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Rt. Hon George Osborne MP
Chancellor of the Exchequer
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ
I am writing to set out the CBI’s priorities for the forthcoming Autumn Statement.
The last few months have seen improved economic news and confidence returning to
boardrooms across the UK. We are now forecasting 1.4% in 2013, 2.4% growth in
2014 and 2.6% in 2015. However, the economy is only slowly rebalancing, as growth
is being driven primarily by consumer and public spending, while exports failed to
contribute to Q2 growth and business investment contracted by 2.7%. Below inflation
wage growth and necessary fiscal prudence mean neither household nor Government
consumption can continue to be the main drivers of growth, so we must focus on
investment to ensure the economy rebalances, and growth is sustained.
Therefore, we are urging Government to:
1. Support business investment
2. Encourage job creation and labour market progression
Government should look to spend approximately £1.3bn to support these aims, funded
by efficiency savings rather than a discretionary increase in public debt.
Although the CBI expects 2013/14 public borrowing to be £11.9 billion lower than
the OBR’s last forecast, the deficit reduction strategy, which has boosted both
consumer and business confidence, is less than half complete and must continue. On
top of the benefits of continuing the current strategy, risks from the Eurozone have not
disappeared, movements in Gilt yields imply £5 billion additional debt interest by
2018/19, and recent events in the United States all highlight the dangers of not having
a prudent medium-term fiscal strategy.
1. Support business investment
An increase in business investment will help ensure that UK businesses remain
competitive in the global market place. While our surveys suggest that investment will
begin to pick up in 2014, it remains 27% below its pre-recession peak, so the
Government must sharpen its focus on investment to cement the fragile recovery.
Over the last five years the UK has suffered its most severe recession in post-war
history, followed by the weakest recovery in the last 100 years, and expectations of
future growth have been particularly depressed. This has caused real uncertainty in
global demand outlook, which has been a key factor holding back business
investment. Therefore, as the recovery picks up, the first priority for supporting
business investment must be delivery of planned initiatives and providing stability,
which will galvanise the confidence to invest. However, there are some small targeted
measures that can really help push investment intentions over the edge – by
supporting regeneration, supporting infrastructure investment, removing barriers to
finance, and reforming the visa system.
1.1 Supporting regeneration across the UK
There is significant scope to drive investment in buildings and structures across the
UK. However, the business rates system, which has become outmoded and
disproportionately burdensome, acts as a barrier to freeing up this investment.
In the medium term, we need full reform of the business rates system, because the
system is uncompetitive, distortive and complex. Government should commit to full
reform now by embarking upon a cross-government review of rates, which can
address all of these issues at once:
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Uncompetitive. Tax on property raises higher revenue as a proportion of GDP
than anywhere else in the OECD’s 34 member countries.
Distortive. As some sectors move away from property usage, the tax is
becoming increasingly concentrated in businesses or sectors that remain
property-intensive.
Complex. The revaluation cycle means rates are often out of kilter with rental
values, and there are negative economic outcomes during a downturn due to the
counter-cyclical nature of the system. Failing businesses with empty property
are punished by being charged rates, and there are perverse incentives on energy
efficiency, where companies are discouraged from increasing efficiency due to
the higher rates that will follow.
In the short term, Government should cap the business rates increase at the inflation
target of 2%, until the next revaluation, to help firms which have suffered particularly
prohibitive rates since the last revaluation. This would be a clear sign for businesses
that Government understands how damaging the system is, and is willing to take steps
to reform it. The cost of limiting business rates to 2% rather than September’s RPI
rate of 3.2% would be £327 million in 2014/15. Government should also consider
introducing an incentive to move into vacant property, such as a one-year rates
holiday, until full reform of the system is possible. This would help to break the cycle
of decline that empty shops can create.
1.2 Boosting private investment in infrastructure
The CBI has welcomed the Government’s focus on infrastructure, which has brought
a raft of positive reforms on planning, increases in public investment, and the UK
Guarantees scheme. However, with the scale of private investment not having picked
up as expected, Government’s focus on infrastructure investment must be relentless,
and there are several small tweaks that could really push investment intentions in the
private sector over the edge:
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Action on sectors where competitiveness is an issue, such as the energy and
aviation sectors
A clearer National Infrastructure Plan to attract investors
Reforms to Major Infrastructure Planning to speed up the system
A capital allowance for structures to reduce the cost of investment
1.2.1 Action on sectors where competitiveness is an issue, such as the energy and
aviation sectors
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Government should focus on the cost of energy to both safeguard the
competitiveness of business users, and to ease the pressure on UK households.
