Lots of news in the weekend about the PM's priorities for the G8 this week in Northern Ireland. For me though it highlights again how emotive and tangled up the current 'tax avoidance' debate has become.

The issue of sorting out tax transparency from Crown depedencies around the globe has been stirred in with large multinationals low effective tax rates with country-by-country reporting and with global tax competition.

The result is a confusing mess for the public who are nonetheless encouraged by the media to think that 'something' must be done - because all this complexity must be hiding corporate malfeasance.

From our perspective, the public is right to demand a reform of international tax rules, many decades old and the Prime Minister is right to raise the issue with his G8 colleagues. But we have to be very careful not to throw the tax baby out with the bath water.

This government has made a virtue of reforming the UK corporate tax system to encourage investment and growth in our country. Once our headline rate hits 20% in 2015 it will be the lowest equal in the G20; that makes big multinational firms sit up and take notice when contemplating where to put their next major investment.

So it is somewhat counterproductive therefore for a threat of a non-specific tax 'crack-down' on multinationals to be simultaneously aired by politicians (though admittedly not by the government). It helps create a climate of uncertainty that undoes the positive impact of the headline rate reform.

Neither is it a very targeted intervention when some very specific behaviours of concern are what tend to generate much of the heat. Our sector has not particularly been subject to tax avoidance headlines - but it's understandable our members are worried with a range of policy sledgehammers being lined up to crack very particular nuts.

We need to be much clearer in this debate about precisely what constitutes tax avoidance and what behaviour the government is targetting. We need a clear process around these reforms and an opportunity for business to feed into a consultation process.

Any new measures need explicit ex ante impact assessments and where tax issues have an international character, the UK must act in concert with other countries, not unilaterally.

Finally, any reform needs to have a point. Asking for country-by-country reporting of company tax positions may sound a great way to open up transparency. But will it really deliver greater confidence from the public in our corporate tax system? And if it doesn't and it simply adds new compliance for corporates, why exactly would we do it? 

For more information see our latest report Focusing the Avoidance Debate: Tackling tax without damaging growth.

1. The term ‘tax avoidance’ is being used to describe lots of different behaviours
2. Debate fails to acknowledge that parliament decides what is a ‘fair amount of tax’ through law
3. Much of the issue centres around international rules, which require international agreement to reform
4. Proposals with serious unintended consequences are being put forward with little challenge
5. The debate is undermining efforts to promote the UK as a place to invest and do business

1. The areas of obvious abuse where there is a clear consensus on the need for action need to be spelt out by government so the public is clear what we are focused on
2. More actively manage the reform process by clearly setting out its timeframes and expected endpoint and setting out opportunities for consultation
3. Better application of current rules should be considered as an option alongside or instead of changing any rules
4. Avoid unilateral or knee-jerk responses to issues with a complex international character that require considered, multilateral responses
5. Explicitly consider an ex-ante assessment of benefits before implementing any new disclosure requirements that will add to administration costs and complexity
6. Any proposed changes need a thorough assessment of the impact on investment and growth for both the economy and individual sectors, including whether the changes will support much needed rebalancing in the economy towards more investment and net exports
7. Aside from their substantive impact, any proposed changes should be assessed for their potential to deliver greater confidence from the public in the corporate tax system.

Competition in UK SME banking has been weak for some time, well before the financial crisis. There is a staggering fact that only one new bank has opened on the High St in 100 years. Competition has been the subject of a major review by Don Cruickshank in 2000 and various other OFT and Competition Commission reviews since.

In the run-up to the global financial crisis, relatively easy credit masked these structural problems in access to finance for SMEs, and perhaps made it easy to ignore the consistent conclusions of these reviews that the market was uncompetitive. Arguably the easy credit actually worsened competition problems further by allowing banks to supplant non-bank sources of finance.

The impact of the financial crisis has been to increase the relative cost, decrease the availability, and at least initially worsen the terms and conditions associated with credit for SMEs. Although these impacts were to some degree inevitable given the unsustainable easy credit and occurred in many other countries - they were exacerbated in the UK by our (un)competitive context.

