What manufacturers need from the Budget for Growth

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The Chancellor will present his Budget for Growth next week. Speculation will inevitably continue to build over the weekend, but the framework for the Growth Review and a number of recent consultations on tax provide some indications of what we might expect. However, what we want is for the Chancellor to send a powerful signal to business that government has a clear strategy to address the barriers to growth and a Parliament-long programme to deliver on it.
The Budget must also make a down payment on better balanced growth by taking measurable steps to improve the competitiveness of the UK business environment for companies investing, innovating and exporting.
Key areas include:
Current state of playWhat's the problem?
Environmental taxationIn addition to the CRC there are already upstream (EU ETS) and downstream (CCL) taxes on energy. HMT has consulted on another upstream tax (carbon price floor), while DECC is consulting on feed-in tariffs.No one part of government has oversight of the total cost of these policies on industry. We risk losing competitiveness if we run ahead of EU neighbours, with minimal impact on climate change at the expense of the UK manufacturing base. There is a lack of overall strategy on energy and climate policy and how government can most cost effectively shift to a low-carbon economy.
R&D tax creditFor SMEs tax relief on allowable R&D costs is 175% and in some circumstances the credit is payable. For large companies the tax relief on allowable R&D costs is 130%.The definition of R&D is narrow and covers only the initial stages of innovation. For manufacturers innovation is broad: it is about overcoming technical and commercial uncertainty of bringing an idea to market. Innovation must be centre stage in future growth – the tax treatment of innovation must be internationally competitive. The tax credit has evolved but for many companies the process of claiming is still complex and costly.
Capital allowancesFrom April 2012 capital allowances are being reduced to18% (from 20%). The Annual investment allowance is also being reduced to £25,000.The UK tax regime for investment is becoming less and less competitive Investment is a cornerstone of balanced growth. Reinvestment cycles in manufacturing are shortening as the pace of technological change quickens. But changes to capital allowances means it is taking longer to write down the cost of investment.
Access to financeEFG will continue until 2014/15. Some areas of trade finance will be covered through EFG and ECDG. Gross lending targets have been set with the major banks. Monitoring of delivery on taskforce actions.Our latest credit conditions survey showed that the proportion of companies seeing rising cost of credit is on the increase again. For small companies rising cost and terms and conditions could act as a brake on investment in the next 12 months. Companies need to be ambitious about growth, but credit constraints could lead to a conservative approach to managing cash and taking on debt.
Growth mandateThe government has set a Fiscal mandate to bring public finances back to balance by 2015 and report against progress at each budget. A growth review is also underway.We've had a clear commitment on the public finances, but without a strong economy recovery meeting the fiscal mandate could be put at risk. We need the same commitment to growth as there is to reducing the deficit over this parliament. Alongside actions to remove barriers to growth there should be clearly defined indicators against which progress on the government's growth objectives can be measured.
RegulationThe growing regulatory burden is pushing the UK down international league tables. Regulation tops the list of concerns about the business environment.Regulation is particularly problematic for firms growing and creating jobs. There are growing concerns about the impact regulations have on flexibility and the cost of compliance. The government does not have a clear view of the burden as impact assessments lack rigour and do not provide a complete picture on total costs to businesses. Despite committing to the one-in one-out approach to regulation, it is not evident that this is working in practice.

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Chief Economist

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