EEF blog

George Osborne has an article in the FT this morning, co-written with Google’s Eric Schmidt, where he lays out what he says is his “explicit industrial strategy: to turn Britain into Europe’s technology centre”.

The article recognises the importance of technology for the UK economy, stating that “the role that technology plays in driving job creation and economic growth becomes more important each day”. I couldn’t agree more.

But, the article takes a relatively narrow view of what industrial strategy to support technology should be. The article focuses on four things:

• improving the internet infrastructure
• overhauling how computing is taught in schools
• ensuring access to finance for early stage technologies
• support start-up businesses

If we want to see a growing economy these measures are entirely necessary: but is it consistent with what the rest of the government is saying?

How does Osborne’s strategy fit with what the rest of the government is saying?

Industrial strategy is, it seems, back in vogue. But, as yet, the definition remains unclear. What can businesses take away from what the government is saying about its growth priorities, when different departments are saying different things?

While Osborne is talking about the UK becoming Europe’s leading technology centre…

Cable has talked about the importance of intelligent government procurement; supporting innovation and technology; and focusing on strategically important sectors.

Hestletine has talked about every industry being sponsored by a government department to ensure the public sector works more effectively with the private sector to encourage enterprise, stimulate investment and reward success.

It is not so much a question of whether any of these measures individually might be good for the economy, but how they fit together to achieve the kind of sustainable economic growth want to see.

Without a coherent strategy for growth, which all departments of government have bought in to – be it an ‘industrial strategy’ or not – prioritising the right policy measures remain a difficult thing to do. And businesses will be no closer to understanding what the aims of government actually are.

This morning’s national accounts release shows a small downward revision to GDP data for the last quarter of 2011 and an improved current account deficit.

The key statistics

• GDP growth in Q4 2011 has been revised down to -0.3% from the previous estimate of -0.2% bringing annual GDP growth to 0.7% for 2011. 
• Manufacturing output fell in Q4 by 0.7%, a lower reduction than previously reported. 
• The UK current account deficit reduced to £8.5b in 2011q4 from £10.5 billion in the previous quarter on the back of strong exports during the end of 2011.  Export of goods rose 4% in the last quarter reducing the trade deficit to £4 billion. 

So what does this mean for the economy in the year ahead?

Last week the OBR substantially lowered their expectations around the role business investment will play in the recovery.  Business investment has struggled to recover over the past few years and the hurdles of finance and uncertainty remain in 2012. Significantly more growth is now expected to come from the Household sector.  In the Q4 2011 Household consumption expenditure saw a small positive contribution to growth.

Low confidence around the world continues to pose a major risk and challenge to the business environment.  The uncertainty from the Eurozone will likely continue to damage demand but there are some positive signs of export growth to emerging economies.  The big question is – to what extent will low worldwide confidence impact on demand over the coming year? 

On a positive note, the trade figures provide some confidence that firms are responding well to the weakness from the Eurozone crisis.  The strengthening Purchasing Managers Index in the first few months of 2012 also shows businesses are more positive about prospects and activity.

While these figures are not likely to materially impact the OBRs projections of future growth, they reconfirm the challenges that the UK was facing during the end of last year.  The positive trade figures for 2011 offer better prospects for economic rebalancing in the year ahead.

Last night Adam Posen gave a speech to the NIESR about the differences between the recoveries in the UK and the US entitled “Why is their recovery better than ours?”

Posen argues that stronger household spending and lower inflation in the US have played a part in the difference between the two recoveries, but it is his point corporate investment has rebounded much more in the US than the UK that I want to look at here. It is certainly a pertinent issue, as figures released by the ONS this morning highlight: business investment in the UK contracted 3.3% in the last quarter of 2011. The OBR’s forecasts for the year ahead suggest weak growth is likely to continue.

So, why is corporate investment stronger in the US? Posen argues this is because:

There are more non-bank options for providing finance in the US

He says:

“This is due to the lack of competition in the UK banking system compared to the US, and the smaller proportion of non-financial businesses which have access to loans, bonds, and/or securitization thereof in the UK than in the US.