This matters because of the impact on investment and growth. Our own manufacturing surveys and economy-wide surveys like the SME Finance Monitor indicate viable investments are going unfunded and companies with growth intentions are citing access to finance as a barrier. ONS estimates of investment remain well below pre-crisis peaks in contrast to investment intentions.

Our view is that we need a much more diverse and competitive access to finance landscape. This will mean encouraging the development and growth of new sources of both debt and equity beyond banks. But given the overwhelming dominance of banks in SME finance it must also mean a more diverse and competitive banking sector.

Current goverment efforts to improve access to finance have three main strands:

1. Funding for Lending, which offers banks access to cheaper wholesale funding but links this to how much they increase their net lending, with a recent new emphasis on SMEs;
2. Diversifying the access to finance landscape for SMEs for example by coinvesting with the private sector in funds offering non-bank products like mezzanine finance; and
3. The Independent Commission on Banking, which as well as making recommendations for how to make banking in the UK safer, also had thoughts on how to increase competition.

Funding for Lending is lowering costs fundraising costs for banks with an explicit incentive to grow net lending - and especially net lending to SMEs. To grow this net lending, banks are expected to lower costs for SMEs (and households). However, this is a temporary intervention, largely introduced because of the strained fundraising environment faced by banks.

Diversifying the finance landscape for SMEs has proceeded under a range of schemes that bring together government and private money to invest in new types of finance, often addressing particular gaps or market failures. While welcome, some perspective is needed. In 2012, bank overdrafts were used by 22%; credit cards by 18%; bank loans by 10%.

No other form of external finance had more than 6% of SMEs reporting usage. Banks are the most important source of external finance for SMEs by some distance.

With the importance of banks in mind the third strand of government action would seem arguably the most important for delivering change over the medium term. And that's why it's concerning that this strand appears to be the poor relation.

Last month we had the news that the Co-Op deal to purchase 632 branches from Lloyds has fallen through. Yet this divestiture was the central part of the Independent Commission on Banking's competition-focused recommendations. While there are success stories of smaller banks in the UK - an effective divestiture was essential to create a true 'challenger'.

With the Co-Op deal a new challenger with a 7-8% market share would have been created. Without it, an IPO, as planned by Lloyds, is likely to leave it with a share closer to 5%. The ICB said that a minimum of 6% market share was necessary for the new entity to be an effective challenger to the dominant incumbents.

At the same time we have had a NIESR paper looking at bank lending to SMEs in the UK from 2001-12. This analysis controls for risk characteristics (worsened by the financial crisis) to look at the cost and availability of finance for SMEs.

As expected, controlling for risk characteristics, conditions have tightened relative to the 2004-07 period - during which there was undoubtedly an unsustainable boom. But worryingly conditions have also tightened relative to the 2001-04 period, suggesting a potential overcorrection on the supply side.

The clock is ticking until 2015 when the ICB recommended the government look at whether there's a case for making a referral to the Competition Commission. With a key plank in the government's strategy for increasing competition looking wobbly, I would suggest the government needs to be thinking now about what more can be done to boost competition.

Today continues our series of blogs on individual sectors in manufacturing. This time it's the food and drink sector, the largest in UK manufacturing by standard industry classification codes (codes 10 and 11 if you're wondering). More than 17% of manufacturing output in 2012 came from the food and drink sector.

Food and drink covers a broad swathe of items we all consume every day from meat, processed fruit and vegetables, and baked goods to soft drinks and alcoholic beverages. Many UK food and drink products on our supermarket shelves make a virtue of being made close to home so look at for the 'made in GB' label.

The sector emerged in the modern sense in the 18th and 19th centuries as the population moved more and more towards the cities and subsistence small scale farming and distribution needed to be scaled up into mass production. Some of the biggest names in the sector today date from this period particularly in brewing, baking goods, and ingredients.

Though food and drink companies are found throughout the UK, areas of concentration include Yorkshire, the East Midlands, and the East of England in food manufacture, the South West for dairy products, alcoholic beverages and the processing of fish and shellfish in Scotland, and of course the 'food square mile' in north west London.

Food and drink manufacturing is not as export or R&D intensive as other manufacturing sectors in the UK. Nevertheless, the UK exported nearly £18 billion in food and drink products in 2012, primarily (61%) to the EU. In 2011 food and drink manufacturing companies invested £350 million in R&D - 14.8% up on 2010, the biggest increase in ten years.

