EEF blog

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.

Vince Cable was at EEF this morning to announce the proposed changes to employment law.

Some of the proposals announced today have the potential to make a significant difference for employers. For example, encouraging the use of pre-conciliation services to reduce the number of tribunals should reduce the cost and burdens associated with unnecessary employment tribunals.

The strong emphasis of the coalition government on reducing the regulatory burden is encouraging, as regulation is one of the key barriers to growth and it is one that is within the government’s control to affect.

In our Shape of British Industry report in 2010 we found that regulation is a major concern for manufacturers who rate it as the second-worst aspect of the UK business environment (after tax). More than half of respondents to our survey cited regulation as an obstacle to their growth plans.

Good news then, that we’re currently in the midst of a key period for regulatory change with a series of reviews and consultations being announced. Next Monday the Löfstedt review of Health and Safety regulation will be published and on the day of the Autumn Statement the results of the manufacturing Red Tape Challenge will be announced. In January there will also be news on Environmental regulation.

We will be looking for announcements on regulatory changes that will make a material difference to the burdens that manufacturers face, particularly those that are specifically holding back growth.

Some suggestions that have come out of the manufacturing Red Tape Challenge include:

• An export licensing system that supports growth by helping UK manufacturers compete in global markets. Member companies are reporting losing orders due to the protracted nature of the process and the lack of transparency over the progress of an application.
• Waste packing regulations that are proportionate to the environmental benefit they deliver.
• A fast-track process for changing an environmental permit where the risk of environmental damage is unchanged or going down. For example, where a building is being removed and/or an industrial activity is being discontinued at a site
• Greater consistency between health and safety inspections. Inconsistency costs firms money and negatively impacts on their businesses. Companies are reporting being asked by one inspector to make costly safety modifications to machinery only to told by another on a follow-up visit that the measures were unnecessary.
• A more efficient process for dealing with small injury claims. The fast-track system for small claims is slow and inefficient. As well as often taking months or years, the legal costs for claims settled at the earliest possible opportunity are very nearly equal to the full value of claim. A protracted process is not in the interests of employers or injured employees. 

For more information on our key priorities for growth, see our submission to the Chancellor ahead of the autumn statement.

Today’s economic data release on UK GDP growth in the third quarter showed a modest upside surprise. But the simultaneous Manufacturing PMI 28 month low doesn’t bode well for the remainder of the year.

The GDP result was ahead of most analysts’ expectations of a 0.3% rise, mainly on the back of stronger growth from business and financial services.

Manufacturing grew too; though at a modest 0.2%, which only equalled the performance of the weak second quarter. And the fourth quarter seems to have opened even more weakly with today’s 47.4 PMI reading indicating contraction in October.

Most concerning in the PMI data is the dive in the new orders reading reaching 44.

So what’s driving this?

Weakness on the domestic side of the economy is the result of well-known factors. The drag on consumption continues from high inflation, a weak housing market, and high unemployment.
The contraction in government spending seems to be showing up most clearly in terms of the number of public sector jobs with some reports suggesting the OBR’s initial forecast may be too light.

These weaknesses remain with us.

The major change since the start of the year, when manufacturing was growing strongly, is the weakening in external demand.

We have increasingly heard from manufacturers saying the continuing problems resolving the eurozone debt crisis were causing firms, particularly SMEs, to hold off investment and recruitment.
What today’s PMI suggests is that the uncertainty and doubt on the strength of future demand that the crisis has created is now spilling into customers’ orders. Worryingly this seems to be impacting markets both within and outside Europe.

As concerning as this is, we still expect growth in the sector to return particularly as demand from emerging markets strengthens. For example, though coming from a low base, quarterly goods exports to China have increased 16% in the 3 months to August 2011 compared with the 3 months to August 2010. These are growing markets.

In the medium term manufacturing is still at the heart of an economy characterised by a greater reliance on trade and investment as sources of growth.

But what today underlines for us is that clearly growth cannot be taken for granted. Europe still accounts for half our exports. And the seriousness of the debt crisis is reaching much further afield.
For this reason we consider more than ever the government must use its Autumn Statement to provide a much stronger focus on growth.

The government cannot decisively change the situation in Europe but it can offset manufacturers’ caution regarding investment by introducing 100% capital allowances for two years.

The government can also match its action with its rhetoric by getting serious about growth enhancing policy reform, especially in terms of reducing the burden of taxation and regulation and increasing the flow of finance and skilled workers - see our blogs for more detailed suggestions.

Is government regulation costing you money and time, or causing you to lose orders? Between 2002 and 2010, the cost to UK business of the annual flow of new regulation more than doubled from £5bn in 2002 to in £11.5bn 2010.

In tough economic times we need to ensure that regulation is kept to a minimum and is as well-designed and sensibly implemented as possible.

