Next month we will come up to what might have been an important milestone for the government.

23 March will be one year since it launched its ‘Plan for Growth’ – the ambitions and accountability framework designed to structure the government’s economic policy.

At the time we had been calling for a ‘Growth Mandate’ – effectively an economic strategy to match the clarity of its fiscal strategy – the ‘Fiscal Mandate’.

Sadly the Plan for Growth has so far proved to be a very poor cousin of the Fiscal Mandate.

For a start, I don’t think many even in the Westminster bubble could name the Plan for Growth as the government’s overarching economic strategy. It has no visibility in the same way the deficit-reducing Fiscal Mandate has.

(For example witness calls from later in 2011 here and here for some kind of ‘plan for growth’ – even though the government strategy is literally called ‘The Plan for Growth’.)

But this failure is really a symptom and not a cause of where the government’s strategy is falling down.

The Plan for Growth set out four ambitions for the UK of 2015:

• To create the most competitive tax system in the G20
• To make the UK one of the best places in Europe to start, finance, and grow a business
• To encourage investment and exports as a route to a more balanced economy
• To create a more educated workforce that is the most flexible in Europe

It’s not that these areas are wrong or unworthy. It’s that they’re a little too vague and too broad to have enough meaning either for businesses or people on the street, or, importantly, for Whitehall policy-makers looking for a way to prioritise economic policy initiatives.

It doesn’t have to be like this.

How about changing:

‘encourage investment and exports as a route to a more balanced economy’

To:

‘increase the proportion of annual ouput accounted for by net investment and exports by five percentage points’.

This is stretching and not wholly within the government’s control – but it certainly would make a difference to the overall economy levers and the government is not without levers it could pull.

Underneath the ambition we could have measurables including increasing the proportion of companies exporting more than 25% of their turnover or increasing the market capitalisation of AIM by 10%. The government could then introduce policies to support these.

The government does seem to know the kinds of areas it needs to focus on. It just needs to be sharper with both its ambitions and its accountability framework.

23 March 2012 will not be a heralded date for the government progress on its Plan for Growth, even if it does try this.

What it could be is an opportunity for the government to refocus its economic strategy into something meaningful for the UK economy.

Even if you don't believe what the banks and government are doing to help finance will work you have to concede both are making some considerable effort.

So what more needs to be done?

The competitive landscape for SME banking in the UK has not yet had a shake up. We may see the beginnings of this in the government’s response to the ICB on Monday. But I think it’s likely it won’t go far enough.

Developing alternative sources of finance still has some way to go with little sense yet of where the Business Finance Partnership might invest its £1 billion or whether additional actions could help such as extending tax incentives for private equity investors to debt.

There’s also a major over-arching issue that hasn’t been addressed. For both supply and demand, where are we trying to get to? What does ‘good’ access to finance look like? Do we have any idea whether this plethora of activity is even moving us in the right direction?

This last point is important to complement the government’s stated ambition in March’s Plan for Growth: To make the UK a great place to start, grow, and finance a business.

So while supply constraints received a fair amount of attention in the media, the main focus for banks (and often from government officials), was to talk about the need to address problems on the demand side.

It wasn’t really until the Autumn Statement last month and the government’s ‘credit easing’ plan that supply constraints started to be addressed in policy. Credit easing includes the new National Loan Guarantee Scheme, which aims to pass on the government’s lower cost of borrowing to SMEs via banks, the EFG extension, a new £1 billion Business Finance Partnership to invest in non-bank channels of lending, and a new Taskforce on Debt investigating non-bank lending.

We have welcomed the evening up as we see it of the supply/demand ledger. Improvements on both sides are desirable.

It’s important that the government has acknowledged supply as an issue and importantly has acted to address the cost of lending.

There will be much in the detail of these schemes to work out however to ensure lending is truly additional and finding its way to SMEs that are not borrowing now. But for now we are hoping these schemes will make a positive difference.

So the EFG was introduced in the midst of financial crisis/recessionary freefall.

But the clamour for banks to do more to help business continued largely unabated even as the recovery slowly started to take hold through 2010.

While the Coalition sorted itself, the banks meanwhile introduced their Business Finance Taskforce in October 2010, which set out 17 commitments to improve access to finance.

The banks deserve credit for this initiative, which had the added advantage for them of allowing them to set the agenda for ‘doing something’.

