The lack of detail and pace from the government on some of the big economic choices we must make as a country, top current concerns for business, according to CBI Director General Tony Danker.
Speaking at the Alliance Manchester Business School, he warned the government that a “return to business as usual in our economic policy, at this unique moment in British economic history, would be a mistake”.
Instead the government needs to be bold in order to unleash business investment. As every country is shifting its strategy to get behind the future engines of economic growth, it’s the only way the UK can forge a new growth story to compete in the world.
Danker issued four proposals to get firms investing more:
- Smarter taxation – reward those firms who invest, rather than the current business rates system, for example, that perversely taxes more than half of business investments;
- New skills for new markets – creating individual training accounts to more easily access support, for those most in need and/or out of work and reforming the apprenticeship levy;
- Catalytic public investment – to speed up the development of major infrastructure projects, new industries, and cutting-edge tech;
- Market making – replicate the successes of offshore wind in hydrogen and other emerging industries and fundamentally rebalance UK economic regulation.
“Investing in the UK. Investing by the UK. That must be our mantra now – so that the decade ahead does not repeat the low growth, zero productivity of the decade past,” he said. “And government holds the key to unlocking it all.”
Transcript
Check against delivery – final speech edited for time.
Thank you, Nancy. Good afternoon everyone and thank you for joining us.
It’s always wonderful to return to Manchester. This was the city where I met my wife and became active in student politics. It’s the place where I visited the Haçienda and saw the Happy Mondays.
I’m told I also got a law degree here, but that bit I can’t really remember.
Huge thanks also to the Alliance Manchester Business School for their invitation. A school with a reputation for an innovative perspective. I was delighted when the school won the race to host the UK’s Productivity Institute ─ a project I championed, during my time at Be the Business.
It’s also why there’s no better place to talk about my subject today.
Choices
I know one of Nancy’s mantras is, ‘try breaking the rules and see what happens’.
We may need that now. I fear that we are about to return to “business as usual” in our economic policy. At this unique moment in British economic history, that would be a massive mistake.
This autumn requires big choices. Choices that will define a decade. We’re at an inflexion point. Brexit, Covid, Climate Change – all demand that the UK forges a new growth story to compete in the world.
And believe me this will be a competition – for new markets, new skills, and technological advantage.
In recent months I have talked to hundreds of UK businesses. Many of whom are global firms or have global customers. They tell me what other countries are doing – the strategies they have, the investments governments are making, and how the UK compares.
The pandemic has not stopped the clock on building the future economy – it’s accelerated it.
One of the great risks of the Budget, the Spending Review, and the Global Investment Summit this autumn, is that we are too proud about what we’ve done so far. That we set the benchmark as beating the policies of UK governments past. Rather than global competitors present.
That would be complacent. Because over the last two years, every country’s strategy to win the future has shifted dramatically. Every country is choosing to invest in the new engines of economic growth. And so, whether we compete with them, is the only way to assess our choices.
Why business investment matters
That’s what I want to talk about today.
Investing in the UK. Investing by the UK. That must be our mantra now – so that the decade ahead does not repeat the low growth, zero productivity of the decade past.
And government holds the key to unlocking it all.
Looking forward, it’s clear that consumption is likely to rage in the short run. Consumers have saved and will spend. So, watch the news in coming months and you’re likely to feel that things are going well. But unless investment catches up, rather than falls behind, that story will be short lived.
Let me explain why.
Business investment matters, on the demand side, because rising investment has a multiplier effect. Sales and profits go up and firms can then invest more; with jobs to follow and yet more demand in the economy. It’s a ‘virtuous circle’.
Business investment also matters, on the supply side, because it adds to the total stock of capital in the economy and, crucially, drives productivity – the secret sauce to consistently boost living standards.
Unfortunately, business investment in the UK has been seriously underpowered since the 1990s, deteriorating from 14.7% of GDP in 1989, to a low of 10% at end of 2019.
Unsurprisingly, the pandemic also hit business investment hard, and we’re still set to be 5% below our pre-COVID levels at end of 2022.
It’s a terrible time to be poor at investment. In our landmark report on the UK’s economic future – Seize the Moment – we identified where this decade’s growth opportunities will be. All the prizes – from AI, Fintech, Genomics, Renewables – are in industries where success requires new investment, and where other large economies are investing now.
