EEF blog

Ahead of tomorrow’s GDP release for q3 it is sobering to realise that October’s most optimistic GDP forecasts for 2011 are now at the same level as the most pessimistic forecasts at the start of the year.

How our expectations have fallen
Independent forecasts for GDP growth in 2011 (year on year % change) 
 
Source: HMT 2011

This fall in forecasts has been predominantly driven by a fall in expectations for consumer spending. At the start of 2011, the median forecaster supposed that consumption would grow by 1.2% this year. The median forecaster now expects that consumption will have contracted 0.8 by the end of 2011.

Relatively weak consumption looked likely at the start of the year, due to inflation-squeezed incomes and a sub-par labour market, but the news regarding consumers’ confidence and spending has progressively weakened all year. Last Friday’s publication of GfK NOP’s consumer confidence index shows that peoples’ outlook remains decidedly gloomy. With more and more households thinking that now is a good time to save – and therefore not to spend – it is clear why the forecasts show consumption dragging on growth this year.

Consumption, investment and exports all expected to be weaker
Median forecasts for components of growth in 2011 (year on year % change) 
 
Source: HMT, 2011

But it’s not just consumption. The median forecast for investment growth in 2011 has also moved into the red. This reflects the fall in business confidence resulting from events such as the political paralysis in the Eurozone and US that was evident in the PMI surveys over the summer. This is bad news if we want a better balanced economy.

Although tomorrow’s GDP release will provide some insight into just how reliable these forecasts are, what is clear is that the external environment has become much more challenging and the outlook for growth has become incredibly uncertain. The significant downside risks to growth are likely to weigh on companies’ investment decisions in the next year or so.

This has implications for the UK economy’s growth potential and, as such, for the government’s fiscal mandate. Last week we outlined our suggestions to support growth, particularly around tax and finance which should support investment.

This week we have been discussing our priority areas for reform ahead of the Chancellor’s autumn statement. In this, the fourth and final post, I will lay out some of the key changes government should make to reduce the regulatory burden on business.

Why focus on regulation?

While not all regulation is problematic, there is no question that regulation is costly to business. And in the last decade the costs have risen significantly. Between 2002 and 2010 the net cost to UK business of the flow of regulation more than doubled, from £5bn to £11.5bn.

Not only is regulation costly, but a flow of new regulation adds to uncertainty in the business environment.

What has been done so far?

We recognise that the government has taken some positive steps to reduce the regulatory burden such as its one-in-one-out policy; the Red Tape Challenge; and the Employment law review.

We support these initiatives – here at EEF we have been working with the government to ensure manufacturers’ views are fed through to the Red Tape Challenge – but given the government has stated its ambition to make the UK the best place in Europe to do business there are other areas of regulation, both at home and in Europe, that the government should act upon.

In the UK government should:

• Deliver on its proposal to increase the qualifying period for Unfair Dismissal from one to two years.
• Scrap plans to introduce a fine on employers who lose Employment Tribunals
• Make good on its proposals to reform Employment Tribunals to make greater use of pre-conciliation measures that will reduce the number of cases getting to Employment Tribunals
• Drop proposals to introduce Equal Pay Audits for companies losing Employment Tribunals on Equal Pay grounds.
• Ensure that any new measures on the right to request flexible working and parental leave make it simple for employers to turn down requests on economic grounds.
• Move forward with its proposals to remove Equality Act provisions imposing liability on employers for third party harassment which they do not take reasonable steps to prevent.

However, as somewhere between half and two-thirds of new regulation comes from Europe, it is crucial that the government acts to stem the flow. In particular:

• Maintaining Britain’s opt-out from the Working Time Directive and resisting demands from unions in Europe for changes to the Directive
• Resisting the additional costs and regulation associated with the Pregnant Workers Directive from Europe, which would add £2.5bn of extra costs to business

In addition, the government should push for reform in Europe, particularly with regard to the quality of impact assessments for regulation. We recommend that the government work with its European partners to push for the establishment of a body similar to the Regulatory Policy Committee that would provide a robust, public and independent challenge to impact assessments.

If there’s one thing that the forecasters got right, it’s that this recovery was never going to be driven by consumption.

