Speech to the EEF Annual Conference – 5th March 2013
Thank you Krishnan for that introduction – and to the EEF for inviting me to speak to you today.
This is the first time I have had the honour to address your Annual Conference.
But I am proud to say I have worked closely with the EEF for nearly twenty years, during which time I have met regularly with your Chief Executives – Graham McKenzie, my Yorkshire friend and colleague Martin Temple and now Terry Scuoler – at the Treasury but also in Sheffield, Wakefield and at your regional HQ in Thorney, outside Leeds.
It was as a result of those discussions that, in government, we introduced 100% capital allowances in 1997, R&D tax credits for small and medium sized enterprises in 2000 and then extended them to large companies in 2002.
And it was also following those early discussions back in the late 1990s that the Treasury agreed to your request to include a particular high energy process, the treatment of cementitious slag, in the list of products which qualified for the lower negotiated agreement tariff in the Climate Change Levy.
Whether the Treasury officials believed I knew what I was talking about when I returned back to Whitehall to make the case for cementitious slag is highly doubtful.
But, as always with the EEF, they knew that you knew what you were talking about – and the change was made.
The Cox Report
And let me also thank the EEF for allowing my colleague, the Shadow Business Secretary, Chuka Ummuna, to join me on the platform to take your questions on what is an important day for us.
Because today we are publishing a report, commissioned by Ed Miliband, which I know will be important reading for all of you here today – on how we can tackle short-termism in our economy and deliver more long-term finance for investment, in manufacturing and across our productive and service industries.
A report authored by the Pro-Chancellor of Warwick University, and previously the Director-General of the Institute of Directors, the highly respected Sir George Cox who is with us here today.
And I am very pleased to say that Sir George has produced an excellent report which does not pull its punches.
Because even with action now to kick-start the recovery alongside a balanced plan for deficit reduction, we cannot secure Britain’s long-term future unless we fundamentally reform the way our economy works.
In his report, based on extensive research and consultation across British business, Sir George finds that:
Short-termism, which he defines as the pressure to deliver quick results to the potential detriment of the longer-term development of a company, has become an entrenched feature of the UK business environment;
He reports that short-termism curtails ambition, inhibits long-term thinking and provides a disincentive to invest in research, new capabilities, products, training, recruitment and skills. It results in drastic cost-cutting and staff-shedding whenever revenue growth fails to keep up with expectation;
And he finds that this short-termism militates against the development of the internationally competitive businesses and industries that are essential to the UK’s future economic prosperity.
The Cox review identifies three short-termist barriers to long-term investment in our economy:
First, the way that equity markets now operate.
Second, the lack of a ‘funding escalator’ for smaller companies.
And third, the short-term focus of successive governments – with decisions on major issues such as energy policy or transport infrastructure too often shunted back from one administration to the next.
And the Cox Review recommendations include detailed proposals to encourage more long-term investment, encourage support for, and investment in, small businesses; boost research and development; strengthen long-term incentives in the pay of executive and non-executive directors; and improve public procurement.
I hope you will agree with me when you study the report that it is thorough, balanced and clear in its prescriptions for the future.
And let me say thank you to the EEF staff for the administrative support that you have given Sir George and his team over the past year.
The long-term challenge for Britain
I want to come back to the detailed policy recommendations of the report in a moment.
But first, though, I want to put the Cox Review in context.
We meet today just two weeks before the Budget, 10 days after the UK credit rating was downgraded, with our economy barely growing, our deficit rising and a debate raging in Westminster and more widely about what the Chancellor should do in a fortnight’s time to get our economy growing again.
In your pre-Budget submission, you have made the case for immediate action now to kick-start recovery.
As your Chief Executive said yesterday to The Times:
“The Chancellor must bring every pound of firepower and whatever revenues that are brought into the nation’s coffers to support projects that deliver the most rapid and immediate benefit and that deliver growth”.
That is why you are right to call for accelerated infrastructure spending and tax cuts.
I agree – and have consistently called for similar action to secure the recovery.
The Chancellor says he is sticking to his plan and that to do otherwise would not be credible.
