EEF blog

In some ways the coalition government’s economic policies were always going to be dictated by the prevailing economic and fiscal situation. At a time when the UK’s public sector net debt stands at nearly 64% of GDP, tax rises and cuts to public sector spending were more or less inevitable. But the choices the government takes in how to raise taxes and cut spending says as much about the state of the economy as it does about the government’s economic world view.

The coalition’s approach – somewhere between the Third Way and Thatcherism – is based around a faith in markets and business. This 'Two Thirds Way' is based on the belief that our economic competitiveness requires a smaller government and smaller government debt, which should then reduce long-term interest rates and encourage private sector investment and growth. In the Emergency Budget, however, it appears a traditional free market purist approach was tempered by a concern for low-income earners, as business taxes were cut alongside a higher personal allowance threshold for income taxes.

The government also departed from the traditional free market approach with some more interventionist tax measures, including the banking levy and creating tax incentives for start-ups to locate outside of the greater South East. The 'Two-Thirds Way' ultimately favours markets over government, but sees a distinct, but targeted role for government in encouraging investment and regulating business.

During last night's leaders' debate on the economy, Brown and Cameron clashed on manufacturing investment and capital allowances.

Capital allowances are incredibly vital to manufacturers' competitiveness. They are how the tax system reflects the cost of investing in new machines. So while the staff costs count as an expense that immediately reduces the amount of tax a company pays, investment costs are only counted as an expense over 30 years.

On average, manufacturers replace their machines every 7-8 years, which means the tax system artificially adds to the cost of investing in machinery in the UK.

The Conservative Party is likely to reduce the level of capital allowances from 20% to 12.5% - which means the tax system will take 53 years to reflect the cost of modern machines.

On it's own this proposal would be extremely damaging to manufacturers' competitiveness. Consequently, EEF have been raising this issue with the Conservative Party for the past year, and have been working constructively to help them firstly understand the investment needs of modern manufacturers and secondly on how to modernise the tax system to match those needs.

And they have listened, acknowledging that many modern machines are only really productive for a few years before technology moves on. They have also committed to working with EEF to find ways of improving the tax system - by adopting our recommendations on the Short Life Asset regime - to reflect the real costs and shorter lives of modern machines.

EEF's proposals essentially say that modern machines have become like computers (in fact, most machines are powered by sophisticated computer systems): advances in technology makes them obsolete long before the machine stops working. So we've recommended that the tax system treats machines like it does computers, allowing manufacturers to write of the full cost of their invesments within eight years.

And because rebalancing our economy must remain a priority, EEF will continue to work with which ever party/parties that form the next government to ensure that the UK has a tax system that enables manufacturing and a balanced economy to flourish.

For background, here's each of the three parties views on investment and capital allowances:

So the Labour Party has today been the first Party to launch its election manifesto.  As far as business issues are concerned, there were no great surprises and even some of the new ideas were heavily trailed in the press over the weekend.

One such proposal is a plan to extend Paternity Leave from its current two weeks paid leave, to four weeks leave (with the option for this to be used flexibly).  Labour also wants to legislate to extend the right to request flexible working to older workers.

Over the course of the election we are likely to see all of the political parties engaged in a race to the top on family-friendly and flexible working policies.
It is very difficult for business to raise concerns about the pace of change in this area, without being tagged as dinosaurs. And many employers do recognise the business benefits of these policies.  At the same time, however, it is the employer that usually has to cope with the corresponding costs and administrative burdens. 

Instead of always hitting business therefore, what we would really need is a wider debate about how society addresses work/life balance issues – perhaps through the tax system or care provision.   Whether or not this is recognised during this campaign remains to be seen.

So now we have confirmation of what everyone has been expecting for months - the General Election will be held on the 6th May. 

Arguably (and quite understandably, given recent events) this will be the first election since 1992 where the economy will be the dominating issue.  And all of the political parties are bending over backwards to say how critical they believe manufacturing will be to the UK's economic future. 

We've already heard some proposals about how each Party would support our sector (whether it's the current Government's New Industry, New Jobs Agenda, or the Opposition's suggestions in the Dyson Review) but over the next few weeks manufacturers are likely to be listening intently to see which of them has a real vision for placing manufacturing at the heart of a better-balanced economy.  Hopefully this is something that will feature in the televised Leaders' debate on the economy (taking place in the week beginning, 26 April), rather than just a debate about the timing of deficit reduction (as important as this is).

We will be blogging on relevant issues throughout the campaign and you can read more about what we would like to see from the next government by downloading our manufacturing manifesto, which has been sent to candidates in all of the major parties.