EEF blog

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 this week we had a story in the FT claiming that the real Merlin lending targets for UK banks didn’t actually appear in the final published document.

Instead ‘stretch’ targets, insisted on by the government were used – even though the banks have no expectation that demand will emerge sufficient to meet these figures.

Separately there are ‘real’ targets, which are about 10% lower, that the banks, happily enough, look on course to meet.

HMT seems at odds with Business Minister Mark Prisk on this but the whole story creates uncertainty around how tough the agreement really is.

No doubt this sets up a nice wheeze for both the politicians and the banks at the end of the process next February where both can save face on lending results.

The politicians can say they pushed the banks as far as they could and can make threatening noises all through the year about what will happen if the banks don’t meet the targets, all the time being less than frank about what these targets actually are.

Next year, the banks can justifiably point to the real agreement on lending, which they believe they will honour, and say that demand hasn’t materialised for the government’s ‘stretch’ ambitions.

Of course left out of all this game playing in the press will be what’s really happening to access to finance in the UK and whether it is improving.

From the start we were sceptical about the value of lending targets – gross or net, stretch or real – as a tool to deliver better credit conditions for UK firms. The targets are hard to enforce and potentially meaningless (if net lending continues to contract, credit could conceivably still be withdrawn from SMEs, as Vince Cable himself said in March 2010).

That’s not to say we want Merlin to fail. If it turns out that credit conditions improve and Merlin has had some role in that, great. And it’s encouraging to see from our latest credit conditions survey that availability of finance, including for smaller firms, appears to be improving.

But the bigger risk is that Merlin ‘succeeds’ however that’s framed and that debate on improving access to finance is shut down.

Already the government seems to use Merlin and the banks’ own set of commitments as an excuse for doing little to improve access to finance.

Commendable as the banks actions are, it shouldn’t be a surprise to anyone that they will primarily act in their own interest and not necessarily go as far as would be warranted in the interests of the wider economy.

We’ve consistently called for progress in four areas:

• Improved competition in the banking sector;
• Increased sources of finance outside banks;
• Better real business expertise in the financial sector;
• Better customer services.

Rather than hiding behind Merlin’s smoke and mirrors the government should be thinking hard how it can address these areas.

So today's GDP estimate of 0.5% growth in the first quarter was, well, expected.

To certain degree, it won't set hearts and minds racing about the strength of the recovery. Nor will it send the markets to panic stations about a double dip.

Manufacturing remains the strong point of the recovery, with 1.1% growth in the first quarter. The service sector rebounded from the snow by growing by 0.9%.

But while we've avoided a return to recession, 0.5% growth won't settle nerves about the rest of 2011. As Joe Grice, Chief Economist at the Office for National Statistics says:

"Abstracting from the snow, we have an economy on a plateau."

Worryingly for the economy, that's plateau, as in stagnant growth...as in stagflation. The Monetary Policy Committee may feel justified in its stance on holding tight on interest rates, but it will worry about the underlying health of the economy: strong service sector growth in q1 is likely a rebound in activity from the snow. As FT Alphaville bearishly notes:

"Plateau isn't the word we would use of course. More stagnation, flat-lining, stalling in mid-air, that kind of thing. The ONS also called growth in Q1 2011 'essentially an arithmetic effect' which seems even more devastating."

What worries us here at EEF isn't necessarily what today's data says about where the economy is now, but what it says about the economy for the rest of the year. The UK will face some stiff economic challenges in the coming months:

• Fiscal austerity has begun (we've seen roughly the equivalent of 1.5% GDP cut back in the past 12 months) and will begin to weigh on the economy through the rest of this year.
• There appears to be no respite in rising oil and commodity prices.
• Supply chain disruptions from the Japanese earthquake will only begin to affect output in this quarter.
• The euro-zone crisis will only get worse unless Greece, Ireland and Portugal begin to restructure their debts (which will be painful enough).

The recovery could probably withstand a shock from any of these on their own. But the risk is that they combine to create a perfect storm that keeps the economy trapped on the plateau...or even worse, forces an economic retreat back down the hill.

Regular readers of this blog should take a look at the Infor Manufacturing Blog.*

My first post for the blog looks at why investment in innovation and IT have helped manufacturers drive the broader economic recovery. However, I also flag up some of the key challenges firms face when innovating in the UK:

"Tackling technical troubles [while innovating] can cost firms time and money as they strive to get to market quickly.

Yet in competitive global markets, time and money are luxuries that most manufacturers do not have."

UK manufacturers don’t compete on price or labour, they compete on innovation and technology. The longer it takes, the more cash is spent in developing and commercialising innovation, the less likely the company will generate a return on its investments in innovation.

What does this mean for the Chancellor's Budget in under two weeks time? Well, R&D tax credits could play a part here.

Right now, the UK only provides tax credits for research and tax breaks for patents. Yet it’s the time-consuming and costly development phase of R&D where the value of innovation – the profits, the jobs & the growth – is generated. And because we don’t support development and commercialisation, other countries reap the economic benefit of our innovative ideas.

The bottom line is that we can't take growth for granted: firms will invest, innovate and grow; they have to if they want to stay in business. The question is whether the Chancellor give them a reason to invest, innovate and grow in the UK?

* Full disclosure: Infor and EEF have a long-standing relationship. This includes partnering with our economists on two reports: the 2008 IT & Productivity survey and our 2010 Innovation Monitor. Infor are also the lead partner for EEF's Future Manufacturing Awards.