Steve Radley, EEF, hopes the Chancellor delivers helpful action for manufacturers on Budget day...
Steve Radley, chief economist at EEF, hopes the Chancellor will deliver helpful action for manufacturers on Budget day (Apri 22), including one-off investment allowances and a payable tax credit for big companies engaged in research and development.
When the Chancellor stood to deliver his Pre-Budget statement last November the outlook for the global economy was pretty bleak.
Although it had yet to be confirmed at the time, the UK and most other developed economies were already in recession, financial markets looked perilously fragile and industry was being hit hard by the synchronised downturn on global markets. The policy response was a significant fiscal boost aimed at getting demand going again.
In the interim we have heard further announcements on loan guarantees for businesses; specific support for the car industry and fervent activity from the Bank of England to get credit markets moving again. But five months on, when Alistair Darling gets to his feet again on Budget day, he will do so against an even gloomier economic backdrop.
The Treasury’s Pre-Budget forecast for 2% growth in the world economy this year is now some way north of the consensus view and a much deeper contraction in the UK economy is now expected. And with tax revenues also coming in lower than expected, positive news is likely to be noticeably absent from the Chancellor’s speech. Despite an already hefty budget deficit, further intervention will nevertheless be needed if the UK is to avoid a more enduring recession.
All eyes on the Chancellor
For manufacturers, who have been increasingly dependent on demand from across the world in recent years, actions beyond the UK will matter too. But the sector will still be looking to the Chancellor to bring forward measures that will help to alleviate the acute pressures that companies are facing in the current economic climate. Importantly, these will need to focus on areas that will ensure manufacturing is in the best shape possible to take advantage of the recovery, when it comes. Any future ‘rebalancing’ of the economy — something which policy makers of all political persuasions are becoming increasingly vocal about — will depend on manufacturers coming through this downturn and out the other side.
Chief among the immediate pressures facing companies is the deterioration in companies’ cashflow positions. Reduced credit availability, customers stretching payment times and depressed profit margins are all taking their toll. And combined with uncertainty about demand prospects, investment plans are set to take a serious knock this year. Investment cutbacks and the potential loss of significant numbers of highly skilled employees — both of which are cornerstones of companies’ competitiveness — put a serious question mark on how well equipped manufacturing will be when demand returns.
This is, therefore, where the Chancellor needs to focus further government intervention. The current state of the public finances offer little scope for further big tax and spend giveaways and there is the real risk that business will end up paying in the long run. Better to focus on targeted measures which can offer the best long term bang for the limited bucks available. Equally the aim must be to support the efforts companies themselves have made to improve competitiveness and productivity in recent years.
Skills, investment, innovation
With that in mind companies are looking for action on three fronts — skills, investment and innovation. Following the lead of a number of our European competitors, more flexible support for employees moving to shorttime working would help companies, already doing their utmost to avoid redundancies and hold on to important skills. A one-off, time-limited hike in investment allowances could ensure that spending plans on new plant and machinery remains on track in the coming year.
And a payable tax credit for larger companies engaging in research and development that will support the UK’s shift to a lower carbon economy would keep innovation high on companies’ agendas. These three policy measures, together, would help keep UK manufacturers at the top of the competitiveness league when the recovery starts to take root.
It will come as no surprise that, as an employers’ organisation, we also want to ensure that cash constrained companies are not imposed with new or additional cost and regulatory burdens. This is particularly important for internationally mobile sectors, such as manufacturing. Firms will be making an assessment of their costs across their worldwide operations and additional costs or a reduction in workforce flexibility would have consequences for decisions on capacity in the UK. The planned increase in business rates, due to come on stream in April, is therefore extremely unhelpful.
A mixed and balanced economy in the future hangs on manufacturers’ ability to ride out the current turmoil in financial markets and the sharp fall in global demand. What our manufacturing base looks like in the future will hinge on decisions made now. Investment in manufacturing is for the long haul and without support to overcome immediate barriers the economy will continue on its current and rather less stable path.