EEF blog

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.

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

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.

The third of our ambitions we want the government to set out in a stronger, clearer growth strategy on Budget Day is to see more companies in the UK bringing new products and services to market.

Why is this important?

There is no such thing as a sustainable competitive advantage. Firms that invest in innovation grow faster and are more productive. This is essential to stay ahead of the competition, especially given the inability of the UK to compete with fast-growing developing countries on relative labour costs.

We have strengths supporting the development of new products and services already. The UK has a good ‘knowledge infrastructure’ (e.g. world-leading universities) and the government has protected its investment in our science base.

However, we are weak in other parts of the innovation chain, in particular commercialising new products and services – taking a design from prototype or proof-of-concept to a commercially produced and sold reality.

How can we measure performance against this ambition?

In common with our other ambitions, we think the government needs to establish a credible set of measures by which progress can be demonstrated. For this ambition we think the measures should be by 2015 that:

• Real business enterprise sector investment in R&D returned to the UK’s pre-recession peak;
• 60% increase in the take-up of the SME R&D tax credit

We’ve chosen these measures quite deliberately – let me explain:

Real business enterprise sector investment in R&D to return to the UK’s pre-recession peak

To see companies bringing new products and services to market in the UK we need to see more basic research capitalised here. This will be driven primarily by businesses. Real business enterprise sector investment in R&D (BERD) is also an internationally comparable metric of business R&D.

National Statistics show that the 2007 figure for BERD in the UK was just under £12 billion. This fell to £11 billion by 2010 (both 2007 and 2010 figures in 2010 prices).

To return to 2007 levels would require 1.5% year on year growth in real business investment in R&D (roughly 8% growth in total). This is below the UK average growth rate from 2002-2007 – but BERD has fallen in every year from 2007-2010.

So we think returning BERD to the pre-recession 2007 peak is a stretching but realistic target.

60% increase in the take-up of the SME R&D tax credit

While the BERD target captures the overall level of business spending on R&D it doesn’t tell us about the number of firms, particularly SMEs, which face the greatest barriers to investing in R&D.

A boost in the number of smaller firms investing in R&D would be indicative of more of our SMEs moving into more productive growth cycle.

A 60% increase in the take up of the SME R&D tax credit would be measured from 2014/15 relative to 2009/10.

HMRC statistics show that average growth in claims since 2003/04 has been c7%; but from 2007/08-2009/10 (the latest year available) the annual average growth has been 12%.

60% growth over the five year period would require growth in 2010/11 of 7% but then growth accelerating to 11%pa 2011/12-14/15. Given that the government has increased the generosity of the scheme, we think this is realistic.

However the billions of pounds worth of estimated unclaimed R&D tax credits suggests the government has some work to do to get the word - and benefit - out there about the scheme.

Today’s labour market figures showed that unemployment rates have risen once again.

Employment in manufacturing has fallen slightly since the end of the recession. However, our Business Trends survey has consistently shown that manufacturers are looking to recruit. Today’s statistics, too, show that manufacturing vacancies have increasedby 10.1% over the last year, even as the total number of vacancies in the economy has fallen.

So how can we explain this?

One of the key issues that manufacturers raised at EEF’s conference last week was skills shortages. Dick Olver, chairman of BAE systems summarised this neatly when he said:

“The UK nurtures great engineers. But we need more. A lot more.”

Skills shortages are hampering manufacturers’ ability to grow their businesses. This is an ongoing issue for the sector, and something that needs to be addressed.

Looking ahead to the budget next week, we are calling for a clearer, stronger strategy for growth, based around four key ambitions (the first of these I blogged about yesterday).

The second key ambition should be for the UK to have

A more productive more flexible workforce

What does this ambition mean?

Achievement in basic qualifications is somewhere the UK lags behind some of its major European and international competitors. One of the biggest issues manufacturers raise with us is a lack of basic numeracy and literacy.

This is an economy-wide issue: basic skills in English and Maths by the age of 16 are vital to an individual’s employability and future progression in any sector.

For these reasons, we believe the government should set the following target for 2015:

65% of people who take GCSEs achieve 5 A*-C grades including English and Maths

But the economy needs more than basic skills. Innovative world-beating companies need people with the skills to match. But advanced or Level 3 apprenticeships numbers have failed to satisfy the skills demand from business.
Therefore, our second target for a more productive and flexible workforce is:

An increase of 25% in the number of STEM apprenticeships at Level 3 (or above).

There is a skills gap now. Businesses across the economy need to fill vacancies straight away as hard-to-fill vacancies impact negatively on firm-level productivity. Similarly, businesses looking to locate in the UK need to know that a skilled workforce is available to them. Our third ambition, therefore, relates to this:

Keep the proportion of hard-to-fill vacancies below 23%.

Setting clear and measurable ambitions for the economy will be essential to ensure the government prioritises its limited fiscal and policy reform resources on the areas that matter most for the UK’s growth. A more productive more flexible workforce is be a key step towards a stronger, growing economy.

UK Trade data released this morning showed that the trade in goods deficit widened in January. Although goods exports were up £0.5bn, imports rose by £0.8bn. Growth in exports to non-EU countries continues, hinting that net trade could still provide a boost to the economy later in the year.

And an improvement in net trade will be crucial in the year ahead. In its forecast at the time of the Autumn Statement, the OBR ascribed 0.3 percentage points of the total 0.7% growth expected in 2012 to an improvement in net exports.

The OBR’s projections were also reliant on investment, which they forecast would grow by (a somewhat ambitious) 7.7% in 2012.

Export growth and investment growth are not only key to growth in 2012, they are a necessary part of rebalancing towards an economy that is less reliant on debt-driven consumer and government spending.