Last week’s retail sales figures provide an example. Although stronger than expected in September, the 3m/3m figure showed total sales fell by 0.2% and core sales fell by 0.1%.

There is an upside to this, as the Governor of the Bank of England pointed out in answer to questions from the Treasury Select Committee on Tuesday: the UK savings ratio has now risen to 7.4%. This means indebtedness is falling. But, this deleveraging on the part of consumers goes well beyond what many forecasters thought would be the case and this has implications for growth and subsequently the government’s ability to meet its fiscal targets.

Given the downbeat economic news from the Eurozone in the last month, today’s return of the consumer confidence figures to recessionary levels is not surprising, but it suggests that sluggish household spending, and the subsequent downward pressure on growth, is set to continue.

GfK NOP Consumer Confidence
Consumer Confidence Index falls to -32

Source: GfK NOP, 2011

On Tuesday I wrote about tax and yesterday Felicity set out our views on skills policy. These are two of four priority areas for reform we identified in our submission to the government in advance of its Autumn Statement.

The third priority area for reform, as nominated by our members, is access to finance. We survey our members every quarter on credit conditions and since the financial crisis both the availability and cost of credit have consistently been issues, particularly for smaller companies.

There’s been much ink spilt on this particular subject given the banks had their paw prints all over the financial crisis – and now it seems, to some, that the same banks are holding businesses back from getting the finance they need to grow.

What we’ve consistently tried to do in commenting on access to finance is avoid being sucked into the debate about who’s to blame or whether the problem is supply or demand (we see it as both).

To be frank this debate continues to generate a lot of heat but not much light. Instead our interactions with the government and the banks themselves have focused on solutions not recrimination.

For us it comes down promoting greater depth and breadth of competition in the financial sector – to generate a better service for the economy and businesses looking to grow.

The banks receive a lot of the coverage and we have our views on that segment of the sector. We endorse Sir John Vickers’ recent report on reforming the banking sector and in particular want to see the government come out and strongly support the recommendations for enhanced competition. If you haven’t read Sir John’s report, this specifically means:

Enhancing the Lloyds divestiture to include a higher proportion of current accounts, higher quality of branches, with a lower reliance on external funding – therefore placing a new challenger bank in a good position to take the incumbents;

Making it easier to switch accounts between banks by 2013.

But progress on access to finance means going beyond just the banks. For many businesses prior to the financial crisis cheap bank debt became the answer to all their external finance needs.
This reliance was out of synch with the risk some businesses posed and had a detrimental impact on other segments of the financial sector as they were crowded out by the banks.

We now need to see a strong re-emergence of funding sources outside of banks. These need to be on both the debt and equity side.

We have been encouraged by action taken by the banks in setting up the Business Growth Fund, a new £2.5 billion equity fund for growing businesses looking for capital of £2-10 million.

And it was positive to see the government extend the generosity of the Enterprise Investment Scheme (EIS), a tax incentive for individuals looking to make equity investments.

But we’d like to see this action extended to encouraging further provision of non-bank debt – especially important given SMEs well-known aversion to equity finance.

That’s why our submission includes two specific calls:

Encouraging the banks to extend their Business Growth Fund to cover debt investments;

Extending the EIS to cover private debt placements, as the government is proposing to do with its new scheme for encouraging Business Angel investments.

Ahead of the Chancellor’s Autumn Statement we are blogging about EEF’s recommendations for boosting growth.

As the global economic outlook remains uncertain, it is crucial that the government dismantles the biggest barriers to growth. Yesterday Andrew discussed critical changes to the tax framework, and today I will be focusing on what the government can do to ensure companies have access to the skilled employees they need to grow. Look out later in the week for blogs on access to finance and regulation.

Why do we need to focus on skills?

EEF’s recent Flexible Workplaces survey showed that nearly half of the companies were interested in recruiting an apprentice over the next year and almost 30% had considered taking on new engineering graduates. However, manufacturers continue to report difficulties in filling both apprentice and graduate vacancies with adequate foundations in maths and science.

In fact, in EEF’s Shape of British Industry survey we found that a lack of skills is one of the most significant barriers to growth that manufacturers face.

