A budget for making things

Posted on 7 Apr 2011 by The Manufacturer

Manufacturing took the centre stage in last month’s Budget and many are calling for a feather in the cap of Chancellor George Osborne. A few things still need ironing out, though. Mark Young analyses the measures with feed in from manufacturers, Ministers and trade organisations.

In the opening gambit of his address to the House of Commons last month, George Osborne described this year’s Budget as one “for making things, not making things up”. With much of his material sourced from the Plan for Growth released the same day, manufacturing was certainly high on the agenda.

According to the Chancellor, the Budget and the Plan for Growth are focused on making the UK “the most competitive tax system for growth” among the G20 countries. Indeed, a Corporation Tax rate of 23%, which will be inacted by the end of the Parliament, is lower than any other G7 country’s current rate. The other aims are to make the UK the best place in Europe to grow a business by encouraging investment and exports and creating a more educated and flexible workforce.

The Budget was, by and large, well received.

Terry Scuoler, chief executive of EEF, the manufacturers’ organisation, said that Mr Osborne has “made a crucial down payment on creating a stronger and more balanced economy.” Food and Drink Federation director general Melanie Leech said the organisation was particularly pleased with the scrapping of the extra fuel duty. “Food manufacturing is heavily dependent on fuel and any increase imposes an enormous burden on our members,” she said.

The planned enterprise zones and the Green Investment bank found favour with Siemens chief executive Andreas Goss, whose company is building a global centre for urban stability in Newham. “If the incentives are right, this new zone could ensure sustainable employment and a lasting economic legacy for London,” he said. The extra £2bn allocated to the Green Investment Bank was equally well received. “This should put the Bank on a secure footing, giving access to finance that is essential to the deployment of low carbon, infrastructure projects,” added Goss.

You’ve had your cake
However, in his response, Labour leader Ed Miliband said that it cannot be ignored that even when all of these measures are taken into account, Osborne had to begin his speech with downgraded predictions of economic growth this year from 2.1% to 1.7% and from 2.6% to 2.5% in 2012.

He refused to allow Osborne to blame the snow in December for the fourth quarter 2010 economic contraction since France, Germany and the USA all also suffered severe adverse weather conditions and grew none the less. If the Conservatives were to put the growth in Q3 down to their policies in last June’s ‘emergency budget’, then they must also accept that they caused damage in Q4, the former Energy Secretary admonished.

But even Mr Miliband struggled to provide instant indictment of the chancellor’s individual measures this time around. “As for today’s policies, we’ll look at them,” he said, to much haranguing from the Coalition benches, which were only stifled upon stern request from the Deputy Speaker.

That doesn’t mean Osborne will get away Scotfree though; his predecessor and counterpart, the shadow Chancellor Alistair Darling, will surely have questions to ask.

One of the main sticking points for manufacturers is the carbon floor price. Mr Osborne said he was setting a price of £16 per tonne of CO2 emissions starting in 2013, rising to £30 per tonne by 2020 in the interests of transparency. But one company with a £100m turnover intonated to The Manufacturer that the measure stands to increase its energy costs by £200,000 per year.

The fact that Britain is the first country to act in this regard certainly seems to contradict the competitive aims. As Roger Salomone, energy adviser for EEF, points out, the 2020 floor price is almost double the forecast for the EU ETS price which European competitors will pay. “This could have serious implications for the long run sustainability of energy intensive sectors, like steel, in the UK,” he said. “Manufacturers will be facing up to four different carbon taxes on the electricity they consume: the cost of the EU ETS, the CRC, the climate change levy and, now, the additional uplift of the floor price.” Business Minister Mark Prisk said the floor price has to be considered alongside a rise in the discount of the climate change levy (CCL), from 65% to 80%, but he conceded that this “doesn’t wholly deal with the problem”. By EEF’s calculations, in 2013 the value of the CCL rebate will be a quarter of the increase imposed by the floor price. “Thereafter, that differential will grow significantly,” said Salomone. “The carbon price has a steep upward trajectory whereas the rebate is fixed. So whilst better than nothing, the rebate won’t address the issue.” Mr Prisk said a joint strategy team involving the relevant government departments will look into other ways companies can mitigate the costs, including the adoption of new energy generation forms. He pointed to Rio Tinto Alcan in Northumberland whom he visited recently. The company has begun to use wood pellets to source some of its supply which benefits from being cheaper, better for the environment and carrying less secondary tasks – like cleaning transportation – than coal. It also offers no loss in the ability to control the energy source.