And it is true that a credible deficit reduction plan is one vital part of strengthening our economy for the long-term. Whoever was the government now would be facing difficult tax rises and spending cuts.
But a deficit reduction plan is only credible if it works. And without growth in our economy, we are not only losing business investment opportunities compared to other countries, but we are not getting the deficit down.
Because, of course, it is this failure to boost growth and business confidence, as we have proposed, that has led to higher borrowing to pay for the mounting costs of economic failure – much higher borrowing than the plans they inherited and £212 billion higher than they forecast in the autumn of 2010.
This just is not good enough – and is doing long-term damage to our industrial and economic prospects, as well as to the living standards of families and the job opportunities for young people.
But I also agree with your emphasis on the long-term reform agenda – finance for investment, energy policy and workplace training.
Like you, I worry too that as a country, if we allow our debate to be solely focussed on the rate of economic growth this year and the level of the budget deficit, we risk taking our eye off the long-term goal that we must also focus on – how we make our economy stronger, more balanced and better able to attract new investment and compete in world markets over the next 20 years and not only the next two years.
That’s why it is important that in your pre-Budget submission, you also call for:
“An economic strategy that goes beyond balancing the books”, and for “government to set out a clear vision of its economic objectives, to give business more certainty about its priorities.“
Of course, the state of the economy now and the long-term prospects for investment and productivity are closely related.
Because the longer the current flat-lining of growth, low confidence among businesses and consumers, and the resulting stagnation in business investment continues, the greater the long-term damage to our long-run growth potential.
It is a worrying fact that over the past two and half years, only Italy and Japan among the G20 countries have had slower growth than Britain and only Italy and Saudi Arabia have seen a sharper fall in investment whilst investment has continued rising in the majority of G20 countries.
But over the past two and a half years, UK investment has actually fallen by £3bn – compared to the OBR’s 2010 forecast of a £24bn rise.
Overall, investment in the UK, as a share of national income, is the lowest in the G20.
And private sector investment lags behind not just emerging markets like Mexico and South Africa, but below Euro zone economies Italy, Germany and France and is falling further behind.
Of course, after the biggest global financial crisis for one hundred years and the resulting Eurozone crisis, which together have spawned the deepest recessions and largest deficits we have seen for generations – in Britain, America, France, Japan and all around the world, it is inevitable that our economic debate has focussed on short-term growth, deficits and banking reform.
But there is a deeper context which is important that we do not miss and which made our economy more vulnerable to this global crisis – a structural flaw in our economy highlighted by Keynes and the Macmillan committee in the 1930s and which successive governments since then, including the last Labour government, have tried but failed to address.
Namely the short-term bias in our financial system, and the challenge that poses for companies seeking longer-term, patient capital, particularly in manufacturing.
I have no doubt that the deep and exchange-driven recession of the early 1980s did deep and unnecessary damage to our manufacturing base.
I also don’t doubt that, despite reforms like the R&D tax credit, the work of the RDAs and active industrial policy support for sectors like cars and pharmaceuticals, the sustained period of stronger sterling after we made the Bank of England independent and returned the government budget to surplus, made life very tough for manufacturers.
But the relentlessly short-term focus of our capital markets has also been a significant factor in squeezing our manufacturing sector, as Sir George Cox’s report today makes clear.
The Cox agenda
That is why I believe Sir George is right to argue that we need to set a clear direction to encourage the long-termism we badly need in British business.
This is central to our vision of a One Nation economic policy – an economy which invests and works for the long-term and uses the talents of all and not just a few.
So we will now study with great care, and consult in depth with you, on the detailed policy proposals of the Cox review:
His call for corporate tax reform to remove the bias towards debt rather than equity finance;
His view that taxation treatment should be changed to attract long-term investors back into the equities market and to incentivise longer-term shareholding generally – for example by tapering Capital Gains Tax on in a series of yearly steps, from a rate of 50% in year one to 10% after year ten;
His proposal that quarterly reporting should be abandoned and that Stamp Duty could be abolished for shares in AIM-listed companies – making it more attractive for both listed companies and investors;
His proposal that in contested takeovers all shareholders who appear on the Register during the Offer Period should have no voting rights until the outcome of the bid has been concluded;
His proposal that the public procurement process should show more concern for the long-term effect of decisions on the supply industry”;
And on executive pay, his recommendation that “the Governance Code should be extended to ensure sufficient long-term incentive is incorporated in both executive pay and non-executive directors’ remuneration – for example, by calling for at least 30% of executive directors’ remuneration to be deferred and based on long-term (five-year) results.