Recent evidence, such as the UK’s poor productivity performance, suggests that the recession has had a negative impact on the UK’s skills base. In the short-term action must be taken to remove barriers companies face in taking on new apprentices, and over the medium-term there is a need to ensure a steady stream of STEM-qualified school and university graduates.

What are we recommending?

Firstly government should clarify the legal status of apprenticeships.

The government’s continued commitment to growing the Apprenticeship programme has been welcome. A positive direction of travel has been set and we urge government to continue along this path.

However, barriers to recruiting apprentices remain. In particular, there are concerns around the on going lack of clarity about the ‘prescribed form’ a written apprenticeship agreement must take from an employment law perspective.
Steps must be taken to resolve this lack of clarity as soon as possible, so as not to run the risk of this issue inhibiting employers from taking on apprentices.
 
Secondly, STEM careers advice should be part of subject curricula and included in continuing professional development training for science teachers

The Department for Business’ ambition to grow the number of apprentices is positive, but it will be undermined if action is not taken to repair the pipeline of young people studying relevant subjects at ages 14-19 years.

There are a number of helpful initiatives in train, such as additional funding to recruit STEM teachers and funding to increase the University Technical College network, but  there are long-standing issues with the careers advice that is made available in schools. 

The current Education and Skills Growth Review project must start to connect the 14-19 years agenda in schools with the goal of increasing the number of students with the qualifications for a career in industry. This could be done by:

• Making STEM careers advice part of both CPD for science teachers and subject curricula.
• Providing a minimum standard of careers advice on the entire range of employment and learning options available. Including ensuring vocational education and progression routes are given equal billing in careers guidance. 

The government’s Plan for Growth in March set out an ambition of making the UK the most competitive tax regime in the G20.This is a really positive ambition. But the ambition jars a little with the reality of some of the policy changes and some of the rhetoric.

The government used a cut in capital allowances to help pay for its headline corporate tax cut. And in the measures included under its Plan for Growth ambition, the ‘lowest corporate tax rate in the G7’ appears as a measure.

It all seemed to suggest the focus is very much on corporate tax alone.

For manufacturers, indeed for businesses in general, tax is tax no matter what its label might be. Mobile investors will take into account the complete picture including incentives for R&D, capital allowance regimes, and environmental taxes – as well as main rate corporate taxes.

However, recently there does seem to have been a greater acknowledgement by the government of the breadth its ambition for the most competitive tax regime must have to be credible.

For example in recent consultations on modifying the R&D tax credit, HM Treasury explicitly mentions its ambition for creating the most competitive tax regime.

We now want to see the ambition broadened out further to include the full picture on tax faced by businesses. An important part of this would be creating a measure to demonstrate how the overall burden of taxes faced by businesses is changing – and how that compares with our competitors.

This measure is necessary to not only show progress year-on-year as the government rolls forward its tax reforms but also to help define the success we are aiming for.

By creating this framework we then have something we can hang policy proposals off. And this is what leads me to EEF’s recommendations in our submission to the government in advance of the Autumn Statement.

We are looking for reforms that cover a wide span of the tax landscape manufacturers face:

1. We want to see the UK create the most competitive tax regime for innovation

Reforming the R&D tax credit by shifting it ‘above the line’ in corporate accounts thus lowering the pre-tax cost of R&D in the UK and increasing the incentive to invest in innovation

 2. A shift in our capital allowances regime to accounts depreciation

Matching tax treatment of capital depreciation to accounts depreciation will free up cash flow and help drive faster reinvestment

3. Rationalising the carbon tax landscape

There are too many different carbon taxes and we are pushing too far ahead of our competitors, particularly in energy-intensive sectors. We need to recalibrate how far the UK is pushing on carbon reduction and introduce measures for the industries most severely impacted by policies that reduce their competitiveness

I mentioned on Friday that EEF has been calling for a programme of growth-enhancing policy reforms since Budget 2010.

The government’s response, at least for now, would be that such a programme already exists; it’s called the Growth Review.

The Growth Review is in reality a series of smaller reviews of policy areas or segments of the economy where the government sets out to find reforms to boost growth.

After a promising start, the Growth Review is in our view starting to peter out and could do with refocusing.

