EEF blog

Last week we had the good news that GDP didn’t contract, and in fact actually grew 0.3%, in the first quarter of 2013. While these numbers are positive, we can’t get away from the fact that there remains little underlying expansion and a lack of demand in the economy as a whole at this time. While this is expected to pick up over the course of the next couple of years, we can’t help thinking what more can be done to get the economy growing and rebalancing now.

In a survey we ran last year we asked manufacturers about their investment over the past few years and their investment plans going forward, and the barriers they face when investing. We also asked manufacturers the very question posed above. Specifically we asked manufacturers – what policy change would lead the company to increase the level of investment in the UK?

An Industrial strategy would have the biggest impact on investment in the UK

Perhaps not surprisingly, greater certainty in the policy environment would have the biggest impact on manufacturers’ investment in the UK. The investment cycles generally spans multiple political cycles so greater confidence over aspects of the business environment will lower the risks of an investment being unprofitable.

• 19% of manufacturers said a long-term strategy for manufacturing would have the biggest positive impact on investment in the UK.
• 53% said it was among the top three changes that would positively impact investment in the UK.

An industrial strategy needs to be based on a wide range of policies that matter for business

An industrial strategy needs to be informed by businesses priorities and needs to focus on getting the policies that affect investment incentives right for the broadest possible base of businesses. The chart below shows the top five policy changes that would have a significant impact on investment in the UK.

• The tax system is both an enabler and a barrier to investment. Making sure the country's taxes work, as much as possible, to promote investment means the government has many tax levers available to encourage greater investment, including, but not limited to, capital allowances, the R&D tax credit and the overall burden of tax.
• The finance environment has been changing since the financial crisis and is restricting the ability of firms to finance investments. Over a third of companies report they have viable investment going unfunded because of difficult credit conditions associated with external finance. The government could do more to encourage greater competition in the banking sector to improve credit conditions for businesses.
• The government has an important role in ensuring the economy has, and will continue to have, the right mix and supply of skills to support a growing and rebalanced economy. Four in five manufacturers report having problems with recruitment.
• UK companies face higher energy costs than most of our key competitors, putting us at a disadvantage. Government policy has had a greater impact on energy costs in the UK than elsewhere.
• The UK does not tend to innovate quite as successfully as other countries despite a strong science and research base and many highly innovative individual companies. The balance of government support is weighted towards early-stage research and the government could do more to help companies convert basic research into products and services that will make a profit.

As you can see, the policies that are important for manufacturers are broad and are not specific to the manufacturing sector. There is no single action or lever that will deliver the large shift in investment that our economy needs. Rather the government has a role in providing clarity and certainty about its priorities along with concerted activity to reform the policies that will support the widest group of companies to invest.

More information and research can be found in EEF’s report Invest for Growth, encouraging more globally focused companies to expand in the UK.

Last week Citi published a briefing entitled “Why is investment so weak?” and goes through some of the facts and figures underlying the current underperforming investment picture. A few of the points made relate back to our own report and survey on the subject, Invest for Growth, published back at the beginning of March.

The Citi briefing makes a clear point that the tax landscape is not encouraging companies to invest, with the cutbacks to capital allowances in previous budgets and, despite the continual cutting of the UK’s headline corporation rate, the effective marginal tax rate has not fallen. I know this is something close to the heart of my colleague Andrew Johnson, and he blogged about this in November last year, ahead of the Autumn Statement.

Our own survey showed that out of all the tax system policy levers the government could pull, 28% of companies said that higher capital allowances would have the biggest positive impact on their investment in the UK. This was particularly important for small and medium sized firms. The recent increase in the Annual Investment Allowance is a move in the right direction yet internationally the tax environment continues to change as countries seek to improve the efficiency of their tax system, and the UK needs to ensure it remains competitive and predictable in the long-term. An EEF member, Stuart Fell, told us about his view as an SME in a guest blog at the end of 2012.