Where is the Government’s growth agenda?
Of course, with the next election still two years away, there is every opportunity for the coalition Government to study the Cox report and attempt to ’shoot our fox’ by implementing these proposals before we get the chance.
Let me say, loud and clear, I really hope they do.
For two and a half years, the Government has promised an agenda for growth.
Perhaps in this Budget Chancellor George Osborne will start to deliver.
But I won’t be holding my breath – because despite some encouraging u-turns, the Government still has no credible plan.
At a time when we badly need an investment-led recovery, the decision in the June 2010 Budget to abolish 100 per cent allowances for plant and machinery was a foolish mistake – which the Autumn Statement has partially put right.
The abolition of the RDAs, and as significantly the slashing of the budgets for industrial support, were equally short-sighted. It now seems the Chancellor is seriously considering embracing the Heseltine agenda on regional growth and re-introducing a version of the ’single pot’ for sub-regional economic development.
The EEF is right to say that the new structures are currently nowhere near established enough or strong enough, to deliver programmes of this scale and importance. So as well as devolving that support we need to make sure the architecture is there to deliver it. But if this condition is met, then that would get our support too – a step in the right direction.
But in other areas, where we need a long-term strategic direction, I still see too much drift and confusion, indecision and short-termism which has failed our economy, for example;
on infrastructure where the government has cut spending, slowed down planning decisions and stalled the future of UK aviation with indecision, the report currently being prepared for us by Sir John Armitt will fill a gaping strategic hole.
and on energy policy, where the Government appears to have united the energy sector, energy-intensive industry and the environmental NGOs in a chorus of complaint.
Handled well, a commitment to a low-carbon economy is a huge opportunity for British manufacturing. That is why it is so discouraging to see companies such as Alstom and Siemens putting investment on hold until the government can sort itself out – and Centrica walking away all together.
But there is a common strand which unites all these policy mistakes – the belief that simply getting government out of the way and cutting public spending will make our economy stronger and our society fairer.
Let me be clear – a future Labour government will look to reduce the regulatory burden where appropriate, and where we can, just as we must root out waste in public spending.
But we must move beyond the false choice that the George Osborne and David Cameron are currently presenting, a return to the ideology of the 1970s.
Public versus private, state versus market, government spending versus business spending.
Because from skills and transport to energy, planning and infrastructure, and the case for a British Investment Bank, it is a modern partnership between business and government that is vital if we are to rise to the competitive challenge.
And at a time like this, when we need to rebuild our economy for the future, that partnership is needed more than ever.
That is what they know and understand in Germany, America, China and India. That is what is informing Chuka’s thinking on a modern industrial policy.
The longer UK economic policy remains trapped in this way divisive and outdated ideological stand-off, the greater the long-term damage, and the harder it will be to make the necessary long-term reforms our economy needs.
In conclusion it is vital that we take action to kick-start our flat lining economy – but now is also exactly the right time to make the long-term changes we need to make our economy stronger, more balanced and better able to attract new investment and create skilled jobs for the future.
The right course is to act simultaneously in the Budget:
to begin the long-term reforms our economy needs, and which Cox today proposes;
to accelerate vital investments which will strengthen our economy for the long-term and re-invigorate our economy now – an immediate housing plan and a jobs guarantee for young people and the long-term unemployed
and to cut taxes temporarily, to support growth in a way that monetary policy currently cannot, vital action now without which our deficit and debt will remain stubbornly high.
That is what the Budget should do. I do hope that the Chancellor will act.
If not, I can assure you that where this government’s indecision and short-termism has failed our economy, Labour will rise to the long-term challenge.