There is increasing consumer awareness and interest in the provenance of the goods they are consuming. Consumer interest in goods with lower sugar, fat, and salt content is prompting interest from policymakers and voluntary actions from industry. Genetic engineering too has an important consumer angle with the increased production possibilities on the one hand tempered by consumer demands for GE free products on the other.

The industry is also challenged by the impact of climate change. Most food and drink key commodities are vulnerable to weather and growing conditions and prices are often determined internationally. So poor growing seasons in Russia, storms depleting fish stocks in Chile, or a drought reducing dairy output in New Zealand can all impact the UK sector.

The food and drink sector has come through the recession period relatively well and although 2012 was a tough year the medium term outlook for the sector is relatively positive with growth returning in 2014 before strengthening in 2015.

Last month Labour's An Enterprising Nation, the report of their Small Business Taskforce, reported last month and included interesting proposals for how to reinvigorate our banking system to the benefit of SMEs. This a theme close to our hearts being the main subject of EEF's Finance for Growth report last November.

Labour appears to have accepted the banking proposals, which broadly is to pilot a network of local banks to lend to SMEs, 'Sparks', under an overarching wholesale institution, the 'Spark Umbrella', that would raise money on debt markets to finance their operations. The Sparks would be initially capitalised by public money, focused on particular geographical areas, and accountable to local stakeholders such as local authorities, LEPs, and business organisations. The geographical focus potentially makes sense as although competition in UK SME banking generally is a problem in some areas it is particularly acute.

There's a lot to like in the proposals, especially the following points:

The identification that 'we need a far more diverse small business banking services sector to give our small businesses access to the best financial services in the world.' This is something we have raised repeatedly - SMEs have too few options on the High Street and too few beyond it.

'...there is a lack of pluralistic competition [in UK SME banking]. With the big banks dominating the market there is little pressure on any of them to improve availability, lower prices or improve service.' It may seem an obvious point but it is worth spelling out again given all the competing rationales circulating for the government's 'business bank' - a lack of competition holds down credit availability, keeps prices higher than they otherwise would be, and leads to poor service.

Sparks would aim to make a profit. We don't need a state-created institute as a 'lender of last resort', lending to companies that have little chance of paying back a loan. The whole analysis of the supply side of the UK SME banking system is that profitable opportunities are going unfunded - this is holding back growth.

The retail presence of Sparks in local communities is also essential. The front end of our banking system is broken - changing the retail landscape must be part of the solution.

At the high level then I think these proposals are definitely on the right track - the focus on diversity and competition, the change in the front end of banking, and the commercial focus of interventions.

Some of the detailed points of the proposals are a little more questionable. For example I'm not sure the analysis of the PSNB impact of the Spark Umbrella's borrowings is correct. With government supplying all the equity, I think the NAO would view these entities as being part of the public sector, even if they were operated at armslength. Reducing this shareholding below 50% could be a way around this...

There are also questions about whether the Sparks would be enabled to take deposits off their SME customers. By not taking deposits the Sparks may be able to get around some of the regulations governing banks that can be onerous for new competitors but crucially, by not offering current accounts the Sparks would be missing the key channel by which SMEs then apply for other types of bank finance. Firing up the SME current account market is absolutely essential.

As well as the Sparks idea this report also includes good ideas for boosting dynamism in the market more generally, including by supporting the creation of challenger banks, introducing risk-based capital requirements to match the different business models new lenders might pursue, and legislating for comprehensive bank data portability. This last is crucial as it is a major barrier to firms switching banks - with showing a new bank your banking history time-consuming and often only partial - and a lack of switching discourages new entrants.

To be fair to the government, it is pushing action in some of these areas already for example through the introduction of the seven day redirection service to give companies more confidence bills won't fall through the cracks if they switch banks.

But the competitive environment and the pace of switching needs more attention. Currently only around 8% of SMEs switch banks each year despite much wider dissatisfaction. The government should draw all ideas for creating a more competitive environment (separate from structural changes a la the Business Bank) into a focused review aimed at generating more competition. 

