EEF blog

Last autumn EEF gave a cautious response to the headline recommendation in Lord Heseltine’s review of growth policy – the idea of consolidating central government funding for local spending in areas like infrastructure, skills and business support and allocating it directly to local areas on a competitive basis.

We acknowledged the potential benefits of devolving spending decisions to the communities they impact, but cautioned that it may not be appropriate in some areas, such as skills, and that local organisations would need to be up to the task of bidding for and taking on significant new spending responsibilities.

Things have moved on since last autumn. The government’s has endorsed the proposal by committing to devolve a greater proportion of growth-related spending from April 2015.

It has also clearly suggested that it envisions LEPs as the bodies that will compete for money from the ‘single pot’ by saying that it will devolve spending on the basis of the growth strategies it has tasked them with developing.

This raises some serious some questions. Two sets of questions stand out. First, what areas of spending would actually benefit from being devolved to LEPs? Second, what happens in parts of the country that fail to secure any funding?

What will be the criteria for deciding which areas of spending should be devolved? There are doubtless some areas where putting LEPs in charge could lead to better outcomes. However, there are other areas, such as skills, where it might be counterproductive.

The Richards Review of apprenticeships seems to have finally pointed the government in the right direction on skills. Involving another, unproven, intermediary in the process, risks undermining the employer-led approach it recommends.  

Heseltine has proposed running competitions for local funding every five years starting in 2015. This begs the question of what happens to the provision of services like business support and transport in areas that fail to secure funding? Are they left to wither for half a decade? Or, would some alternative, basic, funding be available?

The government will need to start answering these questions, and a host of others, if it is to commit to major devolution in spending decisions as part the upcoming Spending Review.

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.

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.

A headline in the Daily Telegraph this morning read “UK slides in manufacturing rankings”. This was on the back of a survey from Deloitte which measured businesses’ perceptions of competitiveness drivers like wages, skills levels and the policy environment.

Deloitte ranked the UK in 17th place out of 26 countries, falling to 20th place in the next five years.

Whilst this suggests that perceptions of the UK’s business environment are not ideal, it does not indicate that the UK’s manufacturing businesses are not competitive; far from it. The fact that the UK remains one of the world’s largest manufacturing nations is testament to our businesses’ abilities to compete and innovate despite the pressures of a high-wage, high-cost economy.

True, the UK is ranked well below the US (in 4th position) and Germany (in 8th), countries which also experience similar high costs. But this is not something that reflects badly on our businesses. Rather, it suggests more needs to be done to enhance the UK (in reality and in perception) as a place to do business, such as: enhancing skills provision; promoting investment through the tax system; and reducing the regulatory burden on 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.

We’ve been saying quite a lot about the risk of policy errors at this point in the economic cycle recently.  There is still a wide range of views on whether the UK is or isn’t yet out of recession. But there does appear to be more agreement on a long and bumpy road to recovery and the need to ensure that stimulus measures remain in place until the economy can stand on its own two feet. 

So first up is the car scrappage scheme – announced in the Budget and came into effect in Mid-May.  At the current rate the cash should run out in the next month or so.  Over the summer new car registrations have picked up and manufacturing output in motor vehicles and other sectors supplying to car manufacturers has also turned a corner.  But can this trend continue in the rest of the year and into next without incentives provided jointly by government and industry. 

EEF and other manufacturing bodies reckon not.  So we’ve written to the Chancellor calling for the scheme to be extended until February next year.  Our argument – as outlined in the letter goes like this;

‘Although the current climate has stabilised, output levels are still below pre-recession levels. Wary about the prospect of a sustained recovery and ongoing concerns about access to credit and cashflow means investment intentions remain low.  Consequently any relapse in auto industry output, coupled with the expected deterioration of the UK aerospace and defence industry in 2010, could pull manufacturing and the economy back into recession in the New Year’  

Rumours suggest that we might have won this argument.

A couple of surveys from EEF this year have show that the reduction and withdrawal of credit insurance has been a major problem for a majority of manufacturers.  We lobbied hard in advance of the Budget in April and HM Treasury listened and put in place a government backed top up scheme for companies that had had cover reduced. 

Take up of the initial scheme was low, so again government listened, and the eligibility criteria for the scheme were backdated from April 2009 to October 2008.  Further changes to the scheme have been announced today.  

• The price of the top-up cover will be cut from 2% to 1%.
• The £20,000 lower limit on cover will be removed.
• The upper limit on top-up cover will be doubled to £2 million. 

No corresponding increase in the money available for the scheme has been announced - but as we said last time the £5bn announcement was more headline grabber than assessment of need.  Any further expansion of the scheme that helps manufacturers is obviously a good thing, given some of the risks associated with a reduction in cover.  It should provide some breathing space for companies starting to see a trickle of orders come through.  But those that have seen a complete withdrawal of credit insurance will still be stuck.

The government has tried to get this off the ground and increase uptake, now we need to see similar moves for companies facing problems with credit insurance on exports. 

The Times Education Supplement has the news today that Lord Mandelson is considering giving Regional Development Agencies responsibility for drawing up skills strategies, which would then be implemented by the new Skills Funding Agency (SFA). 

Our Head of Economic Policy Lee Hopley has responded to the report here. Many manufacturers, and employers as a whole, will despair at yet another structural reorganisation in a system already in need of stability and simplification.  Such changes are happening with increasing frequency, it seems: the Learning and Skills Council is being abolished after less than ten years; the Department for Innovation, Universities and Skills lasted less than two; and now the Skills Funding Agency is being reformed before it has even been formed in the first place. 

Nevertheless, the debate over whether skills policy and funding should be set on a regional or sector-specific basis is one worth having.  It has always been our view that it makes more sense to look at specific sectors of industry, rather than on regional geography. 

There may be some areas of manufacturing that are defined principally by their region (cheese-making, perhaps?) - but is there a peculiarly North Eastern way of welding an aeroplane fuselage?  Probably not.  British companies operating in the same sector will have similar skills needs, regardless of where in the UK they are based – the ‘what’ is more important than the ‘where’.

Lord Mandelson’s intervention looks set to spark renewed debate on this issue, and we can expect some interesting responses from Sector Skills Councils, which would be the main losers under the proposed scheme.  By all means let's have that debate - but let's make sure that whatever the outcome, the system stands at least some chance of surviving an election and being fit for purpose for more than a couple of years.