Yesterday, the Chancellor delivered his #Budget2018. This Budget was always going to be one to watch given it is the last big event before the next big event – Brexit! Regular readers will be aware that we made a number of recommendations and request in our Budget submission – so ahead of Halloween, did the Chancellor deliver us some tricks or some treats?
1. OBR revise forecast up for next two years…but don’t get too excited
The Office for Budget Responsibility (OBR), who are responsible for providing independent forecasts for the Chancellor, have revised up their predictions from the Spring statement for both 2019 and 2020.
Growth is now expected to be at 1.6% next year (up from 1.3%) and 1.4% in 2020 (up from 1.3%). Growth for 2021 and 2022 is left unchanged at 1.4% and 1.5% respectively. These forecasts suggest that growth will be resilient across the forecast period.
However, before we get too excited, the bigger picture here is that this is a pretty weak outlook for GDP growth. Indeed these numbers are all below 2%, or even the 2.5% which until recently was the UKs average long run growth rate. In fact, baring the period across the financial crisis, it was unprecedented to have sub 2% growth across the forecast period.
This weaker outlook reflects the UK’s weak potential productivity growth, something we have been examining for a while now (LINK https://www.eef.org.uk/campaigning/campaigns-and-issues/current-campaigns/productivity-and-uk-manufacturing ) And with Brexit uncertainty still looming large, we should be conscious that these forecasts, while revised up, are still subdued.
2. Reduction in the co-investment rate for non-Levy paying businesses and flexibilities for Levy payers
The fall in the number of apprenticeship starts is something that EEF has been rather vocal on. Manufacturers have had a proud tradition of offering apprenticeships, so any changes to the apprenticeship system that negatively impacts on their ability to do so, is a big no-no. A lot of the fall is from small businesses, who don’t pay the Levy. They’ve had to pay 10% towards the cost of training, which is a stark difference to getting 100% of the costs covered for those training 16-18 year olds. The Chancellor provided a treat here, cutting the co-investment rate to 5%. This should spur more small businesses to create additional apprenticeships, which in turn will deliver a much needed boost to skills in our economy.
While the Chancellor has recently announced greater flexibilities for Levy paying firms, including increasing the amount an employer can transfer to another employer, we would have like to have seen this agenda pushed further. In particular, a commitment to give employers longer to spend their funds and an opportunity to spend more of their money, would have been the cherry on top of today’s announcements.
3. The National Living Wage remains on track to hit 60% of median earnings by 2020 – and after that the Government wants your feedback
The Chancellor announced increases to both the National Living Wage and other minimum wage rates, accepting all the Low Pay Commission’s recommendations. The NLW will stay on track to get to 60% of median earnings by 2020, meaning next April (2019) it will rise to £8.21. The other rates also saw increases, with apprentices in particular getting a boost of over 5% - well deserved and something we call for each time we give evidence to the LPC. The other big question we've wanted for know for some time is - what happens after 2020? We had assumed the NLW would increase in line with median earnings, we're sure the PM had once suggested that. Yesterday, the Chancellor announced he wants to hear from the LPC, the TUC and business groups about the future direction of travel - so if you have views do get in touch!
4. A temporary boost to the Annual Investment Allowance (AIA) and a permanent new allowance on buildings and structure
On investment, the Chancellor announced two measures which may help to fix the chronic under-spending problem the UK has recently experienced. On one side, Philip Hammond increased the AIA threshold from £200,000 to £1 million for the next two years. This would particularly help companies ready to invest heavily and scale up since this new allowance would mean a 100% tax deduction on an £800,000 pot. The very generous policy is temporary, so companies will be pushed to invest now and not delaying the investment even further which is good news if you need to fix the problem now. This would help them to improve their productivity and easing the current industrial capacity pressure. On a larger scale, this may help business investment to overcome the current investment stagnation which has started since the EU Referendum bill of 2015. The measure is clearly an help, however most of our members are holding off investment due to the lack of clarity around Brexit as our latest Investment Monitor has clearly highlighted
Along with this measure, the introduction of a 2% permanent structure and building allowance goes into the right direction recognising that companies’ capacity constraint are not only related to lack of investment, but also to the lack of space.
5. £1.1bn was allocated to Industrial Strategy Challenge Fund (ISCF) projects, and £121m was earmarked specifically for Made Smarter projects
Manufacturing and materials has been the most successful sector so far in receiving funding from the government's Industrial Strategy Challenge Fund, with 307 projects funded through the scheme between its start date in 2017 and 1 April 2018. Further funding to the ISCF provides more opportunity for manufacturers to make the vital contribution to the government’s commitment to raising the percentage of GDP spent on R&D to 2.4% by 2027.
EEF has previously called for a specific ISCF challenge to be assigned to Made Smarter, as a means of helping to address the lack of understanding about the benefits in productivity that new digital technologies can offer in the 4th Industrial Revolution.
6. Knowledge Transfer Partnerships are getting a boost, to facilitate stronger links between industry and academia
The budget has allocated an investment of up to £25 million through Knowledge Transfer Partnerships (KTPs) to boost business productivity. Collaboration is key for fostering innovation within manufacturing, with 61% of manufacturers say that working with others is increasingly important for successful innovation. Further investment in KTPs could help to support this.
However, since the launch of KTPs in 2013, manufacturers’ awareness and usage of them has been lower than some other forms of innovation support, so it remains to be seen if this funding will provides enough opportunity for the boost in productivity through collaboration that government wants.
7. A five-year £315 million Industrial Energy Transformation Fund
The policy win on the energy side was the announcement of a five-year £315 million Industrial Energy Transformation Fund. This is something EEF has long asked for to give energy efficiency projects a more rapid payback period. However it is a mixed blessing as it comes at the expense of the long-running Enhanced Capital Allowances scheme which provided tax relief, or credits for less profitable businesses, on energy and water efficiency improvements. There are likely to be some losers from the change as well as plenty of winners, but hopefully the change to the Annual Investment Allowance will mitigate some of the loss over the next two years. This set the tone for the Budget as a whole for energy and environment, where it proved to be a pretty mixed bag.
All in all not too shabby, looks like more treats than tricks. The Chancellor has kept his eye on the ball of tackling the UK's longstanding productivity problem - which EEF covered in it's latest report - Piecing together the puzzle. Overall, at a time when we need to show the UK is open for business and is building a modern economy post Brexit, today’s statement combining realistic financial prudence with targeted commitments to boost productivity will be welcomed by manufacturers.