Last Thursday, the day after the Budget, Vince Cable released a 'strategy update' on his Business Bank. While the paper contains many worthy words I can't help but feel the focus of the Bank is not quite right and that more is needed to address the most pressing problems facing SME access to finance in the UK today. Here is my potted commentary on the strategy update.

Foreword

The first point I'd raise is a positive one that Vince Cable seems to explicitly link the Business Bank (BB) to his industrial strategy. This certainly fits with our own view of what industrial strategy needs to be, The Route to Growth, which encompasses key 'horizontal' policies and strategies that impact across sectors rather than focusing all our attention on specific interventions for specific sectors.

Dr Cable now needs to make sure that the BB is not siloed within his Business Department but is seen by his colleagues as part of the whole government's view on how to improve access to finance.

Objectives

Broadly I'd agree with the BB's objectives to increase the diversity of debt markets, increase competition, and operate on commercial terms. Dr Cable would do well to pause there as these objectives alone would be more than enough to keep the new institution busy.

But instead the mandate is broader than this with additional objectives to diversify equity markets, improve the supply of long-term patient capital, and reorganise business support services also included. None of these latter aims are wrong - but they will spread already thin resources ever more sparsely when I think it would be better for the government to focus its firepower on the most pressing issues first.

Market analysis

I would agree with the analysis from BIS in the main:

SMEs are finding it much harder to access finance post financial crisis;

UK SMEs are particularly reliant on bank debt;

Compared with European competitors, our SMEs invest less and account for a lower relative share of overall investment;

Loan rejection rates in the UK compared with France or Germany are high;

The concentration of SME banking in the UK is very high.

Armed with this market analysis my suggestion would be to focus solutions on trying to improve SME banking in the UK. This however does not seem to be the central thrust of the BB.

Finance solutions

Instead, BIS goes over a plethora of existing finance interventions the government already manages as well as flagging some future areas for amalgamation under the BB. The areas include:

Enterprise Capital Funds, designed to support early stage VC;

The Business Angel Co-Investment Fund, funnily enough, to support business angel investing;

The UK Innovation Investment Fund, established by Labour to invest in innovative technologies;

Mezzanine finance, a focus of the Business Finance Partnership (launched last year), that offers a high return to investors while avoiding companies giving up equity;

Enterprise Finance Guarantee - a scheme that operates through the banks to support firms that have run out of security;

Start-up loans.

Again all these are worthy and have their place but at most are collectively worth a few £ billion compared with the £100 billion plus SME bank lending market that urgently needs attention.

Business advice

The last substantive part of the strategy update talks about the BB's role in rolling up a range of disparate types of government-supported business advice under the BB banner to provide target businesses with a more 'holistic' experience.

While there certainly was room for a thorough rationalisation of the various government access to finance schemes, I think there's a question mark over whether it is sensible to also include things like UKTI services to SMEs, the Technology Strategy Board's grant schemes, and the Manufacturing Advice Service under the BB.

These are successful advice and support services that already have effective brands. It would be unfortunate to damage them in the necessarily staged development of the BB.

The latest edition of the bank-commissioned SME Finance Monitor covering 2012q4 is out today and it unfortunately shows that finance for SMEs continues to drift with disengagement growing even as finance is identified as a more important barrier to firms running their business.

Key findings from the Monitor this time include:

• 7% of SMEs – the equivalent of 318,000 firms – are ‘would-be seekers of finance’ i.e. they would like to access finance but something is holding them back.

• Disengagement is rising with the percentage of SMEs saying they used external finance in the past but not now drifting up to 5% (from 3% in 2011q4);

• Very worryingly larger SMEs (which tend to be older and haver a lower risk rating – features associated with more success in applying for finance) appear to be using external finance less and less with 65% of firms with 10-49 employees reporting use of external finance (down from 70% in 2011q4) and 68% of firms with 50-249 employees reporting use of external finance (down from 75% in 2011q4);

• Discouragement and the process of borrowing (that includes the cost and security requirements associated with loans) were the main discouragements to borrowing.

• 24% of overdraft applicants end the process with no overdraft; 34% of loan applicants end the process with no loan.