We know government is switching on to this challenge.
The recent letter from the Prime Minister and Chancellor encouraging institutional investors to back assets that they may not have considered in the past is testament to that. The forthcoming Global Investment Summit is a big shindig ─ taking place, in part, at Windsor Castle. And the Chancellor took dramatic action in the March Budget with his innovative super-deduction to incentivise tangible investment.
But the super-deduction merely brings spend forward and only for certain firms. And we need an overhaul of Solvency II – the prudential framework for insurance – to unlock institutional investment in new assets.
Perhaps most starkly, when global bosses visit in October, their test will not be the grandeur of our castles ─ it will be the detail of our offer, compared to our competitors.
Plans not platitudes
Put bluntly, based on my conversations with these firms, we will need plans not platitudes to win their business. The lack of detail and pace from government on some of the big economic choices we must make are their biggest concerns.
They want more details, less declarations. More confirmations, not more consultations. Not just rhetoric you can believe in, but projects you can invest in.
And before global companies come to hear our pitch, we as a country need to decide our post-Brexit level of ambition. Between 2021-2025, the UK Government is projected to invest an average of 3.4% of GDP, compared to 3.9% in the US, 4.1% in Canada, 5.9% in Japan and 9.0% in China.
Take Net-Zero – a central part of our own and competitors’, recovery plans. Already, the US administration has outlined plans for $800bn of investment in net-zero tech over the next decade, supported by trillions of extra stimulus investment.
While EU member states have so far pledged €223bn worth of green spending via the EU Recovery and Resilience Fund, with more likely to come.
Respectively, these US and EU packages – which don’t even account for further spending at state or member-state level –represent around 3.8% and 1.8% of the size of their 2019 economies. That compares to just 0.55% for the UK’s climate funding.
With so much at stake, and so much competition, it’s bold moves like these that are grabbing CEOs’ attention.
Let’s focus on the EV market.
By 2030, the UK could capture £18bn in additional revenues from higher exports of electric vehicles and vehicle batteries to the EU alone. Recently, the UK received a significant boost to its plans when Nissan announced a £1bn commitment to produce EV batteries and a new electric car at its site in Sunderland.
This is superb news – a win we can all be proud of.
But we’re going to need more gigafactories like this by 2040 to enable a thriving domestic EV market. So far, the UK government has committed £2.8bn to develop UK production of Electric Vehicles and batteries, alongside our charging network.
That’s a big investment. But automotive leaders and others, are analysing these numbers, alongside larger commitments from our competitors.
Like Germany, which has committed €4.7bn of funding for charging stations and EV incentives alone, within the EU Recovery and Resilience Fund. This adds to the major funding they’re already providing at a state, and individual-project level. This includes a possible €1.14bn government support package reportedly being put together to back a new battery facility, under-development as part of TESLA’s $7bn EV production plant near Berlin.
Genomics is another growing market, where the UK’s success to date is built on decades of investment in research and innovation.
As science in this area keeps pushing forward, we now must choose whether to strengthen the UK’s expertise – with the potential to secure £8bn in additional revenues by the end of the decade – or risk losing our edge as a genomic-research powerhouse. But, over the past five years, the UK has generated investment in this field way below the US.
What’s also important to acknowledge is that our universities lie at the heart of all this progress – supporting the world-class skills, clusters, and R&D we need to lead. But – to date – the government hasn’t really tapped into the potential of universities as partners in this journey.
Well we disagree. Nancy, we see you and your peers as vital in this journey, and we will work with you to ensure universities are at the heart of these plans.
More broadly, what we see is that the window is closing fast for the UK to deliver the detailed roadmaps, substantial financial support, and speed of movement it takes to lead in these growing markets.
Our fear is that as things stand, Global Britain is on track to be Grow Slower Britain. This autumn we must change that. And make some big bets of our own.
Businesses want this. Investors too. And I know the PM, Chancellor and Business Secretary want it too. But ambition now needs to be backed with action. It’s time for us to join forces and get it done.
Our proposals
Here are some concrete proposals.
We believe there are four main levers that the UK Government can pull to unlock the investment we need:
- The first – is smart taxation to unlock this investment
- The second – is new skills for new markets.
- The third – is catalytic public investment, in growth opportunities
- And the fourth – is government acting as market maker, to outcompete the world
Let’s, look at each of these in more detail.