34% of manufacturers said a change to the tax system would have the biggest positive impact on investment in the UK

60% said a change to the tax system was among the top three changes that would positively impact investment in the UK

The Citi briefing also looks at investment intentions and makes the point it is often hard to distinguish whether these investment objectives are planned in the UK or overseas. Of the manufacturers we surveyed, over two-fifths have some production overseas, up from one-third in 2009. Our survey also showed that decisions on where to locate investment can be finely balanced and will be influenced by a range of factors relating to the business environment and what the business is trying to achieve. We asked companies about the balance of investment in the UK compared with overseas.

The data showed an overall shift in preference towards more overseas investment in the next three years compared to the last three years. Of those manufacturers with some of their production located overseas: 

• Around 80% had made some investment overseas in the past three years and a similar proportion is planning overseas investment in the next three years.
• One third said they invested more overseas than in the UK in the past three years and this is expected to slightly decrease in the next three years, with 30% planning to invest relatively more overseas in the next three years.
• Looking to the UK’s investment position in the next three years, fewer companies are planning to invest more in the UK than overseas compared to the past three years. And the proportion of companies investing only in the UK will remain approximately the same at 20%.

Investment overseas is not restricted to companies with operations abroad; some companies with no production outside the UK are also looking at overseas investment opportunities. Some 15% are looking to invest overseas in the next three years for the first time. Of these companies, almost half are planning to invest more overseas than in the UK which is not surprising as a first foreign investment is likely to be a significant undertaking.

 The Citi paper also makes the point that “the relative cost of capital has risen, in contrast to the pre-crisis trend, encouraging firms to expand via jobs rather than investment”. Making new investment in capital equipment is critical to manufacturers achieving their objectives and staying ahead of the competition. Half of companies in our survey report increasing their investment on capital equipment in the past three years, a reasonably consistent picture across all sizes of company, and just over a tenth report decreasing investment.

Looking ahead, manufacturers are also, on balance, planning to increase investment in capital equipment over the next three years; 45% of companies expect investment to increase with one in ten planning to scale it back. This pattern is again consistent across all sizes of company but firms in the transport and machinery sectors are most upbeat about future investment plans.

Positive upwards revision to annual growth in 2012

While the third estimate of GDP for 2012q4 came in unchanged at -0.3%, upward revisions to the first and third quarter have raised annual growth from flat to positive 0.2% for 2012. The largest upward revisions were made to the agriculture and construction sectors.

However, investment and trade remain weak

Unfortunately, looking below this figure makes it clear that the investment and trade led recovery has yet to eventuate. We see that over the past year growth was held up by consumption and government, which each positively contributed 0.6% to GDP. Total investment was flat but there was a positive contribution to grow of 0.4% from business investment. Net trade, by contrast, was the weakest expenditure component of GDP, with a negative contribution of 0.8% to GDP.

% contributions to growth, quarter-on-quarter and year-on-year
 

Manufacturing investment also fell in 2012

Manufacturing investment contracted by 1% last year after strong growth of over 12% in 2011. This 2012 result is out of line with the continuing positive balance of investment intentions that we have seen in EEF’s Business Trends results over the past year. Early next week EEF will be publishing a report presenting findings from a new investment survey and setting out what needs to be done to encourage more globally focused companies to invest and expand in the UK.

We finish off the year today with some mixed news. ONS released their third estimate of GDP today. Main changes in today’s release: 

• GDP revised down by 0.1 percentage point to 0.9%.
• Manufacturing GDP revised to 0.7%, down from 0.9% in the previous estimate.
• Business investment stats remaining strongly positive and revised slightly upwards from 3.7% to 3.8%.

This is the first quarter for a long while in which all expenditure components of GDP made positive contributions to growth, as shown in the chart below. As we have mentioned in previous blogs, much of this is the result of a bounce back after disruptions in q2 that were caused by the Jubilee and the Olympics.

Contribution to growth, quarter-on-quarter, for the expenditure components of GDP
CVM SA
 

The outlook is not looking as positive as we would like going into 2013. We know from our business trends survey and the weak PMI that manufacturers will still be facing tough conditions nest year. The Monetary Policy Committee are predicting a contraction in headline GDP in the fourth quarter of 2012 and the underlying output in the near term to be broadly flat. However, output and investment are expected to begin to pick up further over the next two years.

