EEF blog

Our Budget submission urged the Chancellor to set out a bold statement of where he saw our economy in 2015 – an economic strategy of ‘more than just cuts’ as I think some in the Coalition wanted.

The Chancellor has not taken our suggestion to set out four ambitions for the economy of 2015, which we proposed as:

• More companies bringing new goods and services to market;
• More globally-focused companies choosing to invest and grow in the UK;
• A lower cost of doing business in the UK;
• A more flexible and productive labour force.

But had he used these ambitions to set a stronger, clearer plan for growth, we would then have suggested that the measurable indicators underneath each of these ambitions should form the basis of annual report by the NAO.

The NAO would take responsibility for compiling the report and perhaps making a judgement, as the OBR is required to, as to whether the government had a greater than 50% likelihood of fulfilling its economic strategy.

Despite the government’s current position, we intend to watch these indicators anyway because we see progress in these areas as important for our members – and the wider economy.

So here is a rough schedule of when the indicators we set out for each ambition will next be updated:

1. More companies bringing new products and services to market

• Real business enterprise sector investment by businesses of all sizes in R&D returned to pre-recession peak (ONS – November 2012 for 2011 year)
• 60% increase in the take-up of the SME R&D tax credit (HMRC and ONS, 26 October 2012, for the 2010/11 year)

2. More globally-focused companies choosing to expand in the UK

• A higher proportion of companies exporting more than 25% of their turnover; (UKTI’s Barriers to Internationalisation survey, November 2012)
• A 2 percentage points increase in the share of private sector turnover accounted for by Mid-Sized Businesses. (Business Structure Database, around September 2012 for the 2011/12 tax year)

3. A lower cost of doing business

• Below average EU industrial electricity prices (DECC’s Quarterly Energy Prices ‘EU-27 median including taxes’, March 2013 for the 2012 year)
• A reduction of 10% in the time and money spent complying with domestic regulation (BIS's report of the net cost of new regulations reported six-monthly, next report Autumn 2012)
• The most competitive tax system in the G20 on a range of measures beyond the headline rate of corporation tax (comparison of UK tax system on a number of key variables for the coming tax year, Budget 2013 for the 2013/14 tax year)

4. A more productive and more flexible labour force

• An increase of 25% in the number of STEM apprenticeships at Level 3 (or above) (The Data Service, February 2013 for the 2011/12 year)
• A reduction in the proportion of hard-to-fill vacancies (UKCES, National Employers’ Skills Survey, Spring 2012 for 2011 year)
• 65% of people who take GCSEs achieve 5 A*-C grades including English and Maths (Department for Education, February 2013 for the 2011/12 year)

Watch this space for the results and our reaction around these dates.

Recently we have had further criticism of the government’s purported lack of strategy, albeit wider than economic policy, this time from the Public Accounts Select Committee. In its report on Strategic Thinking in Government published on 17 April, the PASC concludes:

‘We remain concerned at the absence of National Strategy at the heart of government…The strategic aims of the government, informed by public opinion, should drive every policy decision and align them with tax and spending decisions.’

This is a point very similar to our comments before and after the Budget (and on the BBC as recently as yesterday) that the government needs an economic strategy that matches the focus and clarity of its fiscal strategy.

The PASC has a further interesting point of detail regarding the accountability framework that should sit around a more strategy. Their suggestion is that the government should produce an annual National Strategy Report to Parliament, to allow it to be held to account for its performance against its overall strategy.

We made our own suggestion for accountability arrangements in our Budget submission: that the NAO should monitor the performance of the government against its economic strategy in the same way as the OBR monitors the government’s fiscal performance against the Fiscal Mandate.

It strikes me that, at least as far as economic strategy goes, these two ideas could be married up. The NAO could produce an annual report, say to coincide with the Budget, which then forms the basis of annual Parliamentary examination of the government against its economic strategy, via the PASC or perhaps the Treasury Select Committee.

This morning’s preliminary GDP release shows UK output continued to fall in Quarter 1 2012, putting the UK back into a technical recession.  Overall industrial output was dominated by weak construction activity that has dragged down overall output. 

The key quarter on quarter changes are as follows:

• Total GDP fell 0.2%
  
• Manufacturing output reduced by 0.1% but figures suggest output increased in month of March
  
• The construction sector, the main driver of the economy re-entering recession, fell by 3%

What is happening in Manufacturing?

The quarterly contraction in manufacturing is a concern.  However, on the back of negative growth in January and February the quarterly figure points to output growth of 0.2 in March. 

So, how does the overall picture fit with recent economic indicators?

Some indicators clearly fit with the overall story told by these weak GDP figures.  Worsening credit conditions and continuing low consumer confidence are both concerning as they are likely to act as a constraint on household and business activity, further slowing recovery.   A continuing weak construction sector will also continue to dampen growth prospects. 

The picture is not all bad though and the underlying health of individual sectors is not clear. The Purchasing Managers Indices for both Manufacturing and Services have been positive for the first quarter of 2012 and a raft of private sector surveys, not least of which EEF's own Business Trends Survey, broadly agree that there has been modest improvement in manufacturing trading conditions in the first few months of the year.  With the manufacturing sector growing in March and output for the services sector growing by 0.1% for the quarter we have reason to be cautiously optimistic. 

Trade figures for the three months to February 2012 also improved following record high exports to non-EU countries at the end of 2011.  These markets are crucial and will be of growing importance as the UK looks ahead to recovery.