Smart taxation to unlock investment
I’ll start with tax.
After the pandemic, we in business believe that we should pay our fair share to tackle the debts of Covid. That is why many business leaders accepted the jaw-dropping six-point corporate tax increase announced in March. But there is a real risk now that the government will keep turning to business taxes to carry the load.
Choosing national insurance for social care funding is the latest example. I am deeply worried the government thinks that taxing business – perhaps more politically palatable ─ is without consequence to growth. It’s not. Raising business taxes too far has always been self-defeating as it stymies further investment.
But above all, it misses a smarter way to view business taxation. To flip it on its head. If we want to kickstart the growth capital we need for the next decade, we should do so by rewarding those businesses who choose to invest. And those will be the proposals in our Budget submission.
Let me talk about one of them. Our failing business rates system and how it makes something of a mockery of our commitment to Net Zero.
More than half of business investment is subject to business rates. It’s literally become a tax on investment. And UK property tax levels are four times higher than Germany, and 50 per cent higher than the G7 average as a share of GDP.
There is much about it that’s unfair and it’s changing the face of British high streets. But amazingly it’s deterring firms from decarbonising their operations – because investment in energy-efficiency measures, can make them liable for higher rates. It’s quite hard to believe.
One food retailer told us how they’d had to pause ambitions to fit Solar PV tech across their outlets, because fitting it in seven stores initially led to such a huge rise in their business rates bill – that it made their long-term plans less viable.
We need to do better, and greener. Freeze business rates until 2023; move to annual revaluations; and, crucially, let’s end this absurd disincentive to make our buildings more energy efficient.
New skills for new markets
Second, let’s discuss investment in skills.
It’s uncomfortable to hear, but we’ve benefitted from abundant labour for a long time now. Yet the labour shortages we’re hearing about – in sectors like logistics and transport, food and drink manufacturing, engineering and technology – aren’t something businesses can resolve by simply increasing hourly rates.
We need to be honest about what this is going to take rather than government pretending firms can solve this overnight. If you want to solve the immediate shortages, you’re going to need to use the new immigration system we developed post Brexit to bring in only the skills we need. It was built for exactly this situation!
And if you want to fix the long-term challenge, we need business, government and learners to invest more in skills development. In Seize the Moment, we identified a seismic reskilling challenge for the next decade: some 90% of the workforce will need to learn new skills. It will cost an additional £13bn a year simply to stop skills gaps worsening.
Our skills system is full of perverse incentives.
Providers prevented from delivering what businesses need by government targets. Businesses encouraged to awkwardly re-badge other training as apprenticeships to try to spend their Levy pot. Learners subsidised to gain skills that don’t match the shortages in our economy today.
We will work with government – on its Skills and Post-16 Education Bill – to fix some of this. And we will back the creation of individual training accounts to help those out of work get started.
But if you care about this, you must reform the failing apprenticeship levy. We all want better apprenticeships but that can’t be our only skills bet. By now, it has to be plainly clear to government that a narrow levy isn’t capable of delivering the increase in investment in the skills that the country needs. Whether that’s helping people to retrain as a HGV driver, or offering the regular bitesize training required to keep people in work as jobs are transformed by decarbonisation and new technology.
What a powerful concept – to levy businesses to invest in the skills the country needs. What a missed opportunity that it doesn’t do this. It needs to be redeployed to be part of a plan for growth.
Catalytic public investment
Thirdly, we need government to ensure the UK’s competitiveness by investing in new growth markets.
Foundational and catalytic public investments that the market will never make ─ to speed up the development of major infrastructure projects, new industries, and cutting-edge tech.
In infrastructure, uncertainties around government investment, commitments and financing models continue to delay key projects, denting market confidence and hampering regions’ ability to level up.
This includes HS2, road improvements in the South-East and South-West, such as A303 at Stonehenge and the Lower Thames Crossing, the Heathrow Expansion and regional airport projects like Bristol and Leeds Bradford.
The national infrastructure and construction pipeline is doing little to abate this. Previous analysis from the infrastructure forum suggests that only 8% of projects in the pipeline are sufficiently certain.
Government’s new infrastructure-delivery taskforce, Project Speed can help address this. But action from the UK Infrastructure Bank – working with the Infrastructure and Projects Authority – is needed to overhaul the pipeline, plug the detail gaps and boost investors’ confidence.