Merry Christmas and Happy New Year from the EEF economics team!

The recent increase to the Annual Investment Allowance (AIA) is a welcome change to the capital allowance regime. EEF has been campaigning to increase capital allowances for many years.

In the Autumn Statement the Chancellor announced that the Annual Investment allowance will to be increased tenfold – from £25,000 to £250,000 – for two years beginning 1 January 2013. This change comes at a time when confidence is low, uncertainty is very high and there are lots of things weighing against investment. 

What does this mean for manufacturers?

The easiest way to look at how this change will impact manufacturers is by looking at the following example. Take the example of a manufacturer who is planning on buying two new machines in 2013 each costing £250,000 bringing the company’s total capital investment to £500,000.

Under the current policy, the manufacturer would have been able to expense £110k of depreciation from the investment to lower the company's taxable profit. The new policy will allow the company to expense £295k of depreciation. As shown in the table below, the new policy will save the company over £40,000 more in tax in the year when the new machines are bought than under current policy. This would be an instant boost to cashflow which a firm could then use to reinvest and grow – not an insignificant amount of money for many firms.

This policy is a definite positive move to support investment and one that is needed in the current environment. But the change is not at the scale of change that we were campaigning for - 100% capital allowances for a period of two years. A new AIA of £250,000 will cover the average annual investment of over 98% of all companies. This also needs to be understood in the context of total capital investment – only 30-35% of total capital investment is made by this group of companies. The impact of this policy change could have been greater - a higher allowance would have captured a greater share UK investment and benefited more companies.

Over the last few days a number of guests contributed to our investment blog series setting out why government should be focusing on boosting business investment and providing a range of ideas on how this can best be achieved.

With contributions from a wide range of people and organisations, there were a number of points of consensus and a range of ideas to boost investment that the government can consider. These ideas are briefly summarised below.

There is a clear case for the government to focus on boosting investment…

The importance of investment was widely supported and backed by evidence. The UK has very low investment levels and this is not just a short-term problem. For decades UK investment has been low compared to European competitors and the US and since the end of the recession business investment has failed to recover to the extent expected. Low investment levels are impacting the UKs relative productivity and competitiveness.

There has been some positive news though. Manufacturing investment intentions have been strong during the recovery, with a consistently positive balance of manufacturers planning to increase investment since the end of the recession.

… capital allowances would provide a strong incentive in the short term …

Virtually all contributors recommended raising capital allowances to drive higher investment in the next two years. 100% capital allowances for two years would drive a spike in investment that the UK needs.

Capital allowances do make a real difference to business investment. In his blog, Stuart Fell discusses how low capital allowances impacts cash flow and ultimately investment.

… and changes in a number of other areas will also help reduce the barriers firms face when investing

• Other areas that were identified as important for investment include
• Improving access to finance, both through the banking sector but also alternatives
• Further improvements to the tax system, including the R&D tax regime and the headline rate of corporation tax
• Greater urgency in infrastructure investment
• Providing a long-term signal to business to provide greater policy certainty

The Autumn statement, which the Chancellor will present next Wednesday, provides an opportunity for the government to act now to boost investment in the UK. We wait with bated breath to see what Wednesday has in store for business.

EEF thanks Tom Lawton (BDO), Paul Everitt (SMMT), Paul O'Donnell (MTA), Steve Bates (BIA), Chris White MP and Stuart Fell Chairman of Metal Assemblies Ltd for your contributors to this investment blog series.

This blog forms part of a series of guest blogs on investment. You can follow the debate on twitter with the hashtag #bizinv

Stuart Fell is Chairman of Metal Assemblies Ltd

We need the government to encourage those companies who want to invest to do so. We are in an investment race with our competitor nations, and we are not keeping up. Those companies that understand this are the ones who have the best chance of surviving, but there are numerous calls on their cash and investment is only one of them. It is clear that the tax regime in this country is not as favourable for capital investment as some of our competitor nations. Instead the government has concentrated on getting a low rate of corporation tax, as if this were some kind of virility symbol. However, this does not seem to be encouraging some of the largest companies operating in the UK to pay any tax at all, since they seem to be able to offshore large parts of their revenue at will without HMRC seeming to bat an eyelid.