The ‘Red Tape Challenge’ (RTC) is an opportunity for business like yours to get involved and start addressing the issue and shape a better business environment. It’s a government initiative that invites businesses to tell them which regulations are not working and how they could be improved.

Manufacturing will get out of this exercise what it puts in. We can see it as a gimmick and sit on the sidelines or get involved and generate ideas.  We will be taken most seriously if we submit a considered and focused body of evidence.

EEF wants to do its bit. Our Chief Executive, Terry Scuoler, is acting as the ‘sector champion’ for manufacturing. In this role he is promoting participation in the RTC and working to ensure that manufacturers’ views are taken seriously.

We are pulling together issues from across our membership and beyond to demonstrate the breadth of regulations weighing down on UK manufacturing. A consolidated body of evidence will help give maximum impact to the industry’s concerns.

If you are a manufacturer whose business is being undermined by regulation, let us know and we will champion the issue on your behalf. Send a description of the issue and the regulation causing it to redtapechallenge@eef.org.uk

In 2010, in his ‘emergency budget’, George Osborne boldly set out the coalition’s plans for eliminating the structural deficit over the course of the parliament.

This fiscal plan, though tough, gave necessary signals to the market that the deficit would be reined in and removed a key source of uncertainty.

But now it is 2011 and the new challenge to the government is supporting growth - and that's what we need from Budget 2011. The Manufacturer runs a good summary piece on our submission.

2011 is the year the public sector cuts really start to bite and where private sector growth must take up the slack.

Just as we needed a Fiscal Mandate in 2010, in 2011, we now need a Growth Mandate. EEF's CE, Terry Scuoler outlines the Growth Mandate in today's Telegraph. It will signal that the government is serious about our business environment and helping the private sector deliver the growth we need.

The reality is that we need to see this commitment because manufacturers have a choice on where to invest and the smart money is on investing in an economy that offers a business environment that can compete with the best in the world. We need that economy to be the UK.

The Growth Mandate would set out priority areas for growth that the government would address and against which it will be measured. Like the Fiscal Mandate, the Growth Mandate should span the lifetime of a parliament. As the FT picks up we think each subsequent Budget and policy announcement showing further incremental progress.

This multi-year view must be taken. The fiscal mandate cannot be threatened so a big bang approach is not viable. But the barriers to growth must gradually and consistently be dismantled.

And like the fiscal mandate a long term view on the growth mandate will deliver a confidence dividend to businesses who will see the business environment progressively improving.

Each Budget should therefore report, relative to the last budget on the following measures:

• The change in total tax costs faced by businesses;
• Estimates of the net change in bank and non-bank external finance to non-financial companies;
• The change in total climate and environment policy costs faced by businesses;
• All new and withdrawn regulations, and the change in the total cost of all regulation;
• The change in the proportion of companies facing skills shortage and hard-to-fill vacancies; and
• The change in apprenticeship starts at each level.

The challenge is that this holds the government to account for delivering consistent progress.

But a growth mandate isn’t a replacement for action at Budget 2011. Instead, Budget 2011 offers the first opportunity for the government to take small steps forward to support growth – small steps that point to large ambitions.

We see four key areas, mentioned in the Independent, where progress needs to be shown:

- Tax;
- Access to finance;
- Skills; and
- Regulation.

On tax we need the government to appreciate that firms make decisions based on the basket of taxes they face, not just the headline rate. We need reform on the R&D tax credit and capital allowances that properly account for the costs manufacturers face. The environmental tax burden needs to be reduced. Any support we give for a Carbon Tax is conditional on reductions in other energy taxes.

Finance remains a problem for firms post crisis. We need the Independent Commission on Banking to deliver measures that not only make the banking system safer but also increase competition – because growing firms often get their first lending deals secured through banks looking to enter the market. We also need more alternative sources of finance – both non-bank debt and venture capital, critical funding for firms that aren’t ready for bank debt.

Future funding and demand for 14-19 diplomas needs to be reviewed with the aim of increasing support and improving delivery. And the government should introduce a pilot initiative through the Growth & Innovation Fund to support SME collaboration on industry placements

On regulation the government needs to match its rhetoric with action by reviewing the cumulative impact of thresholds for regulation and commit to further action on reform as appropriate. As scope for simplification of individual regulations has largely been exhausted, commitment to structural reform of entire regulatory domains is needed

All these examples provide initial opportunities for government action to support growth.

In 2011, George Osborne will deliver his second budget. We believe his challenge is to set the Growth Mandate for a private sector-led recovery.

How well prepared are UK manufacturers for the next challenge of turning their investments in productivity and competitiveness over the past decade into transformational growth in the next?

To answer this question and to understand the current state of British industry, our new report - The Shape of British Industry - Growing from strong foundations - draws on a survey of 300 manufacturers as well as in-depth discussions with dozens of businesses.

