A mandate for growth

Posted on 28 Feb 2011 by The Manufacturer

Steve Radley, director of policy at EEF, discusses the upcoming budget and the need for growth.

In just a few weeks, the government will set out its second Budget and publish the conclusions of the first stage of its Growth Review. This will be very different to last summer’s Emergency Budget which, together with the Spending Review, set out the government’s plan for meeting its Fiscal Mandate to reduce the level of government borrowing and debt over this Parliament.

The focus of this Budget must be on growth and generating the kind of growth our economy needs. This must come from investment, innovation and trade. But generating such a change from the unbalanced growth we saw in the last decade will not be straightforward. In particular, the governnent will need to create an environment that encourages business to invest and to do it in this country. It has made a good start by setting up the Growth Review and tasking all government departments with indentifying where they can reform policies that are blocking growth, and where new ones should be implemented to support growth and job creation. This joined-up approach suggests a different type of thinking across government about how it needs to engage and work with the private sector

It now needs to take this work forward by transforming its Growth Review into a Growth Mandate This would embed the process within government by setting out the progressive steps that it would take to dismantling the barriers to growth over the course of this Parliament. It would commit the whole of government to addressing these priority areas and report on the progress it was achieving at each Budget in the same way it does with the Fiscal Mandate.

But, of course, a Growth Mandate will only deliver results if it is addressing the right issues. It is also important that, as well as mapping out a course for the rest of this Parliament, the Growth Review takes early steps to dismantle these barriers. The Chancellor should therefore match the transparency of the Growth Mandate with specific measures in four areas – tax, regulation, access to finance and skills.

The governnent has already taken some useful steps on taxation such as lowering the rate of corporation and setting up the Office of Tax Simplification. But given the potential mobility of much manufacturing investment, it needs to go further to create a truly competitive tax regime. For example, manufacturers tend to replace their machinery and equipment every seven to eight years but the reduction in capital allowances next year will mean it will take 33 years for the full cost of business investment to be written off against tax. We need a new approach that recognises the true cost of modern machines with short lives. Similarly, the R&D tax credit needs to go beyond its current support for the research stage of innovation to include the significant development costs and risks borne by manufacturers. Environmental taxation also needs to be made simpler and more competitive. If the government goes ahead with its current plans for a carbon price floor, some manufacturers will see their electricity use taxed four times. Other environmental taxes would therefore need to be scrapped or reduced.

The governnent has shown it is serious about reducing regulation by introducing a ‘one in, one out’ approach and by ensuring that all new regulatory proposals are scrutinised more rigorously. It should now add some extra transparency to this by ensuring that the final opinions of this scrutiny body, the Regulatory Policy Committee, are published before any new regulation is laid before Parliament. In addition, rather than trying to unpick individual items of regulation, it should examine entire areas to address unnecessary complexity, duplication and contradictions. Its current review of employment law is a good start but waste policy and climate change are other areas that are crying out for attention.

Growing businesses will also only be able to fulfil their ambitions if they can get access they finance they need to, for example, develop new products or markets. Requiring the banks to publish a new lending code and setting up the Independent Banking Commission is a good start but the government should now introduce independent monitoring of whether the banks are keeping to these principles and start to develop an action plan for implementing the Commission’s proposals.

These are some of the early steps that the government should take next month but the Budget should also point to much larger-scale ambitions. And as part of the Growth Mandate it should regularly track progress on dismantling barriers by reviewing progress in areas such as the tax and regulation costs faced by business, the net change in bank and non-bank lending to business and the proportion of companies facing skill shortages.

Ultimately, business will need to drive growth by investing, innovating and exporting but the Budget can start the task of creating the internationally competitive environment that helps it to do this.