Margot James, PPS to Lord Green, Minister for Trade and Investment, and MP for Stourbridge, provides her observations on yesterday's budget.
Trade figures are volatile. We ended last year with a trade deficit of £1 billion for the month of December. Although that was the best monthly result for many years, it was not sustained during the start of this year. During 2013, as a whole, exports grew by just under one per cent. So we have much work to do if we are to hit the government target of doubling UK exports to £1 trillion by 2020.
The Office for Budget Responsibility (OBR) is projecting growth in exports of under three per cent in 2014; and a growth of three per cent in imports. The relative weakness of sterling since the financial crash is often cited as a reason why our trade balance should be better than it is, but that is to overlook the fact that our manufacturers have to pay more for imported components, which in turn boosts the value of imports.
The reasons for the slow growth of exports are manifold and largely historic. Lack of investment and the decline of manufacturing are rooted in post-war economic policy, and even the cost of the war itself to the British economy. Management complacency, a vague notion that the Commonwealth would replace the empire as a captive market for British goods, and an over reliance on the domestic market all played a part.
Another less observed cause of the trade deficit in goods was the application of rigid free market principles to the government’s trade finance function, which used to be known as the Export Credit Guarantee Department (ECGD). The effect of trade finance policies in the 1980s was to strip the ECGD back to the provision of trade finance for very large companies, predominantly those engaged in the aerospace and defence industries.
So British manufacturers were constantly at a disadvantage to companies from countries like Germany, France, Sweden and Canada, all of whom had much more broadly based and aggressive government-backed trade finance bodies.
Two years ago, the Government embarked on reform. The ECGD was re-launched as UK Export Finance (UKEF) and provided with additional support to target SMEs. The budget yesterday takes UKEF to the next level. The Chancellor announced both a doubling of the amount of lending available from UKEF, to £3bn, and a reduction of the interest charged on that lending by a third.
The reduced rate of interest at which UKEF will be able to guarantee finance, is now at the lowest level permitted for any country under World Trade Organisation rules. At a stroke, the Chancellor has made UK manufacturers competitive with companies from the aforementioned countries.
There was more good news yesterday that came too late for the Chancellor to announce in his budget. Companies winning orders that require long term financing find bank support very hard to obtain. Basel lll regulations require that loans with a ten year life, or even less, are categorised as requiring a high capital to lending ratio. This makes long term finance far less profitable for the lending bank. What is required is an export financing capability where a manufacturer can call on UKEF to refinance the loan so that the finance required of banks is converted to a four year loan, or less, that is more profitable for the lending bank.
All eyes have been on the EU Commission as it determined whether the proposed UKEF refinancing capability was to be deemed ‘State Aid’ or not. The good news came from Brussels yesterday that the refinancing capability, worth up to £5bn to British exporters, is not classed as state aid.
UKEF now have up to £8bn to guarantee finance for British manufacturers abroad. The budget yesterday made the terms of that financing as competitive as any other European market (and most other Western markets) for the first time since the 1970s.
Stepping up government trade support for manufacturers is vital, and the progress yesterday is a very significant step forward. It was also very good to see the budget support the revival of UK manufacturing as well; so there are more goods being produced to export in the first place.
In that context it was very good to see so much support for manufacturing in the budget. Energy intensive industries will be protected from the rising costs of the Renewable Obligation and feed in tariffs, the existing compensation scheme for green levies will be extended and the Carbon Price Support rate will be capped.
All manufacturers can benefit from the raising of the Annual Investment Allowance (the old capital allowances) to £500,000. And manufacturers, along with profitable businesses in every sector will benefit from the lowest corporation tax in the G7.
Manufacturing declined massively under the last government; it is enjoying a renaissance under this government. Public spending was completely out of control between 2001 and 2010, causing Britain to have the largest structural deficit in the G7 at the outset of the financial crisis. The difficult decisions made by the Chancellor and his team have seen the budget deficit come down by a third, and on course to be halved next year.
None of the support announced yesterday by the Chancellor – support for exporters, manufacturers, businesses, savers and taxpayers – would have been possible without the restoration of the public finances. There is indeed a very long way to go to overcome our indebtedness, but the fact that we are so clearly on the right road, with results starting to come in, means that the government can provide support where it is most needed to ensure Britain is truly competitive once again.