At the outset there was a welcome determination from Ministers and departments to work across Whitehall identifying the biggest barriers to growth in the review area in question.

So for example, the Advanced Manufacturing strand of the Growth Review, despite being led by the Business Department, was able to look at issues of taxation, usually the exclusive preserve of HM Treasury.

This may sound modest but it was refreshing compared with too often in the past when Whitehall departments have retrenched into their respective policy silos.

But unfortunately as Budget 2011 came and went we seem to have lost focus.

We are not sticking with the most important areas for growth and relentlessly pushing for progress. For example access to finance was one of the first strands of the Growth Review but now seems to have been put to the side after only minor reforms.

We now seem to be in a world where ever more new strands are added to the Growth Review. Past strands are accounted for in terms of numbers of actions (usually 100+) rather than any discussion of the outcomes that will be changed as a result.

So in our submission to the government ahead of the Autumn Statement, we set out some key suggested changes for making a refocused Growth Review more effective:

1. Focus on the areas that matter most for growth

Very little fiscal headroom and limited reform capacity means focusing resources on changes that will make the biggest difference for growth

Progress trumps proliferation in terms of number of reforms;

EEF prioritises improving access to finance and the supply of skills and decreasing the burden of taxation and regulation.

2. Take a Parliament-long focus with an ambition of transformative change

A consistent focus on the areas that matter most can add up to meaningful change over the course of the Parliament.

Reforms should be informed by a vision of transformative change in the business environment.

3. Set meaningful benchmarks both to measure progress and define success

Government’s Plan for Growth set some measures but needs realism e.g. great to have most competitive tax regime in G20 as an ambition – but we need to measure success by more than the corporate tax rate.

Benchmarks are important to demonstrate progress year-on-year as well as describing successful outcome we’re ultimately aiming for.

On Monday EEF released its submission to the government in advance of November’s Autumn Statement from the Chancellor. Below is a short summary of what we said, which we’ll go into more detail on over the next week.

Manufacturing has performed strongly since the recession

Latest revisions to ONS data suggest that manufacturing has grown by 7.5% since 2009q4. This compares with an expansion of only 2.8% in the wider economy since 2009q3.

The sector is at the heart of the rebalanced economy we need

The economy needs more investment, innovation, and exporting. Manufacturing accounts for over half of UK total exports. In 2008 manufacturing accounted for 71% of UK business R&D investment.

We support the government getting a grip on the public finances…

We agree that a credible fiscal plan was the number one priority following the election. Maintaining fiscal credibility continues to be an important part of providing economic stability to the UK and helping keep interest rates lower for longer.

…even as the external economic environment has deteriorated

Necessary fiscal consolidation has meant manufacturers have been looking to external demand to support their growth. But macroeconomic turbulence has increased over 2011 in key external markets leading to weaker growth prospects from these markets, notably Europe but also the U.S.

Manufacturers are still busy but bad press from key markets is denting recruitment and investment

EEF’s own survey data and discussions with companies suggest output and orders are holding up. But the bad news and mounting uncertainty from key markets is making companies nervous – and future-looking business decisions are now being impacted with firms pulling back on investment and recruitment.

Systemic policy reform no longer seems enough given the uncertainty

Since Budget 2010 we’ve been urging the government to take a more urgent and focused approach on policy reform to support growth. We continue to call for a focus on tackling the most important barriers to growth in tax, regulation, skills, and access to finance. However this is no longer enough to support growth in the short-term.

Government should support investment now via enhanced capital allowances

The weak outlook for demand means we now call for the government to take short term action to boost investment. We propose a temporary two-year regime of 100% capital allowances, providing a major cashflow incentive for firms to action investment and offsetting the weak demand environment.

These recommendations reflect our urgency on boosting growth…

Our recommendations are consistent with our views that a more competitive business environment is a priority for growth in the medium term but that short term concerns on external demand require more urgent action.

…while retaining a commitment to fiscal credibility.

Fiscal credibility will only be maintained if the private sector can deliver sustainable growth. Our proposals focus on improving growth. Further, our major temporary recommendation on capital allowances is a measure, which – though it has a short-term fiscal cost – will over time pay for itself to the Exchequer.