There is less spillover from the euro area risks in the US than the UK

He says:

“The ongoing financial and macroeconomic risks to the euro area raise both the cost of credit and the need to provision for UK banks far above that for most US banks, which further inhibits reasonable allocation of risk capital. This is due to the inherent exposure of the UK economy to the euro area economies as well as the accumulated foreign lending to the euro area by UK banks during the boom years.”

These are both good points; though I would also add that the more favourable capital allowances in the US are likely to have played a part in stronger investment figures as well (this blog from the WSJ provides a nice illustration).

EEF's Chief Economist Lee Hopley blogs on the Chancellor's Budget Speech. A longer version of this blog is available on the LSE website

The Chancellor’s speech got off to a promising start  with a commitment to build a new economic model by backing businesses.

While delivering a pro-growth Budget was going to be a difficult trick to pull off when there isn’t any spare cash, the rebalancing of the economy still looks a long way off.

As was widely-trailed the Budget delivered internationally competitive corporate tax rate and the Chancellor reiterated the commitment to move the R&D tax credit above the line.

That’s all good news for some companies, but further down the supply chain the signal to getting hiring and expanding was considerably less clear.

Manufacturers’ strong investment intentions have yet to translate into increased capital expenditure. It is unclear whether this Budget will do anything to get companies to make that commitment, in the UK, and now.

The Office for Budget Responsibility would seem to agree. They have downgraded their forecasts for business investment growth in 2012 from 7.7% to 0.7% between November and this budget.

Although this will be offset by an increase in household spending – meaning the UK avoids a technical recession beyond that it seems that the Chancellor’s new economic model may be built on unstable foundations. Productive capacity will continue to be eroded if companies postpone investments. This bodes ill for our ability to compete in growing world markets, or deliver the Chancellor’s ambition of £1 trillion of export sales by 2020. 

Manufacturers wanted a clear sense of what the government’s growth priorities are, and measures to make them a reality. The Chancellor kicked off with some good ideas, but rebalancing the economy looks as challenging now as it did this morning.   

A Minimal Contribution to growth from Business Investment in 2012 and 2013

OBR economic forecasts, the key points:

The OBR’s overall assessment of the outlook and risks for the UK economy is broadly unchanged from November.

GDP growth fell marginally in the final quarter of 2011. But the recent signs suggest momentum has returned to the economy and we should avoid technical recession. Upward revision of 0.1 percentage points relative to November forecast, reflects this

Euro area problems remain a risk: their central forecast assumes that the euro area finds a sustainable solution to its current problems.

GDP forecast to grow by around 0.8% this year, the same rate as in 2011. With beneficial effects of falling inflation to be offset by uncertainty over the euro area and tighter credit conditions

Business investment forecasts lower because the OBR thinks that balance sheets may not be as strong as official statistics suggest. They expect a boost to the level of business investment of 1 per cent from the corporation tax rate cut announced in the Budget.

Smaller drag on GDP growth from real government consumption

Household consumption will stabilise in 2014 when real income growth returns

Labour market forecast similar to November’s: ILO unemployment rate to rise from its current level of 8.4% to 8.7% over the coming year, as euro area concerns and tighter credit cause continued cyclical weakness.

OBR fiscal forecasts, the key points:

Public sector net borrowing (PSNB) is forecast to total £126 billion this year, £1.1 billion less than forecast in November. PSNB has now fallen by 2.8% of GDP since its post-war peak in 2009-10.

OBR central forecast shows borrowing falling at roughly the same rate on average over the next five years, reaching £21 billion or 1.1% of GDP in 2016-17.

Public sector net debt (PSND) is expected to rise from 67.3 per cent of GDP this year to a peak of 76.3 per cent in 2014-15, falling thereafter. The expected peak is about 1.7% of GDP lower than the OBR forecast in November, largely reflecting the Royal Mail transfer (but the long-term impact of this is likely to be negative)

The impact of the Budget measures on borrowing is broadly neutral across the forecast period, with net ‘giveaways’ and ‘takeaways’ no larger than £2 billion in any year.

