EEF blog

The government can promote business growth and investment by improving access to finance

SMEs in particular are still struggling to access the funding they require, so it is encouraging that the Prime Minister noted in his speech on Monday that opening up access to finance and getting banks lending will be crucial to drive growth. Government should promote access to finance through facilitating greater transparency around lending policies; encouraging increased competition in the banking sector; and promoting alternatives to bank lending.

The government could take better advantage of green opportunities if more resources are given to the Green Investment Bank

The scale of investment needed to really capitalise on the opportunities in green technologies will not be met by the current plans for a £1bn Green Investment Bank. The government should be more ambitious: estimates suggest that the development of a low carbon infrastructure and low-carbon technologies will require £5bn of funding over the next five years.

The government will maximise the returns to its investment, if it is clear about its plans, and the kinds of support that will be available.

In many areas of government spending, greater details are required. Particular areas the government should clarify include which types of adult apprenticeship will be funded by the £250mn announced; and how funding to help firms commercialise their innovative ideas will be allocated. 

The government can spur on regional and sub-regional growth if it sets out clearly what LEPs will do; how they will operate; and how they will be funded

If LEPs are going to drive economic growth then the government will have to:
- get the right balance between central and sub-national government
- ensure LEPs have a clear remit and are focused on the right issues
- achieve a critical mass for LEPs
- secure engagement from business
- deliver value for money

The government can reduce the burden on business by providing greater stability and predictability in the tax system

If the UK is going to have an internationally competitive tax regime, the government must provide a road map for which corporate, environmental and personal tax reforms it will seek over the next few years and explain how these changes will rebalance the economy by supporting investment.

The burden on business can also be reduced through pursuing alternatives to regulation

The government has made a good start by introducing a “one in one out” policy on regulation, but it must recognise that the cost of regulation is also a cumulative effect from the layers of regulations that have built up over time.  For this reason the government should consider seven-yearly sun-setting reviews and consultations with business and use these to discuss alternatives to regulation.

The government can only ensure that businesses will receive the support they need in the coming months if changes to business support are properly communicated and managed

The need to reduce public spending along with the transition from RDAs to LEPs will inevitably lead to changes in business support, but the government should do everything it can to smooth this transition. Businesses will need clarity over which services will continue to receive funding even if the delivery mechanisms, brokerage and costs are still to be determined.

The government can work better with business if it develops a more nuanced understanding of the contributions to growth from different sectors of the economy.

The forthcoming manufacturing framework must demonstrate an understanding of manufacturing’s contribution to the economy and recognise that, given manufacturing’s high capital intensity and global exposure, certain policy levers will have a differential impact on the sector compared with the rest of the economy.

The government can catalyse private sector investment by targeting funding more strategically.

Government investment in port infrastructure, for example, would help attract additional foreign investment in the UK low-carbon economy. Similarly the £1bn commitment for carbon capture and storage should enable the development of low carbon industries in the UK, though experience from Canada suggests that the government needs to move more quickly.

The government can get more from its suppliers by engaging with business at an earlier stage, and becoming a more collaborative partner.

Rather than focus on short-term cost savings, changing the culture of procurement and upgrading the skills, expertise and experience of public sector procurers will help bring long-term value for the economy.

Supply chains suffered in the recession. As demand waned many suppliers cut back sharply and decisively. Whilst this enabled many firms to stay in business, it is now hampering their responsiveness to the dramatic increase in demand since the recession ended.

Yesterday the FT reported that electronic component makers are now operating at 94% capacity, up from 56% last year, and many are struggling to keep up with orders. This, in turn, is reducing the ability of large multinational companies to respond to increased demand.

In the UK one sector that is particularly reliant on its supply chain is Aerospace and Defence. According to ADS there are over 9000 defence SMEs in the UK. These SMEs often supply niche or high-tech components for the large defence multinationals.

The problem for the UK defence industry is that these SMEs are now facing a “double whammy”. Having cut back during the recession, these businesses are about to be hit by large cuts in government spending.

Whilst the multinationals will undoubtedly be hit by spending cuts these businesses are much less vulnerable than their suppliers because they have many markets; BAE, for example, generates just 20% of its revenue in the UK.

This matters for the large multinationals and it matters for the UK’s future defence capabilities. If the UK’s supply chain suffers in the short term, the UK’s ability to compete in this sector could be permanently diminished. This has political implications, too. If the UK’s capacity to manufacture defence equipment is reduced then so too is our ability to respond to a changing defence situation.

Whilst there may well be a role for government in supporting the defence supply chain, businesses are also looking at ways to help themselves. Larger defence companies are aware that their suppliers are struggling, and recently there have been some examples of firms buying out suppliers rather than see them go under.

Suppliers themselves are also diversifying by moving into new markets where demand for defence is growing; and moving into adjacent sectors such as security and intelligence.

These strategies are not without risk, UK businesses are not the only ones seeking to increase defence exports in those countries where defence spend is growing, however, it is this kind of adaptability that should stand UK manufacturers in good stead even in a tougher economic climate.

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.

Anyone outside the Labour party (and many inside it!) know that Gordon Brown has taken an absolute beating on the public spending issue over the past few weeks.

The PM's "zero per cent growth" line gave new meaning to the phrase 'lies, damn lies and statistics'.

Taking pity on the PM, David Smith gives him some much needed advice:

"This is what I would do: concentrate on the numbers for the whole of the next parliament rather than just the 2011-2014 period. The sequence for total spending in real terms, 2009-10 prices, is courtesy of the Institute for Fiscal Studies: £682 billion in 2009-10, then £702 billion in 2010-11, £700 billion in 2011-12, £701 billion in 2012-13 and £700 billion in 2013-14.

2009-10 is the last full year of this parliament. 2013-14 will probably be the last full year of the next parliament. Comparing the two, Brown could say that the Treasury plans imply a real spending rise albeit a modest one (2.6% over four years) during the next parliament. Or he could carry on making a fool of himself ..."

Quite.