IRAQ is rightly at the forefront of everyone’s mind as the harsh realities of war dominate both the domestic and international agenda.
I feel that it is unseemly and wrong to talk about contracts in postwar Iraq when our young men and women are sacrificing so much; our prayers and wishes for “safe home” are with them. But we are very keen that the current diplomatic situation should benefit British business and British jobs.
Our partnership in war with the US must be translated into a deeper business partnership in peace. More trade and investment with a less protectionist USA is our aim and, if that succeeds at the expense of France, so be it.
Away from the theatre of war, the economy remains fragile, profits continue to be squeezed and we are witnessing a slump in business investment that will put the UK at a serious disadvantage when the eventual upturn comes. This may not be the most encouraging backdrop for a Budget statement but it certainly concentrates the mind.
The April 9 Budget will clearly present the Chancellor with many challenges but also an opportunity to convince a sceptical business community that the Government really wants to improve the productivity of the wider UK economy. The overexposed business taxation card must not make another appearance, in any form, for some time to come, and pro-business words must be seen to translate into pro-business action.
Business has consistently told Government that it never underestimates the major achievement of macroeconomic stability. But Government must now tell business that the dramatic increases in the business tax burden since 1997 will stop. Business has become mightily fed up with being taken for granted. The cumulative rise in taxes of £47 billion between 1997 and 2005 has exacerbated a five-year decline in corporate profitability and sliced investment by 11.5 per cent in just two years.
As I meet businesses around the country of all sectors and sizes, it worries me to see dramatic falls in employment and non-existent investment plans, with dire pensions situations often threatening to engulf the whole company. My simple advice for the Chancellor, as he prepares for this Budget, is don’t do anything that makes matters worse.
The CBI has published its detailed Budget recommendations and spelt out its belief that this has to be a “no-frills” Budget. Even without war-related expenses the huge sums already committed to improvements in public services (let us hope they will be matched by radical reform) and diminishing tax receipts as a consequence of the global downturn, the room for manoeuvre is limited. An overall rise in spending or taxes, with the potential to upset public finances or depress economic activity, must be avoided at all costs. But we still believe that there is room for £1 billion’s worth of fiscal help, to ease problems with pensions and employer insurance and get business back on the investment track.
Of course, the CBI call could be simple. No tax credits, allowances or relief, just lower the rate of business taxation and let business get on with it. But the Government prefers a different route, and we therefore have to work with that to help to make the business environment more supportive of wealth and job creation.
Many companies have seen their employer insurance premiums soar by up to 400 per cent in the past 12 months. Such rises have put some firms out of business. That’s why we have urged the Chancellor to return the unexpected £200 million to £300 million windfall the Treasury has received because of the dramatic rise. When business sectors have made windfall profits in the past they have been taxed — oil and utilities come to mind. Why shouldn’t the same principle apply the other way round? Responsible business is also very anxious about future pension provision so we have asked the Chancellor to offer incentives to encourage more private pensions provision in businesses of all sizes.
Imposing an arbitrary cap on the size of a future pension pot (and not even subjecting politicians and civil servants to the same rules) is no way to encourage young people into a culture of long-term saving.
We are seeking changes to the R&D tax credit, which could see it increase in value to £900 million if other R&D costs like power and equipment are included. But it must also be made more user-friendly if companies are going to consider it worth applying for.
At a time when investor confidence is at its most depressed, the CBI is also asking Government to consider helping to bridge the finance gap for smaller firms. Government loans and guarantees stop at £250,000 while venture capital funding usually begins at £3 million. If growing companies are to secure the capital they need to develop, we have to find an effective way of closing that gap.
SME capital allowances should be extended to leased equipment and the lack of any allowance for commercial property should be addressed. More tax breaks could also be introduced in the Enterprise Areas where wealth creation can be a useful agent for change and social inclusion. The Chancellor should also use this Budget to signal a series of reforms on tax policies that continue to put UK firms at a competitive disadvantage internationally. At the top of the list are transport taxes, environmental taxes and stamp duty on shares.
All of the CBI’s economic proposals are grounded in our economic forecasts, which are somewhat lower than the Treasury’s. We predict growth this year of 2.2 per cent and 2.4 per cent next. The Treasury predicts 2.5-3 per cent this year with 3-3.5 per cent next. We therefore expect the Government to borrow an extra £13.3 billion over the next two fiscal years. But neither the Chancellor nor the CBI is talking recession.
The UK is still the best place in Europe to do business but its competitive advantages are in serious need of reinforcement. If our businesses are to have a fighting chance of capitalising on new opportunities likely to arise when today’s international uncertainties are behind us, we need to be armed with convincing tax competitiveness and labour market flexibility.
No matter how difficult the backcloth, this Budget will still be a major test of the Government’s pro-business credentials. Warm words must be replaced by pro-business action. Investment by business is at dangerously low levels. The UK’s reputation as the place to do business has never been under greater threat. The Chancellor has a critical opportunity to stop the erosion. Failure will have a high price in lost growth, lost jobs and lost tax revenue for years to come.
The author is Director-General of the CBI