• Awareness of bank-led initiatives to improve the relationship with SMEs remains low and static – with for example just 10% of declined overdraft or loan applicants being made aware of the banks’ lending appeals process.

So we have a situation where hundreds of thousands of SMEs would borrow money but for some factor holding them back – that factor is very often discouragement (whether directly or indirectly) from finance providers or concerns about the costs and T&Cs on lending. These are factors that, unlike the external demand environment, can be influenced to increase the flow of net lending to SMEs.

The banks deserve some credit for committing to a number of actions to improve their relationship with SMEs. But making commitments is not an end in itself – we need these to start improving the relationship. The on-going woefully low levels of awareness of these actions means they are making little real difference on the ground. Fundamentally our view is that the SME banking sector is simply not competitive enough.

We need the government to take a hard look at the state of competition by immediately launching a review of further actions it could take to increase switching and bring forward new challengers. It should also think hard about how to focus its proposed Business Bank on the key issue of competition in SME banking.

In November 2012 EEF launched Finance for Growth – Increasing Competition in SME Banking, setting out proposals for improving SME access to bank finance. The report is available here:

The report proposes the following recommendations

o An immediate review should looking at options for increasing competition from private sector finance providers including

full account number portability

a switching incentive

lowering barriers to new entrants

lowering the costs of branch infrastructure, and

the merits of an earlier referral of SME banking to the Competition Commission.

o A study of the feasibility of a bank or network of regional banks part-capitalised by the public sector. A new challenger bank could be set up in competition with the big four banks using the £1 billion currently earmarked for a British Investment Bank. The government’s capitalisation would be joined with investment from the private sector and potentially local government.

The resulting institution would not be state guaranteed or subsidised but instead aim to compete on commercial terms with the incumbents to drive higher competition in SME banking.

Interesting to hear reports today that UK has come out top in KPMG's league of competitiveness ranking countries by their ease of doing business.

I've finally had a chance to read through Obama's State of the Union address last week, with a special lookout for bits that were relevant to manufacturing - with a view to seeing how we are doing competitiveness-wise. I thought it might be interesting to have a look at what the president said and how this compares with what's happening in the UK.

Obama called for a tax code that lowered rates for manufacturers that create jobs in America and tax credits for firms that hire and invest.

In the UK, the government has aggressively cut the headline rate of corporation tax and at 24% now (and heading down further) is already a full eleven percentage points below the equivalent rate in the U.S. However, the picture for manufacturing is considerably more murky because part of the UK's reforms were made by making capital allowances less generous. The government has recently reversed it's cut of the Annual Investment Allowance (from £100k to £25k) and put this back up to £250k - but only for two years. We will definitely need to keep watching that space.

The U.S. has added 500,000 manufacturing jobs over the past three years

Obama notes that after a long period of falling job numbers, the U.S. has recently added jobs. A very similar story holds in the UK. After not having seen an increase in employment in manufacturing since 1998, in the four quarters ended 2012q3, UK manufacturing added 76,000 jobs.

Obama hailed the creation of a manufacturing innovation institute in Youngstown, Ohio and called for three more to be created working with the DoE and DoD.

In the UK we have the recently launched Catapult Centres. These are physical centres designed to increase collaboration between the UK's research base and business. Though not all are focused on manufacturing, the High Value Manufacturing Centre is one of the seven Catapults (although it is itself spread across seven locations).

We think the UK is going in the right direction here, though we could do with some more funding - the Catapults have only about half the funding of their German equivalents, the Fraunhofer Institutes (the HVM centre gets £25 million per year). Obama's talking about funding of $1 billion for up to 15 centres.

Obama wants a focus on STEM in high schools on and reform to the immigration system to make it easier to attract engineers

The same focus on STEM in UK high schools couldn't really be said to be occuring with the government's downgrade of the engineering diploma. And as for the immigration system - 'easy to attract engineers' are words that do not belong in the same sentence and have become less so in the government.

That's what I heard in his speech on banking at Bloomberg this morning. Some might argue that even C- is a bit generous.

I found Dr Cable's speech simulataneously encouraging and disheartening.