To achieve this rebalancing, we need more companies choosing to grow into large corporates, creating jobs and investing in the UK.

More large UK companies would encourage the development of domestic supply chain network and more firms focused on global sales opportunities would maximise the UK’s exposure to increasing demand at a time when our domestic demand and traditional markets are weaker.

In the Budget next week we are calling for the government to adopt a clearer, stronger strategy for growth, based around four central ambitions. One of these is:

More globally-focused companies choosing to expand in the UK

But a clear ambition is only part of the story. We believe that the Plan for Growth should – in a similar way to the Fiscal Plan – be a tool for holding the government to account. As such, there need to be clearly defined measures against which to gauge success.

Export intensity is crucial to taking advantage of growth opportunities, particularly in fast-growing emerging markets. The greater exposure UK firms have to more markets and competition the more productive and more resilient they will be. For this reason, the first target is:

A higher proportion of companies exporting more than 25% of their turnover

Our second target is:

A 2 percentage point increase in the share of private sector turnover accounted for by Mid-Sized Businesses.

Medium-sized businesses provide significant potential for sustainable volume job creation; are more likely to invest in training and have the scale to work with external supporters of innovation. All of this would be beneficial to the long-term competitiveness of the UK.

If manufacturers are going to locate, invest and grow in the UK, they need to have the confidence that the business environment is improving, relative to competitors, and is on track to continue to do so for the foreseeable future. The growth strategy needs the clarity and purpose of the Fiscal Mandate to cut through to real businesses’ perspectives, and support them in driving the growth that the UK economy needs.

In our previous blogs this morning, we have set out the case for the government having a clearer, stronger strategy for growth.

To be credible the strategy would necessarily need to have transparent measures, independently monitored that would demonstrate progress.

As important as this is however, a clear strategy only sets out what we want to achieve not how we are going to achieve it.

The how is where our policy recommendations come in.

Not all policy proposals that will contribute to our ambitions will neatly fit under only one ambition. Neither do we pretend our list is definitive or that we have a monopoly on good ideas. We also acknowledge some of the government's actions to date have been positive - its compensation package for energy-intensive companies and its willingness to address stiffling employment regulations as two examples.

We will of course develop further policy proposals in advance of the 2012 Autumn Statement and Budget 2013.

What is important is that the policies we are putting forward are all clearly focused on achieving the strategy for growth that we have set out and will make incremental progress towards those goals within current resource constraints.

EEF’s proposals for Budget 2012, grouped under our ambitions are:

More companies bringing new products and services to market

• Introduce an above-the-line R&D tax credit that increases benefits to the largest number of firms possible

More globally-focused companies expanding in the UK

• Introduce 100% capital allowances for a two year period
• Extend the Enterprise Investment Scheme to cover debt
• Use the Business Finance Partnership to provide growth capital for supply chains
• Ensure the National Loan Guarantee Scheme is pushed strongly through bank networks

A lower cost of doing business in the UK

• Remove Carbon Price Floor by 2015, limit its cost until then
• Implement Feed-in Tariff Cost-saving Proposals
• Subject Electricity Market Reforms to Robust Cost Control
• Keep 2020 Renewables Target under review
• Introduce Burden Reduction Target
• Follow Advice of the Regulatory Policy Committee
• Help employers to offset impact of State Pension Reform
• Review the UK’s tax treatment of capital expenditure
• Tax relief for employers who fund early interventions to enable employees to return to work faster
• Task the Office for Tax Simplification with reviewing the full set of green taxes
• 1% Employers’ NICs reduction for new employees aged 18-24
• Avoiding further instability in the pensions system

A more productive, more flexible labour force

• Make STEM careers advice part of CPD for science teachers and subject curricula
• Introduce minimum standards of careers advice on the entire range of employment/learning options available

In the coming days we will set out more detail for these policy areas and how they contribute to our overall strategy.

Felicity has set out the four ambitions that we see as forming the core of a vision for the UK economy of 2015.

Our ambitions have been carefully selected to use as a means to prioritise government resources and activity. But alone they are not enough.

We need a meaningful accountability framework that will hold the government to account for delivering on these ambitions.

In spirit this is not a wholesale departure from the government’s little-known Plan for Growth. But the government’s measures are too many, too vague, and are not stretching enough to drive a meaningful improvement in the UK economy.

So in our submission we set out an alternative set of measures to sit under each of the ambitions we have for the UK economy of 2015:

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
• 60% increase in the take-up of the SME R&D tax credit

2. More globally-focused companies choosing to expand in the UK
• A higher proportion of companies exporting more than 25% of their turnover;
• A 2 percentage points increase in the share of private sector turnover accounted for by Mid-Sized Businesses.

3. A lower cost of doing business
• Below average EU industrial electricity prices
• A reduction of 10% in the time and money spent complying with domestic regulation
• The most competitive tax system in the G20 on a range of measures beyond the headline rate of corporation tax

4. A more productive and more flexible labour force
• An increase of 25% in the number of STEM apprenticeships at Level 3 (or above)
• A reduction in the proportion of hard-to-fill vacancies
• 65% of people who take GCSEs achieve 5 A*-C grades including English and Maths

And to ensure these measures are reported and monitored consistently, clearly, and regularly, we propose the National Audit Office produces an annual summary of the government’s progress.

The ambitions, the measures under the ambitions, and the monitoring of the NAO would create a directly comparable growth counterpart to the government’s Fiscal Mandate.

This is our recommendation for re-setting the government’s strategy on growth. We think that a credible strategy would do a lot to boost confidence in the UK economy and give companies the confidence that the UK is becoming a more attractive place in which to invest in and grow a business.

But as important as this is, a refocused strategy only tells us what we’re aiming for. It doesn’t tell us how we’re going to get there. The how is where our policy recommendations come in…