We must keep up the pace on energy infrastructure in order to shore up
confidence among investors. A lot of hard work has helped progress the Energy
Bill to this point – now it must receive Royal Assent to ensure that investment is
forthcoming in order to secure our energy supply.
Energy costs are mounting for Energy Intensive Industries (EIIs), and their
international competitiveness is at risk, in particular following the
implementation this year of the Carbon Price Floor (CPF). The compensation
package for EIIs facing the pass-through costs of the EU Emissions Trading
System and the CPF was understandably extended into 2015/16. However,
investments are made with at least a ten year profile in mind, so Government
must guarantee support for the duration of the policy, expanding the package to
reflect its upward trajectory, if it is to anchor investment intentions. Further
relief could be provided by exempting inputs to electricity generated by
Combined Heat and Power – a technology which provides an important
opportunity for some large energy users to improve their efficiency and costcompetitiveness – from the CPF. More broadly, there remains a question mark
over how sustainable the CPF is over the longer-term, which Government must
seek to address.
Householders are also feeling the pressure of rising energy prices, resulting
from a combination of wholesale price rises and the cost of securing and
transforming our energy infrastructure, and it is right to look at how that burden
might be eased. The Energy Company Obligation (ECO) is an important policy
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in terms of supporting households, including the vulnerable and fuel poor, in
managing their bills through energy efficiency. However, as the largest of all the
policy costs on consumers’ bills, it is important to consider ways in which we
can improve cost-effectiveness. To this end, it would be sensible to allow
greater flexibility within the scheme, for example regarding the eligible
measures to be delivered through each of the three sub-targets, which could
reduce overall costs, as could improvements in data sharing to identify those
eligible for the scheme. If the Government were to directly fund the scheme in
order to remove it entirely from consumers’ bills, this should be funded through
further efficiency savings from public spending. Furthermore, the government
should extend the scheme from 2015 to 2017 to give those delivering the policy
– both the energy companies and the supply chain – greater certainty, and must
work with industry to set targets for the programme in accordance with the time
extension. It should also continue to work with industry to ensure the success of
the Green Deal, which, if delivered in line with Government expectation, should
support a more cost-effective ECO.
On aviation, Government should freeze Air Passenger Duty (APD), due to the
negative impact the tax has on the UK’s ability to attract business and export.
The UK’s APD rate is the highest air passenger tax in the EU and has seen
significant increases in recent years. As a result, the World Economic Forum’s
(WEF’s) competitive index ranks the UK’s airport taxes and charges as the
second least competitive in the world. This proposal would cost approximately
£93 million in foregone revenue in the first year. However, PWC’s analysis
suggests that tax receipts could rise over the medium term, due to higher exports
and inward investment as the lower duty encourages the number of flights
domestically and internationally to increase.1
Housing policy should remain a focus. Government has rightly taken action to
boost demand for housing through the two-pronged Help to Buy scheme. Now,
there must be a renewed focus on supply of housing to mitigate against any risk
of a housing bubble. Taxing land with planning permission fails to address the
core problem – developers either do not yet have planning permission, or they
have permission but the project is not viable. The priorities for boosting supply
should therefore be accelerating land release and addressing the length of time
and cost required to receive planning permission. Businesses have welcomed
the reform of our planning system, but we need to ensure that all local
authorities are delivering on a pro-growth approach. Finally, the outdated stamp
duty land tax should be reformed, as it is distortive and a hindrance to a wellfunctioning market.
1.2.2 A clearer National Infrastructure Plan to attract investors
This Autumn Statement should see the publication of a revised National Infrastructure
Plan (NIP) that is plainly directed at prospective investors. The NIP should be used to
1
PWC, The economic impact of Air Passenger Duty, February 2013
market infrastructure investment opportunities to domestic and international
individuals and businesses, but in the past it has provided insufficient information, or
in an inappropriate format. The third Plan should be a genuinely “living document”,
with up-to-date information on progress, as well as being forward looking. The
prioritisation of projects must be clear – both in terms of economic priorities and with
regards to which projects enable other projects to be brought forward. There must be
greater clarity on planned project funding, whether Government is directly funding
development or merely pulling policy levers to facilitate private funding, and on
revenue streams further down the road. We have worked closely with the
Infrastructure UK team on developing the plan, and are positive that a more detailed
approach will go far to offer greater clarity to potential investors.
