EEF blog

Alongside the Budget last week, the government published the Plan for Growth.

The Plan prioritises four key ambitions for the UK:  

• To create the most competitive tax system in the G20;
• To make the UK one of the best places to start, finance, and grow a business;
• Encourage investments and exports;
• Create a more educated, flexible workforce.

Furthermore, each of these ambitions is backed by ‘measurable benchmarks’. For example under tax a benchmark is to have the lowest corporate tax rate in the G7.

The coalition makes clear that the focus on growth begun with the Growth Review will continue over the whole parliament.

Now compare this with the recommendation in our Budget Submission where we called for a Growth Mandate, featuring:

• Prioritisation of four key areas;
• Measurable indicators of success;
• A parliament-long focus on growth.

That’s a pretty good correlation. But before we award the Chancellor and Business Secretary an A+ there are a couple of reasons to pause for thought.

We called for a Growth Mandate and we chose that name deliberately. We wanted the Growth Mandate to match the Fiscal Mandate with its clarity, predominance in the setting of the budget, and currency in the media.

It might seem a subtle point but by publishing the Plan for Growth as a separate 126 page document, co-authored by HMT and BIS, the government has risked the Plan succumbing to the fate of so many other such documents in the past.

In the past, such documents seemed to be de rigueur for a budget. Endless publishing of strategies seemed to overtake and blur each other, making the direction of travel less clear, not more.

Now, that’s not happened yet. But the challenge for the government is to give the Plan for Growth the necessary backing to give it ongoing relevance.

Secondly, we need to see real prioritisation. We suggested focusing on tax, finance, skills, and regulation – the top four concerns our members have with the UK business environment.

The Plan for Growth is a little patchy here. The tax and skills ambitions are good. But making the UK a great place to start, finance, and grow a business is a bit loose. It could potentially cover all manner of government actions to support growth.

And while there are multiple worthy areas where the government could make progress, the point of prioritising, particularly in an era of such limited resources, is to focus on the most important issues.

The final area to watch is the measurable benchmarks. It is good that the government has shown willingness to be held to account.

However the choice of some indicators is not exactly stretching (home to most top universities outside U.S. - already the case) and some are not within the government's ability to directly influence (increase in exports to key target markets). The number of them looks on the high side too – giving it a ‘scorecard’ feel rather than creating an expectation for concrete progress on each indicator.

Despite these cautions the Plan for Growth has the potential to be very positive. The real test will not be in its writing but in its delivery. We’ll be doing our part by watching carefully on how the government follows through.

Earlier today BIS announced the first four of the government’s new enterprise zones. These will be the Boots campus in Nottingham, Liverpool Waters, Manchester Airport, and the Royal Docks, in London.

These areas are well connected to growing cities which addresses one of the problems with the 1980s Enterprise Zones, where for some a lack of infrastructure held back growth.

Experience from the 1980s showed that lower tax levels and a simplified planning regime did boost employment and inward investment within some Enterprise Zones. The new zones should expect a similar uplift. However experience also suggests that the benefits from Enterprise Zone designation do not always last for very long, and there are high deadweight costs associated with activity simply moving from one area into an Enterprise Zone.

Not only are there potential deadweight costs associated with Enterprise Zones, but having different regimes in different areas could add to the very distortions in the business environment that the government has said it seeks to address.

And Enterprise Zones are only the beginning. The structure of local governance is in the process of substantial change. LEPs are only in their formative stages and further complexity could be added to the business environment by upcoming sub-national reviews and policy changes. Businesses will be waiting to see what the whole picture looks like.

The government has said that Enterprise Zones will be “unashamedly pro-growth” but also “unashamedly localist”. How these two – sometimes contradictory – ideals will be reconciled it remains to be seen.

In our experience Budget statements always bring the good, the bad and the ugly.  In our blog last week we outlined the six areas where we really needed to see some tangible progress from the coalition if our economy is to generate better balanced, sustainable growth. 

This Budget had to be about more than government getting out of the way.  Government needed to hard look at the UK's business environment and, importantly, how it compares with other economies also seeking to boost growth throught investment and exporting.  And then take steps to ensure that companies with ambitions to invest and innovate start to see that it makes commercial sense to do that here in the UK.

What we got were some measureable steps in that direction. 

Specifically we got a signal that the government gets how manufacturers invest with an extension in the Short-Life asset regime - something that EEF has been campaigning hard on.  Extensions of the R&D tax credit for SMEs this year and next are welcome but the potential for further change in the coming consultation in May will be eagerly watched. We'll be looking for the definition to be broadened to include more development activity and for the rises to apply to all firms.  