Key highlights of the BFT’s commitments include the new Lending Code/lending principles on dealing with SME customers, the new loan appeals process for declined requests, the creation of the £2.5 billion Business Growth Fund, the funding of a major new independent survey (the SME Finance Monitor), and various schemes to encourage mentoring of SMEs.

While we support many of the aims of these initiatives and the banks are genuine in trying to help business the main issue for us with the overall approach is that most of the action is cast as being on the ‘demand’ side: Businesses not asking for loans or not asking in the right way being the problem rather than any issue with banks.

To be fair demand side issues are part of the picture. The number one factor bearing down on lending activity right now has to be the economic situation. Firms don’t think now’s a great time to borrow because their outlook is not looking good in the short term.

But supply constraints are surely also part of the picture.

What’s the most obvious thing that's changed since the financial crisis? Is it a massive increase in the number of companies around that are unable to put together a decent business plan? Or has there been a change in the application and practice of lending from banks?

Should it be the credit risk of businesses or the credit risk of banks that is most important in determining the price of lending?

Both the government and the banks have recognised the UK’s SMEs are facing difficult credit conditions and have acted to improve finance.

There is a difference between them and between them and us as to how much of this difficulty is due to issues on the supply or the demand side and how much is reality and how much perception.

The government’s schemes go back to the Enterprise Finance Guarantee, launched by Labour in January 2009 and designed to boost the availability of lending to SMEs who lacked sufficient security to secure loans.

The EFG works by government providing a guarantee on lending by banks (for a fee) to SMEs.

Insofar as it goes, the EFG has been successful albeit very small scale. The government has tried to extend its model to support exporting (the Export Enterprise Finance Guarantee) and now the range of eligible firms has been extended at the recent Autumn Statement.

The chief problems from our perspective with the EFG is that it is perceived as helping firms that have limited security – EFG-loans cannot be secured against personal property – but in reality in many cases it is part of a bundle that banks offer customers, where the non-EFG-backed loan is secured against personal property.

Also the EFG comes at a price and we know that the cost of credit is a key concern for SMEs.

Following the election the Coalition took some time to gather its thoughts on access to finance issuing a Green Paper seeking views from business organisations in July 2010.

The government will make its much-anticipated response to the Vickers’ Commission on banking on 19 Dec.

In the run-up to that announcement we are blogging on access to finance and especially we are trying to highlight the less-emphasised aspect of Vickers’ recommendations – his calls to boost competition in the UK banking sector.

Today I’m setting out where we’ve come from and what challenges UK companies are facing now accessing the finance they need to grow.

If we cast our minds back to before 2007 everyone likes to climb into the banks for their recklessness.

However we shouldn’t forget that the easy access to finance was not exactly shunned by companies either.

Some companies that banks backed shouldn’t have got any money. Some got financed on terms that didn’t reflect their risk. Businesses weren’t complaining.

So the adjustment in risk assessment by banks was necessary not only to correct reckless lending but also to correct reckless borrowing by companies.

This is important to accept because a lot of the so-called ‘bank-bashing’ we hear is caused by firms facing a wholly appropriate change in their access to finance.

So with that admission out of the way, what is the situation we find today?

We make three main points on credit conditions facing UK companies:

The availability of finance on reasonable terms has to improve.

Too often banks and actually finance providers outside of banks are attaching unreasonable terms to lending conditions.

Take covenants on lending. I’ve had a member tell me how these have been adjusted to include a requirement to make a profit on a monthly basis. Anyone with any degree of seasonality in their business will know this is a tough ask – and not reflective of the underlying risk of the business.

Even when terms and conditions are reasonable, because of more robust risk assessment, standards of communicating changes from past practice are often poor.

The SME Business Finance Monitor last month said that 49% of firms approached by their bank to renegotiate T&Cs were given no reason.

The cost of credit is too high.

We’ve seen the government finally recognise this by announcing a raft of schemes under the banner ‘credit easing’ designed to bring down the cost of credit for SMEs.

The cost is particularly salient for costs outside the headline rate on loans. Our Credit Conditions Survey has consistently shown a balance of companies reporting an increase in fees on existing lending, for example the fees attached to overdrafts.

For me the escalation of these fees, often product-specific, is the clearest indication that we haven’t got enough competition in UK business banking.