Things are rather different if you are an SME. I don't want to move my production to the far east or eastern Europe, and I can’t move my intellectual property to Eire or the Bahamas, so I am stuck here.. The Capital Allowance regime in this country does not allow me to claim anything approaching the real cost of capital investment against my corporation tax bill, with the result being that I have to find the cash to pay for the investment as well as the tax. So the rate at which I can invest is limited by comparison with my foreign competitors.

Osborne and Cameron seem to like their military metaphors and we have heard much of the new global marketplace in which we operate and the importance of national resurgence. But, as one of the foot soldiers in this struggle, as I walk towards the gunfire that is global manufacturing, I look around me and I see that, while we may no longer be the “Limp of the Lepers”, we are yet far from being the “March of the Manufacturers”. When I look into the far distance behind us I can see Mr Osborne. He is performing the “Tiptoe of the Timid”.

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Please note: these blogs contain the views of the author and are not necessarily those of EEF

This blog forms part of a series of guest blogs on investment. You can follow the debate on twitter with the hashtag #bizinv

Chris White is MP for Warwick and Leamington and is the co-chair of the Associate Parliamentary Manufacturing Group

You can follow his tweets via @ChrisWhite_MP 

Over the past two years, manufacturing has become one of the central planks of the Government’s efforts to get the British economy back onto a path of sustainable growth. It is hardly surprising, as the co-chair of the Associate Parliamentary Manufacturing Group, that I believe this is to be the right move.

While a great deal of manufacturing success is down to the efforts and decisions of business, the Government has a role to play in creating an environment in which manufacturing can thrive – a point which was highlighted in Lord Heseltine’s growth review. Signals from Government can have an important impact on the plans of businesses, creating confidence and stimulating growth – and this Government needs to send a strong signal to business to invest for the future.

The UK is facing a significant productivity challenge. According to the latest figures, competitors such as the US, France and Germany all have large advantages in terms of productivity, and unless the UK is able to reduce that productivity gap, UK businesses will find themselves at a competitive disadvantage. The only way to reduce that is to encourage investment in new equipment, more research and development and better skills.

The Government can send the right signal to encourage investment by increasing capital allowances in the Autumn Statement to 100% for two years – a policy which has been championed by EEF for many years. This will give an incentive for manufacturers to invest in the future and give a valuable boost to our economy. We also need a long term review into our system of capital allowances. According to research by Oxford University, the UK ranks 28th in the world for allowances for plant and machinery and 41st in capital allowances for industrial buildings – this is simply not good enough.

We also need greater urgency in infrastructure investment. The UK ranks poorly for infrastructure quality – 33rd according to the World Economic Forum and excellent infrastructure underpins the competitiveness of countries such as France. Any under spend by Government departments should, therefore, be redirected at infrastructure projects and additional measures should be taken to encourage outside investment.

The Autumn Statement presents an excellent opportunity for the Government to boost manufacturers and create the platform for long term growth. I hope that the Chancellor takes this opportunity. 

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Please note: these blogs contain the views of the author and are not necessarily those of EEF

This blog forms part of a series of guest blogs on investment. You can follow the debate on twitter with the hashtag #bizinv

Steve Bates is the Chief Executive Officer of the BioIndustry Association (BIA)

You can follow the BIA's tweets via @BIA_UK

For members of the BioIndustry Association (BIA), particularly small and emerging companies developing innovative products and technologies to treat areas of unmet medical need in cancer and diabetes for example, access to finance remains a core issue. I understand this continues to be the case in other equity based innovative sectors as well – be they cleantech, digital, software, gaming etc – and that is why ahead of Autumn Statement the BIA is urging the government to consider introducing Citizens’ Innovation Funds (CIFs).