A bigger cut in the headline rate of corporation tax isn't to be knocked, nor is the commitment to more apprenticeship funding.  The were some strong words on deregulation, particularly the Prime Minister's intention to take the battle to Brussels - we'll have to wait to see if that can deliver.   

Further, the government's Plan for Growth provides a parliament-long commitment to improving the UK's competitiveness through the tax system, the environment faced by start-up businesses and those looking to grow, boosting exports and investment, and lifting the education and flexibility of the workforce.

However, the bad and the ugly came on the environmental tax measures.  We saw further evidence of the coalition’s continued willingness to forge a path ahead of major competitors in its aggressive response to climate change. The introduction of the carbon price floor from 2013, rising to £30/t in 2020 is well above forecasts of where the price of carbon will go through the EU-ETS. EEF continues to caution against advancing climate change policy at the expense of UK industry’s competitiveness.

But the question we said we would pose when the Chancellor sat down was 'is the UK now a better place for manufacturers to invest and grow their businesses?' 

The answer is a modest yes with further positive signs on the horizon. But the Budget cannot be an excuse for any let-up from the coalition in dismantling the barriers to growth. We will hold the government to account on its Plan for Growth and expect progress to be consistent and considerable in future years.

Figures for the three months to December show that employment in manufacturing rose by 0.5%. This was the first rise in employment in the sector since 1998 and follows on from record employment balances on EEF’s Business Trends survey. In q1’s survey a balance of 28% of manufacturers said they had taken on new workers in the last three months and there is some reason to hope that this will continue, with 27% of manufacturers intending to take on new workers in the next three months.

But this one quarter's growth in employment cannot be taken for granted. While the strength in manufacturing activity in 2010 meant firms needed to take on new workers, anecdotal evidence suggests that much of this employment was on a temporary or agency basis. Firms will be hoping to convert these workers to permanent staff, but will only be able to do so if the recovery translates into sustained growth. Additionally, skills shortages are already holding firms back meaning vacancies are up by 33% since last year.

Last month, the government announced ‘Project Merlin’ its accord with the banks. The most important idea was to get more credit flowing to businesses that needed it. As we said at the time, while we support the intent, we are less than enchanted with what Merlin agreed.

Bank of England data for December 2010 showed that the net change in loans to businesses was negative again. This means that credit in net terms fell back in 10 out of 12 months last year. Interestingly Merlin avoided a net lending target and instead focused on gross lending, perfectly consistent as Vince Cable said in March last year with credit being withdrawn from SMEs who need it.

Today, we have further evidence suggesting access to finance remains a serious issue. Our survey, amongst others covered by the FT, the Guardian, and the Independent, shows that while there has been a modest improvement in the availability of finance this has been outweighed by rising costs. Problems remain most acute for small firms.

The slight improvement in the proportion of companies reporting an increase in the cost of credit in 2010q4 has reversed over the past two months. The balance of companies reporting an increase in the overall cost of credit jumped to 32% from 19%.

In good news, our survey shows that over a quarter of manufacturers expects their demand for external finance to increase in the next twelve months. But this is another source of pressure for 2012 that is already shaping as a crunch year because of the banks’ own refinancing needs. Without an improvement in costs and fees on lending, access to finance threatens to be a drag on investment and growth.

Our survey also shows that conditions are diverging for companies with smaller companies faring noticeably worse than larger companies. Fees on existing borrowing over the last two months illustrates this well:

The proportion of small companies seeing an increase in fees on existing borrowing increased to 32% up from 17% in the previous quarter with none reporting a decrease. By constrast only 6% of large companies reported a rise in the past two months and a similar proportion actually saw a decrease.

There isn’t a big bang solution that we see being able to fix companies’ credit difficulties overnight. However, our survey offers another opportunity to highlight meaningful actions that together and over time will make a difference.

We think it’s important that with its Growth Review, the Budget, and, later in the year, the Independent Commission on Banking’s recommendations, the government doesn’t take its eye off the ball on access to finance. In particular it should consider:

1. Increasing competition in the SME banking sector through ensuring action on any recommendations from the Independent Commission on Banking not only strengthen the banking system but improve possibilities for further entrants into the market;

2. Improving the customer services and perception of banks by enhancing banks’ own customer services commitments through establishing a robust, transparent, and independent system for monitoring their adherence to good lending principles;

3. Encourage development of alternative sources of finance especially non-bank debt and venture capital;

4. Improve knowledge of how to assess risks and returns in real businesses in the financial sector – for example by improving understanding of supply chains and export markets