Today, less than four months since the announcement of his ‘credit easing’ programme at the Autumn Statement, the Chancellor has launched the National Loan Guarantee Scheme.

The NLGS aims to take one percentage point off the interest rate that SMEs pay on loans from banks. This is made possible by allowing the banks to borrow a chunk of money (£20 billion) from wholesale markets at a lower price, courtesy of a government guarantee, and then passing this lower cost on to SMEs.

Launching the scheme has involved tricky negotiations with the banks and the European Commission – the government deserves credit for getting the scheme off the ground fairly quickly.

Cutting the cost of credit is vital at a time when the economy is crying out for companies to invest and a very uncertain demand environment continues to discourage borrowing to support investment by SMEs.

Tomorrow we’ll hear the latest OBR forecasts for the economy and it’s likely that as at the time of the Autumn Statement growth will be heavily dependent on business investment.

We know that SMEs in particular are facing the most difficult credit conditions. EEF’s Credit Conditions Survey has consistently shown a balance of companies reporting an increase in the cost of credit since the financial crisis – a balance that has been consistently worse for SMEs. In our 2012q1 survey a net balance of 10.2% of SMEs reported the overall cost of finance had increased, rising to 18% if we exclude those who didn’t need to borrow.

And the bank-funded SME Finance Monitor has also shown that a considerable minority of SMEs (12%) would like to have applied for finance but did not in 2011 – with discouragement being a key factor holding them back.

Addressing the cost of loans is an important means of addressing this discouragement. But the challenge now is to avoid the mistakes of the past when good ideas in Whitehall were undermined by poor understanding on the ground.

The participating banks are in the main large organisations with networks of many branches across the UK. For the NLGS to be a success awareness of the scheme needs to be high in the branch network with bank staff not just able to deal with customer queries but actively promoting the scheme.

The government cannot pop up in every bank branch to encourage uptake of the scheme. But it needs to be doing all it can to promote the scheme by undertaking a major communications exercise, working with the banks.

This might grate with the government’s crack down on advertising and marketing spend but it cuts to the heart of whether the government sees addressing access to finance as a key ingredient in generating the investment and growth the UK needs.

There are also opportunities for promoting the scheme that would not cost the government much money. For example, it already has a series of road shows planned for the latest round of the Regional Growth Fund – it would not be hard to amend the programme for these road shows to also include promotion of the NLGS.

Government needs to make sure that awareness and promotion of the scheme in the regions is strong and act accordingly if in coming months this proves not to be the case.

The Treasury's Key Messages for Business are available here: 20120319 NLGS Key Messages for businesses FINAL.pdf (305.69 kb)

Ahead of tomorrow’s Budget, EEF is calling for the government to adopt a clearer, stronger strategy for growth. The government should establish a commitment to growing the economy with the same clout as the commitment to balancing the books embodied in the Fiscal Mandate.

We have been blogging about what such a Strategy for Growth would look like, centred around four key ambitions:

• More companies bringing new products and services to market
• More globally-focused companies choosing to expand in the UK
• A more productive, more flexible workforce
• A lower cost of doing business

The next question, then, is what sort of policies would get us to this point?

How do we get more companies bringing new products and services to market?

One way is to ensure that the introduction of an above-the-line R&D tax credit benefits as many firms as possible. The reform to the tax credit has been announced, but the consultation process needs to ensure that companies who contract with the government on a ‘cost-plus’ basis also benefit from the move.

How do we get more globally-focused companies expanding in the UK?

One way would be to introduce 100% capital allowances for a two-year period. This policy would boost cashflow, and therefore investment, especially for firms who are constrained in their access to external finance, or unwilling to use external finance.

Another measure would be to ensure that the new National Loan Guarantee Scheme which is designed to reduce the cost of credit is widely available and accessible to business previous schemes have been held back by poor awareness of the products by bank employees: the government must take an active role, beyond London, in making sure that NLGS-backed loans are understood and promoted in the regions.

How do get a more productive, more flexible workforce?

One way would be to address long-standing issues surrounding careers advice by making STEM careers advice part of CPD for science teachers

How do we reduce the cost of doing business in the UK?

