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. 

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.

The PM said yesterday that the coalition government will,

“do what we can in the Budget to ensure that we have in this country a tax regime, support for apprenticeships and support for training that will want to make businesses locate, stay and invest in Britain."

This is encouraging news.

Whilst the budget will focus on the spending cuts and tax rises that will be needed to reduce the UK’s fiscal deficit, policy is required to support the business investment that will ultimately drive economic growth in the UK.

Business investment suffers heavily after a recession.

After the recession in the 1980s ended it took five quarters for levels of annual business investment to begin to grow again, and fourteen quarters for investment to return to pre-recession levels. After the 1990s recession ended it took ten quarters for business investment to make a sustained recovery.

Quarter on quarter change in GVA; and business investment in the 1990s

The size of public sector cuts to come mean that economic growth will only happen with private sector investment. The UK cannot afford to wait as long for investment to recover this time.

A day after being slated by the IFS, the Darling, Cable and Osborne gave speeches on their economy policies and priorities.

Vince Cable was up first. With the Lib Dems rise in the polls, he's come in for some hard questioning recently, and their proposals focus on regulating the banks and personal tax issues.

Darling's was next and his speech focused on his experience as Chancellor - which an FT poll of City types labels as 'impressive' - and contrasting his record with what he calls the Tories "lack of judgement".

Despite being labelled as inexperienced by the City, Osborne is still the punters' favourite to become the next Chancellor - his focus is on regulating banks and corporate tax reforms. The challenge for Osborne is to ensure his tax proposols don't undermine manufacturing and a balanced economy.

What's EEF's view?

Like we said this morning - we need more from all the parties on their vision for the economy and how they intend to make it a reality.

Unfortunately, we've seen precious little detail to match the scale of the rhetoric coming from the parties.

Yesterday, the Institute of Fiscal Studies launched a detailed and scathing assesment the three main political parties plans for repairing the public finances.

The essential point of their criticism echoes what EEF have long been saying: the superficial debate on when to begin tightening is detracting from the more important debate on how you cut spending and raise taxes.

• The Tories have yet to account for £52.5bn in spending cuts and £3 billion in tax rises.
• Labour have to account for £45 billion cuts and £7bn in tax rises
• The Lib Dems have to account for just £34.4 bn in spending cuts - they're plans require no further tax rises.

The phoney war of words on the planned NICs rise is a storm in a tea-cup compared to the parties' vast unexplained plans to repair the public finances.

But the real story behind the IFS report relates to the tax challenge EEF set out a month ago.

Firstly, VAT is almost certainly going to go up.

But that's alright: VAT in the UK is lower than the EU average and is one of the least damaging tax rises possible.

Another issue close to manufacturers' competitiveness is on capital allowances and the Conservative Party proposals to reduce the level of capital allowances to 12.5% to pay for a 3p cut in the rate of corporation tax.

The IFS's verdict?

"...the Conservatives’ proposed changes to capital allowances would make corporation tax more complicated, not simpler.

If the package is revenue-neutral then on average there would be no change in firms’ overall tax burden. However, some firms would benefit and others would lose.

The losers would be firms that invested heavily but made little profit – notably in the manufacturing and transport sectors but also some capital-intensive service-sector firms.

The winners would be less capital-intensive but more profitable firms, historically typified by the financial sector.

...by reducing the generosity of capital allowances, the Conservatives would weaken the incentive for firms to invest in new equipment in the UK.

It is difficult to imagine that this is the most efficient way of financing a cut in corporation tax rates."

Not since National Insurance Contributions were first introduced to fund the new welfare state, can a change in their rate have generated so much attention. Though the ferocity of the debate has been surprising, it's not hard to see why it's become such an important issue.  With the next government facing a massive task to reduce the public sector deficit, business naturally worries that it will end up footing a significant part of the bill. The two half point increases in NIC rates therefore sent out the wrong signal to business, particularly as the second one funded an increase in government spending rather than paying down the deficit.  For manufacturers struggling to rebuild their margins after a particularly serious recession, this increase in costs was also particularly unwelcome.

Manufacturers were therefore pleased by the Conservatives' announcement of a partial reversal of the NICs increase but for many the welcome was a wary one. Until we get the full details of how the next government will reduce the deficit, manufacturers can't start making plans for the future with any degree of confidence. And that's why the level of debate this week has been so disappointing if not surprising.    

Over the coming weeks, we challenge all the main parties to start debating the real issues. For example, what will be the balance in spending cuts between capital and current spending?  How will they go about deciding which areas to cut? Do they have any fresh ideas about the relative roles of the public and private sector in providing public services? And how can the government start to reform the tax system to create a more balanced economy?     

Manufacturers won't be holding their breath that they will get much clarity on these issues in the next month but is vital that the next government starts to answer these questions very soon after May 6th.