Overall, these GDP figures are both a reminder of the big challenges facing the UK and world economies, and a confirmation of the patchy and unsteady recovery that we have been expecting.

Ahead of tomorrow's GDP release for the first quarter of 2012, what do the most recent economic indicators suggest about the state of the UK Economy?

The decision:

The MPC voted to maintain the Bank Rate at 0.5% and continue with asset purchases totalling £325bn

All nine members of the committee voted in favour of maintaining the Bank Rate. Only David Miles voted against maintaining the level of asset purchases, favouring an increase of £25bn.

The committee noted the recent unexpected falls in manufacturing output and construction seen in ONS data this year and thought that this (combined with the mechanical affect of an additional Bank Holiday as a result of the jubilee) might mean that GDP would fall in the first and second quarters of this year. In addition, Euro area instability continues to present a risk to the UK economy. However, it was felt that underlying activity had probably picked up since the second half of 2011.

CPI has started to fall back, though at a slightly slower rate than had previously been expected, meaning the path for inflation was likely to be higher than that forecast in the most recent inflation report.

Upside risks to inflation:

• Rising oil and commodity prices
• Domestic companies seeking to rebuild margins to improve cashflow
• Nominal wage growth outpacing productivity improvements

Downside risks to inflation:

• Demand too weak to absorb the margin of spare capacity in the economy
• Potential for further economic contraction might dampen business and consumer confidence
• Households and businesses building up a buffer of savings might slow growth

Economic developments over the month:

(NB the MPC’s meeting was held before much of the recent escalation in Spanish government bond yields)

Financial markets

• Conditions in financial markets continue to normalise
• Functioning of bank funding markets had improved
• Fall in short-term funding costs in the Euro area

International markets

• Global PMIs suggest that growth rates were similar to those seen in the first half of 2011
• Euro area PMIs, however, suggested that economic activity in the region was weak
• Steps to restructure Greek debt had been agreed
• US growth looking stronger
• Chinese data consistent with gentle slowing in activity
• Oil prices remained elevated, compared with the start of the year but increased little over the month

Money, credit, demand and output

• UK GDP fell in the fourth quarter of 2011
• Manufacturing output fell in February, though this was at odds with more positive business surveys
• Service sector surveys suggest growth in the first quarter
• Construction saw another large contraction, which is likely to depress GDP growth in the first quarter of 2012
• Credit conditions likely to remain tight

Supply, costs and prices

• CPI down to 3.4% in February (since the meeting CPI inflation was reported as 3.5% in March). The fall was a little less than expected
• CPI likely to be higher than previously forecast
• Picture from labour market mixed, with unemployment elevated and wage settlements running at about 2.5%
  

The short answer is no.

We needed a Budget last month that focused on setting out the ambitions for growth. Where does the Chancellor see the British economy heading by 2015 or beyond?

This need stems from a fundamental question we have been confronted with since the financial crisis. Where is growth in the UK going to come from in the future?

EEF’s response has focused on seeing growth driven by higher business investment and net trade – this is our view of ‘rebalancing’ the economy and our ideas for an economic strategy stem from this.

Clearly it was bad news then to see the Office for Budget Responsibility again downgrade its forecasts for business investment.

In 2011 we were supposed to see nearly 7% growth; in fact business investment is now estimated to have only slightly expanded at 0.2%.

For 2012, the OBR was expecting 7.7% growth in business investment as recently as November. It now expects 0.7% growth.

Exports have grown strongly; 2011 is 23% up on 2009 despite considerable weakness in our major European markets. This is positive.

However, the substantial boost to growth from net trade that in decades gone by these higher exports may have suggested is negated by the fact that some things now are unable to be made in the UK, so that import substitution has not happened as much as we would like. This highlights the need to invest in rebuilding UK supply chains.

We recognised before the Budget that fiscal loosening was not appropriate given the ongoing delicate state of the UK’s public finances. However, the government has again shown its dexterity in applying a ‘fiscally neutral’ budget by finding sufficient tax and spending changes to fund £21 billion in new tax and spending initiatives.

And this really underlines the importance of having a vision for the economy. Even in these difficult times £21 billion has been applied to government priorities. £21 billion could certainly be used to help growth in the UK economy.

So did this £21 billion focus on growth?

The most positive measure was the further reduction in corporation tax (accounting for about £3.8 billion), meaning as the Chancellor noted that a 20% headline rate is now within reach in the not-too-distant future.

We are also supportive of the government’s current consultation on improving the R&D tax credit and the government's commitment that it will commit at least £200 million to this enhancement. The Aerodynamics Centre is also a positive £60 million investment. But there was not much else in that £21 billion pot.

And some policies, such as maintaining the Carbon Price Floor at the level set in Budget 2011, are putting us at a greater disadvantage to even our competitors in Europe, let alone faster-growing economies further afield.

Moving away from the resources decisions, the spending and tax changes, did the Budget have anything to say about government ambition, the ‘vision thing’?

Two announcements are noteworthy: The ambition to double exports to £1 trillion by 2020 and the Heseltine Review, which loosely seems to be looking at industrial policy.

Of course these are in addition to – but unclearly connected to – the ‘Plan for Growth’ launched at the last Budget.

This continues to bubble away with a random number of actions in the hundreds usually thrown out as a sign of progress.

For us, this does not stack up to a strong enough economic strategy for the Britain of 2012.

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