One way would be to remove the carbon price floor by 2015, and limit its cost until then. In particular, the government should not use this budget to increase the Carbon Price Support to compensate for weakness in the European carbon markets. Such a move would translate into a 6-7% unilateral increase in UK industrial energy prices.

Another way would be a 1% cut in employers’ National Insurance Contributions for new employees aged 18-24. This would incrementally reduce the tax burden for employers looking to hire new staff and would add to the tax system’s support for recruiting young people, who are particularly suffering from unemployment. Such a measure should be extended to all employees when fiscal conditions allow. 

These are ideas that would fit with our Strategy for Growth, but this list is not exhaustive. The importance of the strategy is that it frames the thinking about which policies are, and are not, sensible to adopt. It also provides a set of measures against which can hold the government to account.

In the run up to Wednesday’s budget there has – as usual – been a significant amount of speculation about the measures the Chancellor will adopt.

Discussion of extended trading hours during the Olympics, toll roads and personal taxation seems to be doing the rounds.

But I can’t help wondering, if this is the bigger issue:

GDP growth all-but flat lined in 2011.

What we need from this budget is a stronger, clearer commitment to growth from the government.

We need economic policies that are focused on achieving a stronger economy, with better balanced growth.

• We need more innovative companies bringing products and services to market.
• We need more globally-focused companies choosing to invest and grow in the UK.
• We need a lower cost of doing business.
• And we need a more productive and more flexible labour force.

The policy priorities for government must be determined by the extent to which they would promote this type of economy.

So how do we get there?

Specific policy priorities to bring about a stronger economy include:

• A two year temporary increase in capital allowances to 100%
• Ensuring that the new National Loan Guarantee Scheme which is designed to reduce the cost of credit is widely available and accessible to business
• Reducing national insurance contributions for firms recruiting 18-24 year olds

We will blog more on these priorities tomorrow.

This week we’ve been blogging about the how the Chancellor could set out a stronger, clearer strategy for growth at this year’s Budget.

So far we have set out three bold ambitions for 2015, and associated measures of progress, that we think would form the core of this stronger vision:

• More companies bringing new products and services to market;
• More globally-focused companies choosing to expand in the UK;
• A more productive, more flexible labour force.

The final ambition we have is to have a lower cost of doing business in the UK.

High regulation, energy, and tax costs discourage job creation in the UK. These costs also have a deadweight effect, creating a high baseline cost of servicing human resources and compliance processes which detract from the productive capacity of business.

Lowering the cost of doing business in the UK will help existing firms to succeed in international markets and attract new ones to locate here.

The government already does have some ideas in this space for example with its one-in, one-out policy on regulation or its commitment to have the lowest corporate tax rate in the G7.

But UK businesses need to see the government commit to going further.

A firmer commitment is needed to cut the burden of regulation. Merely stemming the flow of cost in regulations is not enough. We want to see a reduction of 10% in the time and money spent complying with domestic regulation.

We also need to address the long-term deterioration in the competiveness of the UK’s electricity prices. It’s fine to want to develop the green economy but why does it have to be at the expense of UK industry? Since 2006 the UK’s largest industrial consumers have paid 19% more than the EU average.

The Chancellor needs to make good on his call to not extend ourselves further than our European competitors, we want to see him go slightly better and commit to having industrial electricity prices below the EU average.

Our competitors are also constantly seeking to improve the competitiveness of their tax systems, we need an ongoing effort to hit what will continue to be a moving target.

As mentioned above this is an area where the government is making some good progress on headline corporate tax rates. But creating yhe most competitive tax system in the G20 must be on a range of measures well beyond the headline rate of corporation tax.

It needs to include areas like support the tax system gives for R&D or capital investment and how our system taxes jobs too.

These three key areas – regulation, electricity prices, and tax – form the basis of our ambition to have a demonstrably lower cost of doing business in the UK in 2015 compared with 2010.

Together with the other three ambitions and associated measures, this forms EEF’s proposal for a clearer, stronger strategy for growth. We hope the Chancellor responds with vigour in his Budget speech on Wednesday.