will allow businesses to drive the recovery.

A strong rebound in manufacturing is driving the broader economic recovery.

In large part this is a result of the range of strategies that manufacturers have been undertaking before, during and after the financial crisis and global recession.  Increased innovation, capital investment and penetration into export markets have contributed to improved productivity, competitiveness and ultimately ensured a strong growth path out of recession.

But there is considerable uncertainty in the air: the effects of public sector cuts and reform on business and the wider economy are, as yet, unknown.

If it persists, this uncertainty could hamper the ability of manufacturers to invest, grow and support the economic rebalancing that the government wants to achieve. Just as cuts without reform would not address, cuts without growth will not deliver the rebalancing our economy needs.

Never mind a ‘Plan B’, we need a ‘Plan A’ for growth.

Business has already started to drive growth forward by increasing investment, expanding exports and creating new jobs. The government can now help industry to sustain this by setting out a framework that explains clearly how it will work with the private sector to grow our economy.

To do so, the government must ensure that its strategies fit together to create the right environment for private sector growth. This will mean more than just getting out of the way. Rather, a private sector recovery requires the government must become a better partner to business; build business solutions to last; and invest in the future productive capacity of the UK economy. As it begins to cut spending, the government will be looking to the private sector to drive the economy. But if the private sector is going invest and grow then government needs to be a better partner to business.

Even in an era of cutbacks, the government can catalyse private sector investment by strategically targeting scarce funding. Government investments in port infrastructure, for example, will help attract foreign investment in the low-carbon economy in the UK. Similarly the £1 billion commitment for carbon capture and storage technology will enable the development of low carbon industries in the UK. Yet the government needs to commit quickly to next round of CCS funding. A Canadian CCS pilot took 16 months to complete a competition to allocate government funding. In the UK we are three years on from announcing the competition and the government has yet to award the money or to commit to much needed future pilots. Increased collaboration between government and business would also help to create a more stable and predictable business environment.

Another part of this will be ensuring that new frameworks for business are built to last. Constant reorganisations of business support can create uncertainty that reduces businesses’ ability to invest and grow. This is not to say that changes should not be made, but major changes to the support infrastructure must be approached in a consultative manner, and they must not be rushed.

For example, the government should be prepared to take its time over the development of Local Economic Partnerships (LEPs) and accept only those that have a credible plan to address the issues in their economy. Crucially, the LEPs must be given the chance to work. In the interim, it is imperative that Business Support is maintained, particularly as the economic recovery is still fragile. A stable support base for business is the best foundation for growth.

While stability is crucial for businesses, the government will need to go further to ensure the investment that is necessary if the UK is to achieve sustainable, long-term and balanced growth. Deep cuts to capital investment and capital allowances were disappointing, but businesses are aware of the financial strain that the government is under. However, the government must consider the impact any further cuts or changes will have on the incentives it provides to business, or it will risk undermining the potential the economy has to grow.

There is also more that can be done to encourage investment in the productive capacity of the UK. For example, grand challenges and X-Prize style competitions linked to orders can stimulate private sector investment of 10-40 times the prize or contract on offer. This kind of initiative could provide just the spur that companies need to make investments at a time when the economic outlook remains uncertain.

The government has to deal with the aftermath of the recession. This means cutting spending to reduce the fiscal deficit, but it also means supporting growth.

The government needs to put policy in place to restore the confidence of businesses in the face of an as-yet fragile recovery. As the government cuts back, the UK will be increasingly reliant on the private sector for growth.

It is therefore imperative that these cuts are combined with the structural reform and a framework for growth that will allow businesses to drive the recovery.