Scratching at the surface
While an increase in R&D tax credits for small businesses to 200% this year and 225% next year looks good on the surface, government has been accused in some circles of failing to address the underlying issues prevalent in this area. Stuart Fell, chairman of West Bromwich based SME Metal Assemblies, a supplier of pressed and welded assemblies to the automotive industry, says that the way the system is calibrated makes it difficult for small businesses to benefit.

“For too long, the tax relief has applied more to the ‘R’ than the ‘D’,” he said. “We are a small business, where new ideas are devised and applied to products by the same team in the same process. It’s easier for big corporations to chop up R&D into distinct parts, but SMEs neither have the staff nor structure to disseminate the two things to satisfy the current criteria.” Andrew Churchill, managing director of JJ Churchill Engineering, added: “The credits are very easy to claim if you are at stage one and two of the Technology Readiness Scale (TRL) but it gets very much harder there on in. It’s good that the relief has been increased for SMEs but I would have liked to see it widened to include innovation.” The introduction of the Patent Box, first revealed in November and budgeted for now in the Red Book, is no consolation. Said Churchill: “I think it’s patent stupidity. It’s only going to benefit a very small number of very large firms – those in the pharmaceutical industry, for example. Perhaps they’ll say they are entitled to their day in the sun.” Churchill was more upbeat about the doubling of tax relief on short life assets from four to eight years, even though the rate of relief has been lowered from 20% to 18%. “I was surprised to the degree to which they’d moved and how quickly,” he said. “EEF recommended seven or eight years and they’ve gone for eight. We’ve got exactly what we we’re looking for.” Fell, however, is not convinced that the measures go far enough, considering the situation in competitor countries. Assets for many companies fall outside the short life category and, for these, it will take over 30 years to fully write down the investment, especially given that the relief rate has now fallen by 2%.

“In the US, the taxation system means it takes just one year to write off the same piece of equipment, meaning they get a considerable tax saving and can reinvest in new, more productive equipment on a much shorter cycle,” he said.

“The Germans and the French can write down machinery in as little as ten years. Compared to 30 years, that is a huge gulf. I’m not convinced government sees the validity of this, despite the short life change. To put it in context, our business has trebled in size in 10 years. But today, our investment needs in order to grow are about double our net profits. For SMEs the gap between the investment they require and the money available is a barrier.” While recognising that disparity can exist, Business Minister Mark Prisk contends that government has exceeded a lot of people’s expectations with the balance that has been struck here. “We’ve addressed the short time issue but in a way that still fits in with a broader aim of simplifying the overall tax benefit,” he said. “If you look at the net benefit in terms of the capital allowances regime, most manufacturers would, by 2014, still find themselves enjoying relief – many were concerned that our changes would remove that.”

One business suffered as a result of this year’s Budget address before it had even finished. Bookmakers Ladbrokes said it had to pay out a four figure sum to customers who had placed bets at 16/1 on Justice Secretary Ken Clarke falling asleep during proceeding. Seventy year old Mr Clarke denies the inopportune attack of the sandman but Ladbrokes felt its hand was forced after Ed Miliband referenced it in his response. The company’s Alex Donohue told the Guardian newspaper: “Ed says he caught Ken napping, which is good enough evidence for us.”

Whether or not Mr Clarke had drifted off, it’s not clear just yet if Government has fully woken up to the needs of manufacturing. There’s evidence to suggest, however, that it might be coming to.