The last point we emphasise on lending conditions today, is the special plight of SMEs. SMEs consistently fare worst on both the cost and availability of credit.

SMEs also have the least alternative options and are often dependent solely on banks for external finance.

Greater choice and competition in banking is therefore very important for SMEs.

George Osborne has made a major improvement to the UK’s tax environment for R&D today by announcing in his Autumn Statement that the R&D tax credit will become payable ‘above the line’ from 2013/14.

This reform will increase investment from companies already the UK as well as bring additional investment in R&D to the UK.

The change means that rather than large firms accounting for the R&D tax credit in their tax return ‘below the line’, the benefit will be accounted for upfront in R&D budgeting ‘above the line’.

The key benefits of moving to an above the line credit are:

• Creating a simpler system;
• Strengthening the link between the R&D tax credit incentive and the parts of companies where investment decisions on R&D are made;
• Increasing certainty around the timing of the benefit of the R&D credit by decoupling it from a company’s tax profile.

Innovation is crucial for keeping ahead of the competition, generating better balanced growth, and creating high-value jobs.

When the R&D tax credit system was introduced it was a positive development for the UK. But our competitors do not stand still. Many countries have sought to incentivise greater expenditure on innovation and attract mobile R&D investments by introducing reforms to their own schemes to increase the incentive effect.

Today Mr Osborne has responded. He has made clear that the ambition he stated in March, to make the UK ‘the most competitive tax environment in the G20’ means the whole tax system, not just the headline rate. This is welcome news because it corresponds to how companies see the impact of taxes.

PwC has conservatively estimated this reform would deliver £665 million per annum of additional value to the economy at a net cost to the Exchequer of £205 million per annum. These are meaningful numbers at a time when the UK must be doing all it can to support growth.

Over the past few weeks we’ve been trying to highlight what we think today’s Autumn Statement from the Chancellor needs to deliver.

If the forecast revisions from the OBR are as bad as most of the media seem to be expecting, then our central claim, that the government’s Fiscal Mandate is most threatened by weak growth will be vindicated.

The government must act now to support growth.

This doesn’t mean throwing away its hard-earned fiscal credibility; quite the opposite – the two are intrinsically linked. That is why we have thought carefully about the options we have advocated on behalf of our members. We are not calling for unrestrained fiscal loosening.

Our central policy recommendation to address weak short-term prospects for growth is to bring in a temporary policy of 100% capital allowances for two years for new investments.

Why?

• The government needs investment to drive overall growth;
• Nose-diving prospects in Europe are causing companies’ to think twice about investment;
• The financial sector is becoming more nervous about supporting investment meaning cashflow is even more important to drive investment;
• Our medium-term competitiveness depends on firms investing now to stay ahead of the competition.

Critically this is a policy that is totally compatible with fiscal credibility. Capital allowances are already a legitimate expense representing depreciation that can be claimed by investing businesses, albeit over a longer timescale. For a given level of investment, within five years 63% of the cost to Treasury would be incurred anyway under existing parameters.

This policy would bring forward planned investments now and encourage more investment. But a ‘plan for growth’ doesn’t end here.

The Chancellor must start painting in the picture of his ambitions for growth by setting out how the UK can become the best place to do business in the G20.

What does our business environment need to look like in five years time to meet this ambition?

For our members it’s about focusing on four key areas, which we’ve been highlighting.

Reducing the tax burden: e.g. by compensating our energy intensive industries for the impact of carbon taxes; and making the R&D tax credit payable above-the-line

Improving access to finance: e.g. bringing down the cost of finance by boosting competition in the banking sector and increasing sources of debt and equity finance outside of banks

Decreasing the regulatory burden on businesses: e.g. by sweeping away stifling regulations holding back employment

Increasing the supply of skilled workers: e.g. by formalising the status of apprenticeships and improving and increasing maths and science education at secondary level.

We’ve seen some positive movements already from the Treasury on these areas including the package for energy intensive industries, Vince Cable’s employment regulation announcements last week, and the so far detail light credit easing plan.

In two hours time we’ll see how far the ChX’s commitment to growth runs.

EEF released its latest Credit Conditions Survey today and unfortunately the news is not good. A higher net balance of companies (17%) is seeing the overall cost of finance rise and worryingly after two quarters of improvement, a net balance of companies (3%) also saw the availability of credit worsen.