1.2.3 Reforms to Major Infrastructure Planning to speed up the system
The latest CBI/KPMG Infrastructure survey suggested planning remains a barrier to
development for nearly all businesses (96%).2 Despite planning changes in recent
years, more can be done to build businesses’ confidence to invest. This is clearly the
case with local planning, where pro-growth reforms have been often undermined by a
lack of consistency in applying the principles of sustainable development and lack of
clarity about decision-making. The decision to “call in” an Energy from Waste plant
in Hertfordshire, following an initially successful application, is a good example of
this. A nationally significant piece of infrastructure is now subject to an unpredictable
public inquiry and ministerial decision, which will erode the confidence with which
other companies view investment in the UK. On the other hand, while businesses are
generally positive about the fast-track planning process for Nationally Significant
Infrastructure Projects, the Government should tweak the regime. There are three key
areas that need to be addressed:
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The pre-application stage must be streamlined. Project promoters already take
considerable time to prepare and consult on their proposals. While rigorous
preparation is appropriate, the information required is often disproportionate or
irrelevant. The Planning Inspectorate must give a clearer steer to developers on
when they have included sufficient information for submission.
Developers must be afforded flexibility in how they obtain non-planning
consents. Being a ‘one-stop shop’ is one of the main benefits of the system, but
a number of non-planning consents still must be obtained separately from the
main application for a Development Consent Order (DCO). Developers may
still choose to obtain these consents separately, but government should give
companies the option of incorporating these consents into their DCO.
Further guidance is needed on how changes to projects can be accommodated.
On occasion, elements of complex projects may need to change after an
application has been submitted as more sustainable solutions come to light.
Government has rightly moved to assure project promoters that small changes
CBI, KPMG, Connect More, CBI/KPMG infrastructure survey 2013, September 2013
can be made without the need for a new application, but as more projects move
through the system, its flexibility will be tested more frequently. Clearer
guidance as to the permissibility of proposed changes is therefore essential.
1.2.4 A capital allowance for structures to reduce the cost of investment
The lack of a capital allowance for infrastructure since the abolition of the Industrial
Buildings Allowance is making the return on investment for non-qualifying assets in
the UK far less competitive than similar assets elsewhere. This will have to be
rectified if government wishes to see an upturn in infrastructure investment.
For companies with an international profile, the effective tax rate is one of the key
factors in the decision of whether to invest in the UK or abroad. Without a capital
allowance for infrastructure, the effective tax rate on capital-intensive projects in the
UK is uncompetitive, and this is most acute for energy, waste and aviation
infrastructure. The CBI continues to call for this to be rectified through a capital
allowance that applies to infrastructure assets, at a depreciation rate of 4% over 25
years, based upon the existing allowance for dredging. We estimate that £11 billion of
infrastructure assets a year would qualify and though there are difficulties associated
with this proposal – such as the possibility of state aid non-compliance – the
Government needs to implement changes to make investment competitive if it wants
to see an uptick in private infrastructure investment.
Finally, business investment in infrastructure will be supported by increased public
sector investment in infrastructure, which has a buoyant effect on investor confidence
and supports business activity in the UK. The increase in Public Sector Net
Investment (PSNI) set out in the Spending Round 2015/16 was a good start, but our
public investment remains far below our competitors and the G7 average. This is
reflected in both the WEF competitiveness index, which puts us at 28th globally, and
the CBI/KPMG survey, which suggests that only a third (35%) of businesses believe
that current government policies will make a difference on the ground. PSNI is
expected to peak at 1.6% of GDP under current plans. The G7 long-term average is
around 2.25%, and we must move towards this as a long-term aspiration.
1.3 Delivering the right sources of finance for small and medium-sized firms
Over the last five years, the overwhelming majority of jobs have been created by
medium-sized and small businesses. Ensuring that the finance system works properly
across all businesses will ensure that the best businesses emerging are allowed to
thrive. This means doing all we can to address cyclical and structural barriers to
prudent finance in the UK market.
The first step is to deal with cyclical issues, which threaten to choke off finance just as
the economy is beginning to heal. Much of this is about ensuring that rapid regulatory
change does not unnecessarily reduce the supply of bank finance, and publicly
recognising the improving credit conditions will go a long way to boost confidence.
However, supporting securitisation of SME loans is a further area where the
Government should focus its attention:
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At a time when net lending to SMEs continues to fall, there is scope for
Government to kick-start a market in securitisation of SME loans. This could
increase overall supply of finance for SMEs, especially for businesses at the
margin of viability. Despite poor performance in certain product segments, high
quality European securitised produces have consistently performed well since
the crisis. For example, the default rate for Residential Mortgage Backed
Securities (RMBS) is very low, at only 0.08%. One way for Government to
explore securitisation is through the provision of guarantees for either senior or
junior tranches of SME loan securitisations. The European Commission is
already exploring a similar model for the European Investment Bank – the UK
Government should not be left behind.
