Weekly Focus – EEF’s Reaction to Budget 2012 | OBR Economic Forecasts | EEF support at Global Manufacturing Festival | In the news | Week in review | The week ahead
Weekly Focus
EEF’s Reaction to Budget 2012
The Chancellor delivered his Budget 2012 statement this week, setting out the ways in which the government will try to boost the recovery this year, whilst rebalancing the economy. The key measures set out included:
Moving the R&D tax credit above-the-line
The government intends to make the large firm R&D tax credit payable ‘above-the-line’ – meaning it is payable before tax including to loss-makers. Budget 2012 expands this to commit an extra £200 million at least to ensure the rate of the credit is 9.1% before tax. This is something EEF has been calling for over the last few years, and we were credited for our campaigning on this issue by the Chancellor in his Budget speech. We await further details of the government’s plans to implement this.
UK centre for aerodynamics
The government will create a new £60 million centre for supporting innovation in aerospace technology, commercialising technology, and supporting spin-off technologies.
Exports
The government has set an ambition of doubling UK exports to £1 trillion by 2020. Budget 2012 mentioned an increased international role for UK Export Finance alongside UKTI and a greater regional presence. No additional resources were announced for this.
Appointment of Lord Heseltine
Lord Heseltine has been appointed to work with government departments to consider ways for bringing a stronger industry perspective to policy development and to benchmark the UK against how other countries implement industrial strategy. He will report in Autumn 2012. We believe the Chancellor was right to say we shouldn’t be shy about identifying our successful industries and reinforcing them, but we need to hear more about how all parts of government can pull in the same direction and work with the private sector to deliver it. This should be the top priority for Lord Heseltine in his review.
50p rate
The government has decided to lower the current 50p rate of income tax on incomes above £150,000 per annum to 45p from April 2013 at a cost of £360 million over the forecast period.
State Pension reform
The government announced the abolition of the second state pension. This will see the end of contracting out relief on NICs. Measures to offset the impact on employers will be part of the forthcoming Pension White Paper. We believe these plans are a step in the right direction, but it comes with a cost to employers who will lose contracted out relief on NICs. It is therefore vital that government brings forward plans to help employers committed to providing high quality pensions to offset these costs.
Further corporate tax rate cuts
The corporate tax rate will be reduced by an additional 1% from April 2012. The rate will therefore reduce to 24% in April 2012, 23% in April 2013 and 22% in April 2014. This tax rate reduction will cost nearly £3.8 billion over the five year forecast horizon. The rate cut is a welcome move, but on its own we do not believe it’s the silver bullet that will unlock the business investment our economy urgently needs.
Carbon Price Floor
Government has stuck with the trajectory agreed at Budget 2011 meaning that the Carbon Price Floor will increase from £4.94/tonne CO2 in 2013/14 to £9.55/tonne CO2. EEF analysis estimates this will increase industrial electricity prices by 6-7% in 2014/15. This announcement appears to lock the UK into higher energy taxes than our competitors, regardless of the European carbon price. This is yet another unilateral increase in carbon taxation and contradicts the government’s stance that the UK will go no faster than our partners in Europe.
Carbon Reduction Commitment
The government will consult to reduce the administration burden of the CRC energy efficiency scheme on businesses. If significant administrative savings are not found, the government will consider an alternative environmental tax in autumn 2012. We welcome the decision to review the CRC and believe it should be abolished in the forthcoming Autumn Statement. The scheme is costly, provides no guarantee of carbon reductions and no amount of tinkering with it will ever make it work. We are calling for the government to use the coming months to conduct a full review of its green taxes.
Business Finance Partnership
The Business Finance Partnership fund, which aims to invest in developing alternative lending sources, has been increased by an additional £200 million, to £1.2 billion.
However, despite these various announcements the Government’s task of rebalancing our economy still looks daunting. Whilst there are some helpful measures, EEF believes they fail to send a strong enough signal to growing manufacturers that now is the time to bring forward their investment plans and to do it here. You can read our full press reaction here.
For more information contact Lee Hopley, Chief Economist
News
OBR Economic Forecasts
The updated economic forecasts from the Office for Budget Responsibility (OBR) were also announced by the Chancellor during his Budget Statement, providing an overall assessment that the outlook and risks for the UK economy is broadly unchanged from November.
GDP growth fell marginally in the final quarter of 2011, but the recent signs suggest momentum has returned to the economy and we should avoid technical recession. The OBR has therefore revised its forecast for GDP growth in 2012 up by 0.1 percentage points (to 0.8, the same rate as in 2011) relative to its November forecast. Although the Euro area problems remain a risk, the OBR’s central forecast assumes that the euro area finds a sustainable solution to its current problems.
Assuming GDP does grow by 0.8 percent this year, the beneficial effects of falling inflation are likely to be offset by uncertainty over the euro area and tighter credit conditions. Business investment forecasts are also lower because the OBR thinks that balance sheets may not be as strong as official statistics suggest. They expect a boost to the level of business investment of 1 per cent from the corporation tax rate cut announced in the Budget.
In terms of the OBR’s fiscal forecasts, the key points to note are that public sector net borrowing (PSNB) is forecast to total £126 billion this year, £1.1 billion less than forecast in November. PSNB has now fallen by 2.8 percent of GDP since its post-war peak in 2009-10. OBR central forecast shows borrowing falling at roughly the same rate on average over the next five years, reaching £21 billion or 1.1 percent of GDP in 2016-17.
Furthermore, public sector net debt (PSND) is expected to rise from 67.3 percent of GDP this year to a peak of 76.3 per cent in 2014-15, falling thereafter. The expected peak is about 1.7 percent of GDP lower than the OBR forecast in November. This largely reflects the current Royal Mail transfer that is taking place, although the long-term impact of this is likely to be negative. The impact of the Budget measures on borrowing is broadly neutral across the forecast period, with net ‘giveaways’ and ‘takeaways’ no larger than £2 billion in any year.
For more information contact Lee Hopley, Chief Economist
EEF support at Global Manufacturing Festival
EEF continued to support the Global Manufacturing Festival in Sheffield for the second year running. This year’s conference focused on the critical areas of exporting, innovating and building world class supply chains in order that UK manufacturers can compete and thrive into the future. Delegates heard from company representations about growth opportunities and EEF’s Chief Economist provided an overview of the UK’s export performance and potential, reflecting on the ambitions and challenges manufacturers face in entering new markets.
For more information contact Lee Hopley, Chief Economist
In the news
EEF’s response to the Budget led our press coverage this week, with extensive coverage across the broadsheets. In particular, we were quoted in 7 FT articles – key highlights are available here and here (registration required) – and three times in the Guardian – key highlight here. We were also featured in the Telegraph, Independent, Sky News website, and the Daily Mail. Our Chief Executive also gave to broadcast interview following the Budget to Channel 4 News and the BBC News Channel. Senior Economist Andrew Johnson also gave a post-Budget interview for New Zealand TV.
Week in review
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 Consumer price inflation
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After peaking at 5.2% in September 2011, CPI inflation has fallen back steadily, reaching 3.4% in February. Although it remains some way above the Bank of England’s 2.0% target CPI is falling roughly in-line with expectations. CPI inflation should return to target in September this year, a little later than previously forecast, as forecasts for the oil price have been revised upwards. |
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 EEF Pay Settlements
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The three-month average pay settlement was 2.5% in February, at the same level as the revised figure for a month earlier, continuing the trend of broadly stable settlements seen throughout 2011. |
The week ahead
Wed 28th: GDP; Business Investment; Balance of Payments
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