For our sector and many others bank lending isn’t an option. So we have to consider other innovative funding policies to support these high-growth, creative industries that are core to future UK growth.

At the BIA we believe CIFs offers one such policy. The proposal, contained in a detailed report published in September, is a practical and effective investment product that will unlock the patriotic potential of the general public providing the chance to be involved in future UK growth.

CIFs are based on the successful French Fonds Commun de Placement dans I’Innovation (FCPI) scheme that has been running since 1998. Through investments made by the general public, on average around €5,000 to €6,000 per person, over €6 billion has been raised supporting well over 1,000 innovative French companies. The FCPI scheme allows individuals to invest up to €13,000 per year, with the incentive of a tax break, into pooled managed funds which then invest in promising companies. 60% of the funds must be invested in innovative companies.

As we make clear in our report, detailed research has shown the FCPI-backed companies, as compared to non FCPI-backed companies, grow revenues faster, export more, hire more staff, file more patents and are more likely to list.

We propose this readymade blueprint is adopted in the UK in the form of CIFs. These would allow individuals to invest up to £15,000 per annum, with a tax break, and that money would be pooled and used to support innovative UK companies. It would be the first time that the general public are given the chance to invest in high-growth and potentially high-reward sectors, rather than limiting this opportunity just to high-net worth individuals as is currently the case.

We have been encouraged by the response we have received from other sectors and interested parties and are pursuing the proposal with government. Ultimately, we all share the desire to promote growth and at the BIA we are grateful for a number of positive government policies including the R&D Tax Credits and the Patent Box for example. However, adding one or two more pieces to the policy jigsaw could make a real difference.

I look forward to seeing the direction of travel at the upcoming Autumn Statement but, beyond that, to Budget 2013 and seizing the chance to creatively fund innovation.

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Please note: these blogs contain the views of the author and are not necessarily those of EEF

This blog forms part of a series of guest blogs on investment. You can follow the debate on twitter with the hashtag #bizinv

Paul O'Donnell is Head of External Affairs at the Manufacturing Technologies Association (MTA)

You can follow the MTA on twitter via @mta_uk

For the first time in a generation advanced manufacturing is, politically speaking, cool. After decades of at best benign neglect and at worst outright hostility there is widespread recognition across the whole spectrum of political opinion that making things and all the economic activity that goes with it is not only beneficial to our national economy but essential to it.

Furthermore the advanced manufacturing sector is doing well, comparatively speaking. Manufacturing as a whole has outperformed the economy over the last three years and the parts of manufacturing which involve engineering and machinery have outperformed even the wider sector.

This is good news because we in the UK have a real opportunity to take advantage of a unique set of circumstances to drive a manufacturing renaissance. We have a first rate science and research base, outstanding international performance in some key growth sectors (notably aerospace), a position that straddles European and global markets, and a competitive exchange rate. Much that the Government is doing – the High Value Manufacturing Catapult, strengthening apprenticeships, and bolstering UKTI will play to these strengths in the medium to long term.

But there is a problem; UK has long suffered from internationally low, well actually abysmal, levels of investment (see chart). We have underperformed all of our European competitors for most of the last four decades. If we cannot address this problem then our reboot of the UK economy will result in a system error.

We have to drive an investment spike needed to master the new global manufacturing environment that we see emerging around us. Introducing 100% Capital Allowances for two years would do that. Companies are holding back on investment and keeping their cash close. And who can blame them when the tax treatment of investment is as mean as it is in the UK? The Centre for Business Taxation at Oxford University ranks the UK as only 28th in the 41 country OECD/G20  league table for capital allowances available for investment in plant and machinery; a substantial contributory factor  to our placing of 32nd (again out of 41) in their ranking of country’s effective marginal tax rates – a vital investment determinant.

Encouraging companies to invest at least some of what they have now, through a time limited allowance window, is the simplest way to bring that money into play and would provide a valuable boost to investment at a time when it is most needed. The Government has to say that bottom quartile performance isn’t good enough. Put simply: if not now, when?

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Please note: these blogs contain the views of the author and are not necessarily those of EEF