Government has taken action to address another key cyclical barrier to finance,
linked to the risks associated with exporting. UK Export Finance has expanded
their product offering and supports an increasing number of businesses, but only
52 medium sized and small businesses were given direct support in 2012-13.3
UKEF should aim to raise this number to 250 by 2015. This can be helped along
by increasing the scope of the direct lending facility, which currently has a
minimum deal value of £5 million, and so often cannot be applied to initial trade
efforts. The focus must also turn to increasing demand for these products
through effective marketing – in particular to SMEs.
Addressing structural barriers to finance is a matter of overcoming hurdles that
affected finance in the UK even before the recession. Central to this problem is the
reliance of SMEs on traditional forms of finance. Traditional debt will continue to
play a large role in growth of firms of all sizes, but the most resilient finance system,
which meets the broad array of business demands, is one in which the forms of
finance are diverse. Four types of finance which have scope for further development
are the retail bond market, private placement, equity finance and crowd-funding – all
of which play a much fuller role in competing economies. Supporting the
development of these markets should be a priority.
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The first of these, private placement, is well developed in the US. It currently
represents 90% of the global market of investors, with UK businesses
accounting for over 40% of borrowers in 2012. The demand for this finance
from UK firms suggests there is significant potential to enlarge the market on
this side of the Atlantic. However, it is being held back by several small
problems, such as a lack of regulatory clarity, no standard documentation or
market intelligence, and straightforwardly a lack of understanding of what
private placement is. The first step to overcoming these is for the FCA to
develop a regulatory opinion of private placements to provide clarity and
security for all stakeholders.
CBI, Go your own way, an MSB guide to the journey from non-exporter to global business, October 2013
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The retail bond market is also undeveloped in the UK, primarily because of
regulatory and cost barriers. For issues over €5 million, companies must comply
with the EU Prospectus Directive, which requires various reporting and
disclosure requirements. The burden of these requirements disproportionately
falls on smaller issues: costs for the prospectus, rating and legal fees come to at
least 5% of the issue value. There is currently a ‘carve out’ in the Directive for
raising less than €5 million. However, with the US exempting up to $50 million,
the Government should work with EU partners to raise this to €20 million, at
which point fixed costs of bond issuance become more proportionate and larger
companies are more able to cope with costs. Government could also play a role
in tackling these costs directly by ensuring that advisory costs associated with
bond issuance can be funded by the Growth Voucher scheme.
Equity finance accounts for a tiny proportion of SME finance (approximately
3%).4 We welcomed the removal of stamp duty from AIM-listed shares, and the
Enterprise Investment Scheme and Seed Enterprise Investment Scheme are both
working well, but more action can be taken to boost supply and demand for this
type of finance. One of the key barriers to higher demand is misinformation
about the use equity finance. Too often, equity finance might be a viable option
for a firm, were they to understand that selling equity has benefits, and does not
have to mean ceding control of the company. The CBI is currently exploring the
use of equity finance among mid-caps and small businesses in the UK, and
findings will be published in January.
The crowd-funding and peer-to-peer lending market is rapidly expanding.
Regulation from April 2014 will bring certainty to the market, but must be
proportionate to avoid stifling this fast-growing source of finance.
The Business Bank will have a significant role to play across these structural and
cyclical barriers. We have always supported the idea of a bank, as a responsive
institution that can identify gaps in the provision of finance and become a ‘one-stopshop’ for support by simplifying initiatives. We support the Business Bank’s focus on
co-investment in alternative finance options and would welcome a commitment to
continuing this, as well as supporting alternative finance options, such as those listed
above.
For the Business Bank to be a credible institution, it should function alongside, not in
competition with, the private market. The Bank should work with finance providers to
identify gaps in provision and utilise its balance sheet to better target support during
periods when viable businesses are under-serviced, due to risk-averse behaviour in the
banking sector. Two sectors to consider at this time should be construction, where
despite the improving economic conditions firms continue to struggle to access
finance, as well as IP-intensive businesses, like the creative industries.
4
Stuart Fraser, Small Firms in the Credit Crisis: Evidence from the UK Survey of SME Finances 2008, October
2009
1.4 Rolling out successful visa reforms beyond China to other key economies
The enhanced visa scheme for incoming Chinese business people is positive, and
should be rolled out to other key economies as a priority. The package of reforms to
visas introduced late last year (for instance the Passport pass-back scheme and
enhanced customer service) is already having an effect.