What comes out is a picture of an industry starting from strength, but cautious about growth. Having weathered the recession, UK manufacturing emerges as an innovative, diverse and globally engaged sector. Firms have continued to boost productivity and competitiveness, even if they have struggled to deliver profits or meet their ambitions. According to our new report there's both good and bad news.

Chart 1 - SMEs less likely to turn productivity boost into profits or growth
% balance with increase in productivity, profits and meeting growth objectives

There is, however, one striking feature: the UK, has relatively fewer large manufacturers – those employing more than 250 people – than our closest competitors.

Chart 2 - UK has relatively fewer larger manufacturers,
Number of manufcturers with 250+ employees (US figure is for firms with 500+ employees), and large companies as % of total manufacturers

The twin dynamics that could drive growth in manufacturing are large companies creating markets for a dynamic, diverse supply chain and innovative, agile suppliers attracting large, mobile multinationals to the UK. The danger for manufacturing and the economy is that the lack of larger companies could slow this dynamic, leading to a hollowing out of supply chains and placing a cap on future growth

After a deep recession in which the economy shrunk by 6%, a manufacturing-led recovery has helped drive a year of good economic news. Exports to developing economies are booming and the private sector is slowly creating jobs again. But with public sector cuts looming and a currency war threatening to derail the global economy, we cannot take this growth for granted.

Generating long-term, sustainable growth will require the private sector and government to work together to build on the strengths of sectors – such as manufacturing – that are essential to tackling our future challenges, such as global security, demographic change and climate change. Government, therefore, has a big part to play in providing the right framework that will support and catalyse private sector investment and business growth.

As the Prime Minister stated in his speech on growth, this will mean more than government getting out of the way.

Instead it will need to be clear about what its role is in generating and supporting growth.

The previous government’s preferred approach was overly focused on industrial champions. The current government’s attention to start-ups and young businesses is helpful, but is in danger of swinging too far in the opposite direction.

Yet growth is not a big or small issue. It is about providing sufficient demand to sustain a dynamic and diverse supply network. It is about big businesses with the capacity to drive innovation and productivity down supply chains. And it is about growing bigger businesses with the scale and muscle to invest in tackling our long-term economic challenges.

Prior to the recession, manufacturers’ investments in innovation, their collaboration and their agility were paying dividends. But knocked off their plans for growth during the recession, many companies are now justifiably cautious about investing in growth until they gain greater certainty over the economic and business environment.

Growing more, larger manufacturers is, in part, about continuing to attract new ones to the UK. But it is also about ensuring small and medium-sized manufacturers overcome barriers that constrain them.

The limited availability of affordable finance traps some young and small companies in a Catch-22: unable to get the necessary finance, their ability to plan for growth is constrained, yet unable to demonstrate clear ambitions for growth, some firms find it difficult to get the appropriate finance. If they do manage to grow, these firms would be caught in the thicket of tax and red tape that helps make mid-sized cautious about planning to become truly global in scale.

Chart 13 Tax and regulation are major concerns for mid-size firms
% balance of companies citing UK strengths by company size

The Prime Minister has challenged industry to commit “to create and innovate; to invest and grow; to develop and break boundaries”.

This report shows that manufacturers are already rising to the challenge, but it also sets out where both manufacturers as well as government must make better progress if we are to grow a generation of bigger manufacturers.

Maintaining momentum behind the recovery is crucial. But not all economic growth is equal: imbalanced and unsustainable growth can leave a terrible legacy, as the recent financial crisis and recession have shown.

To ensure our economy can pay its own way in the future, the UK does not need a handful of bigger manufacturers, we need hundreds of them.

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.

Regulation is an essential part of a well-functioning society and can deliver major benefits.

However, where it is excessive, ill-conceived or poorly implemented, it can impose significant cost on individuals, businesses and the wider economy with little or no benefit.

Just over half of UK manufacturers see regulation as obstacle to growing their business. But desipite promiseses from successive governments to reduce the costs of regulation, only to see them rise year on year.

So if we're going to live up to the Chancellor's aim of making the UK economy saying ‘Open For Business’, then we need a bold new approach to regulation.

You should take a detailed look at the report, but in Reforming Regulation: Improving competitiveness, creating jobs, we argue that far-reaching reform is needed in two areas.

Firstly, we need a robust and transparent system of measuring and controlling the costs of regulation is essential. We need to make a substantial reduction to the regulatory costs faced by manufacturers and the first place to start is by understanding the burdens borne by business

Secondly, policymakers need to develop some fresh-thinking about they develop regulation. We need to break out of this stale cycle that sees new legislation and regulation introduced, simply for businesses to complain about the costs yet more cumbersome government bureacracy. We need to be more smarter about regulation - and alternatives to regulation.

There have been some positive early signs from the coalition on making a fresh start.

Now need to see decisive action that will turn these intentions into results that actually help business to deliver a re-balanced economy.