On the one hand, much more than others in the Coalition, he seems to get that competition is a major issue in banking in the UK and that it is hurting ours SMEs. He talked tough on legislating if necessary to ensure there was adequate data transparency from the banks on lending to SMEs - both gross and net - 'at the postcode level'. To be fair to the banks they have already made great progress in this direction.

He also made much of boosting competition - saying this was one of the three aims of his new business bank. And in this speech at least it was the only objective he paid much attention to.

Addressing long-term market failures (e.g. in the provision of growth capital) is a worthy objective - but I do think it is not on the same scale as the difficulties encountered by SMEs at the moment both for working and investment capital. From his comments today, I think Dr Cable sees it this way too.

What I found disheartening was the language Dr Cable put around actions to date.

He talked about the Cruickshank Review from 2000 and how the previous government had not acted on its recommendations for invigorating competition.

But then he claimed that we have 'turned a corner' in competition and later that change has been 'revolutionary'. I think this is going too far.

Dr Cable listed off the usual suspects of 'new' banks making an impresssion on the incumbents - but as he admitted the sum of all these incumbents is very small scale - collectively surely less than 10% of the total business current account market and that would be including the purchase of the Lloyds branches by the Co-Op. The big four would presumably still have close to 80% of the market. A revolution?

Cable also mentioned the incoming redirection service that from September will aim to ensure a smooth switching process for current accounts, taking less than a week. He said this was a good step towards full account number portability.

It begs the question of why the government is not pushing the banks to move to full account number portability as soon as possible.

My view looking at the evidence of how big challengers need to be to take market share off the incumbents is that on the current trajectory change will be measured not in years but in decades. Disheartening if that's what turning a corner looks like.

Yesterday in Bournemouth the Chancellor unveiled his plans for reforming the banking sector. He concentrated on structural reforms to make the banking sector safer - and in particular safeguards to try to make it harder for the government to end up on the hook for a big bank - and all its risky investment business - going down.

Towards the end of the speech the Chancellor made mention of the issue of competition, or rather the lack of competition, in UK banking. I couldn't help myself thinking though that, once again, competition reform feels like a footnote to the real action on banking reform.

But it shouldn't be. For my mind, a lack of options both on the High Street and beyond is a major supply side factor holding back the flow of lending to the real economy and in particular the small business sector.

In case you need reminding of some key numbers, try these:

1 in the past 16 - quarters where net lending to UK businesses has been positive

85% - the share of business current accounts held by four banks in the UK

One third - Proportion of manufacturers saying viable investments are going unfunded because they have difficulty accessing the credit they need 

The Chancellor made mention of Metro Bank, others talk about Handelsbanken, or Aldermore - new(ish) banks making inroads into the High Street. But these banks currently have branches numbering in the 10s or low 100s. The Project Verde deal, splitting off a ~5% market share from Lloyds covered 600+ branches.

Organic change is going to take decades to have an overall impact, even if these smaller banks were adding a branch a week.

It is encouraging to have the redirection service, supported by the Independent Commission on Banking, committed to by the government. By September, banks should be able to switch current account customers over within a week.

But it's not enough.

There have been multiple reviews of the state of competition in banking in the UK over the past 15 years - but definitive action still seems to be lacking. Indeed with respect to business current accounts, market concentration appears to have increased marginally in the last ten years.

We think that it needs to be easier for new banks to get through their necessary licensing arrangements with the FSA. It's fair enough that the authorities are gun-shy after the cowboy behaviour of recent years - but new challenger retail banks surely aren't where the balance of risk is coming from.

While the redirection service is a welcome improvement, we think full account number portability should be the aim. Customers are understandably cautious - perhaps moreso than in other sectors - about switching when essential payments depend on systems that have failed too often in the past.

Some in the financial sector might say that account number portability is too hard or that it's not done anywhere else. That seems a strange attitude indeed for a sector that has gone to extraordinary lengths to contort itself in increasingly byzantine financial innovation in search of new customers. Surely, with the right motivation, full account number portability could be cracked by the City.

There may also be a case for considering now whether at least the business current account market should be referred to the Competition Commission. We're not saying definitively that a referral should be made - but rather that the government should consider whether the sum of all its actions is going to add to meaningful enough change or whether a referral is needed.

For more details on these thoughts check out Finance for Growth.