1.5 Enhancing the role of our world-leading universities in supporting growth
Sir Andrew Witty’s report offers a powerful agenda for enhancing the contribution
universities make to growth and is worthy of support. In particular, funding for the
new ‘arrow projects’, which will bring together researchers, major industrial and
supply chain partners, and LEPs (including their devolved equivalents), will help
bring new technologies to market and bolster the industrial strategy. Improving the
innovation ecosystem for the UK’s mid-sized businesses should also be a high
priority, and Sir Andrew’s report offers some powerful suggestions on how this could
be done.
2. Encourage job creation and labour market progression
2.1 Ensuring that people are properly skilled and trained for work
There must be more concerted effort to ensure that people are suitably skilled to enter
a dynamic workplace. The current vocational education system, in which most
funding passes straight to the trainers themselves, is not sufficiently demand led, so
the funding often does not reflect business needs. A model under which businesses
can recoup payments themselves, for instance through PAYE as they do maternity
pay, would help to address this. It will also help ensure that the system offers
businesses certainty throughout the political cycle – unlike a grant based system,
which might be more susceptible to the frequent changes that have blighted the
vocational education sector. To be effective, such a system would need to pass several
key tests. It must be simple, provide appropriate support for smaller firms to engage,
maintain the scale of government spending on the apprenticeship programme and be
implemented in a way that protects and maintains existing provision that businesses
value. A smooth transition and careful piloting can deliver this. The new system must
also be part of a wider skills ecosystem that supports and enables business leadership,
including seed funding for clusters of skills provision – locally, sectorally and within
supply chains.
One particular area of skills that requires focus is the supply of higher level skills in
key growth sectors, where part of the solution has to be more flexible partnershipbased provision at Level 4 and above. There is strong interest in businesses and
universities to develop more ‘learn while you earn’ courses, but steps need to be taken
to address the barriers to expanding the market for such provision. Tackling this
requires a broad set of measures, including aligning funding for equivalent
qualification courses with the UK’s industrial strategy priorities, so that individuals
can draw down on finance to re-skill in value added sectors; removing higher
education places that are fully funded by employers from the student numbers quota;
and reforming student finance arrangements to better incentivise universities to offer
shorter, more business-focused provision.
2.2 Supporting job creation through targeted schemes and lower labour costs
As growth returns, unemployment for adults will fall, but leave the structural issue of
youth unemployment to be addressed. A particular problem in this field is the lack of
joined-up support and advice for young people. Even where it does exist, it is often
tenuously linked to labour market realities and skills needs. The Youth Contract
attempts to address this, but has been hampered by poor roll-out, as local areas fail to
drive the centrally-designed scheme, and the lack of a skills element in the incentive
scheme, which is vital for garnering business support.
Government should introduce a scheme which overcomes these difficulties, based on
innovative, business-relevant, locally-led partnerships across the country. Recently,
the use of Youth Contract funding for City Deals to build more local approaches
involving the private sector has been effective in tackling local unemployment. The
remaining Youth Contract funding, plus a further £800m, should be set aside to form
a bid-for fund which can be used to build single, local points of support for young
people. This should focus especially on the 16-19 age group, where too many fall off
the Government’s radar and do not reappear until the barriers to getting a job are
much greater. Any projects would need to be based on genuine priorities for the local
labour market, and should face a rigorous assessment panel, encompassing the public,
private and third sector. There is developing evidence that these local “guarantees” are
more likely to be effective than national schemes.
Government should also have a medium-term aspiration to make UK labour more cost
competitive by reducing the tax costs of taking on and keeping staff. The
competitiveness of the UK’s labour taxes has declined, partially due to the increase in
employers’ National Insurance Contributions (NICs) from 11.8% to 13.8%. It is now
more burdensome than any other business tax – in 2012, the tax raised £59.2 billion,
compared with £39.4 billion in corporation tax. The most efficient way would be to
increase the threshold or reduce the rate of employers’ NICs. Such action would be a
firm indication that the Government is willing to continue making the UK’s business
tax system more competitive, as well as having the more immediate positive impact of
helping those with low skills back into the market.
2.3 Making pensions work for growth and savers
It is crucial that the Government maintains incentives to save for the future, in
particular the incentives of the Pensions Tax Relief and tax-free lump sum. Further
limitations to either of these will progressively undermine the appeal to save for the
middle class, and risk those people falling back to rely upon Government support in
the long term.
At the same time, it is essential that the Pensions Regulator fully applies its new
statutory objective to minimise the negative impact of funding defined benefit pension
deficits on the growth prospects of employers. This means changes to its codes of
practice and guidance as well as in its day-to-day dealings with businesses.
Companies are committed to honouring the pension promises they made to their
employees, but to do so they need to invest in their business to remain competitive.
The best form of protection for employees’ benefits is a solvent employer standing
behind them.
I look forward to discussing these issues further with you in due course.
John Cridland
Director-General