This is an additional barrier to investment when we can least afford it given the challenging short-term demand outlook is already a considerable deterrent.

Looking at just new lines of borrowing, a balance of 24% of manufactures reported an increase in cost, rising to 31% for just small companies. This compares with 8% and 3% respectively last quarter. A notable deterioration.

Also fees on existing credit lines, a pet-hate of ours and I think the clearest indicator of not enough competition in banking, increased for a balance of 21% of companies, the highest since 2011q1.

EEF’s own survey comes on the back of last week’s SME Finance Monitor, published by BDRC Continental and financed by the major UK banks, which showed that manufacturers were more likely to have new/renewed loan requests declined. In addition, 37% of new/renewed loan requests by manufacturing companies required security compared with 25% for the overall sample.

The situation must have the Chancellor worried ahead of tomorrow’s Autumn Statement. Treasury officials were busy briefing over the weekend on the ChX’s ‘credit easing’ scheme – basically designed to use the government’s ability to borrow cheaply to pass on lower costs to firms looking to borrow.

Lots of detail still to come on that but intent-wise credit easing looks positive – and at the least is a welcome admission from the government that the Merlin agreement was not a fix-all for UK companies’ access to finance issues. In particular the Merlin agreement to increase lending from the major banks had nothing to say about cost; whereas this seems the focus of credit easing.

The caution I would have is the mechanics of the scheme to ensure there is actually a benefit passed through to small companies looking to borrow – rather than a new implicit government subsidy to banks being gobbled up on the way through. Treasury is promising audits of lending books to ensure this ‘additionality’.

Even establishing additionality still might not help with the visibility of cost reductions for firms that borrow. This is because we are entering a period where banks’ funding costs are about to rise as many of them seek to refinance themselves in 2012 – potentially further hampered by any euro-meltdown.

But ChX is having a crack and we shouldn’t rush to judgement until we’ve seen a few more details.

Given Mr Osborne has now showed some enthusiasm for bringing the cost of finance down, would it be too presumptive to assume that ChX also plans a strong response on boosting competition in the banking sector when he responds to the Vickers Commission recommendations in mid-December?

Or has he used up all his ammo with the banks by a rumoured increase in the balance sheet levy to be announced tomorrow?

In the long run boosting competition in the banking sector has to be the focus of sustainable improvements in access to finance in the UK.

Jobs. We need more of them. It’s an issue that keeps the government up at night. Various reports have it that the government is considering options for making employment laws friendlier to employers. Fewer restrictions will make it easier for businesses to justify taking on new staff.

That’s got to be a good thing and EEF has played its part through the Red Tape Challenge in suggesting candidates for reform. We'll hopefully be hearing more specifics from Vince Cable when he comes to EEF's London office on Wednesday.

But is there more to do to encourage employment beyond regulation?

Youth unemployment has cracked a million. This is a big issue of wasted resource sitting there idle – economically costly let alone the negative social impact.

Manufacturing is not going to be a source of mass youth employment. But we do hear fairly continuous noises about a lack of skilled staff available for our members to hire. Companies are always on the lookout for good staff.

Skills is one of four key policy areas we identified in our submission to the government in advance of the Autumn Statement that the government should focus on in enhancing the UK business environment.

What’s wrong with our skills system and how can we connect a large pool of potential workers with what demand is out there?

Firstly some positives.

It's good the government has signaled its deserve to growt the number of UK apprenticeships and to refocus FE training providers generally on the needs of employers.

But manufacturers continue to report difficulties in filling both apprentice and graduate vacancies with adequate foundations in maths and science.

Informing students about career opportunities in engineering and manufacturing is important to breaking the monopoly university-based education seems to have on maths and science students’ imaginations.

We must ensure a strong pipeline of interested and properly qualified young people are coming through from the secondary education system. STEM careers advice should be part of subject curricula and included in continuing professional development training for science teachers.

This is really a specific instance of a wider point about engaging the education system at the secondary level with the needs of employers.

Another important change from the employers’ perspective is clarifying the legal status of apprenticeships. This is important because the legal status has implications for what rights must be afforded to apprentices and thereby how willing employers are to taking on new apprentices.

29 November is the government's Autumn Statement where OBR forecasts will likely show grow expectations having deteriorated sharply. Addressing skills issues in the UK economy has to be part of the response.