For example, urgent investment in the UK’s nuclear capacity risks being delayed if the government does not come forward with legislation to enable the financing.
This is hitting projects, such as Sizewell C – where British companies are set to secure 70% of EDF’s construction contracts; creating 25,000 job opportunities and 1,500 apprenticeships.
And we are missing chances to build high tech leadership. For example, with just a relatively small investment of £55-75 million, the UK could build the world’s first truly zero-carbon Service Operation ship. The technology is available now and ready for deployment with key maritime players like Bibby.
Public backing would encourage private sector investment, and potentially create a world-leading high-tech industry exporting around the globe.
Market making to outcompete the world
Now I know that the Chancellor is worried about public spending.
And, perhaps, the UK government will choose not to compete with other governments’ levels of investment. That’s a big choice but it’s loaded with risk. And it raises the bar for the UK to crowd in the private sector ─ to do more of the heavy lifting.
The good news is that we have considerable private sector resources available in our capital markets, and we have a strong presence of global companies. We also have new-found regulatory freedoms.
So how do we bring these UK advantages to bear? This can be done by government playing the role of market maker to unlock private sector investment for growth industries.
This means doing what no-one else can – setting up the necessary market rules, pricing structures, institutional bodies, and incentives to get more private investment flowing in.
We’ve done it well before, with UK Offshore Wind. Private sector expertise, skills and money built the industry. But it took government to put in place the right policies, like the Climate Change Act; the right regulatory frameworks, like Contracts for Difference; and the right incentives, investment, research bodies and expertise, like the Green Investment Bank and the Offshore Renewable Energy Catapult, to make this a highly investable market.
And, together, we’ve built the largest installed base in the world. Now, we need to replicate this success in other sectors – even faster.
We waited so long for the newly published Hydrogen Strategy to give us the business model, the timetable, the terms of trade – all the market making mechanisms to capitalise on our first mover advantage. Instead, we got more consultations. It’s holding-back cutting-edge initiatives, like the technically ‘shovel ready’, Gigastack – which brings together ITM Power, Ørsted, Phillips 66 and Element Energy – in one ambitious consortium to deliver hydrogen power at scale in the UK.
The consortium needs decisions ─ access to the Net Zero Hydrogen fund in early 2022 to prevent further delays, resolving the business model as a matter of urgency, as well as setting a 2030 target for green hydrogen production in the UK; and ring-fencing the funding to help deliver it.
Speed matters. It can’t just be a government project. It must be a government mindset. As Keith Anderson of Scottish Power puts it bluntly ─ “If government halves the time, then I’ll double the investment. But the government needs to act quickly, to ensure that this investment can be made in the UK”.
At the heart of all this is regulation.
Known for our high standards, the UK’s reputation as an open, competitive economy has helped drive our long-term success. Our new relationship with the EU gives us more control, and the opportunity to ask if our current regulatory frameworks encourage innovation, sharpen our competitiveness, and attract investment?
We don’t think they do. Traditional UK regulation has always prioritised competition and consumer price. Those things will remain vital. But the pendulum has surely swung too far when the UK is bottom of the global league table for investment. We must do more to make investment and innovation as important in terms of regulatory goals.
This could be done by amending the Regulators’ Code or through other means. The government is keen to utilise our regulatory freedoms post Brexit. Well rather than focusing on how to diverge from EU rules, let’s think about how to diverge from prior philosophy – let’s pioneer pro-investment, pro-innovation regulation as the best way to use our new freedoms for economic gain.
International investment
So, there it is. Four major choices needed now to unlock a different decade. Not so much breaking the rules Nancy, as writing new ones.
The first – use smart taxation to unlock investment
The second – invest in new skills for new markets.
The third – deploy catalytic public investment – and place the bets only government can.
And the fourth – government as market maker to outcompete the world.
Taken together these will achieve the seismic shift in the UK’s investment mindset we need, and also show international investors coming to the government’s Global Investment Summit on October 19th – that the UK is more than a castle on a hill.
Because let’s be clear, these four choices – that drive domestic investment – are also the preconditions to attracting foreign investment to our shores.
We know that because global investors have told us. They, more than we in Britain, view our country’s offer against our competitors. And they have told us these things are where the UK must do more.
Because they are ready to go. The real question is, go where?
Conclusion
My message today therefore is that these decisions need to come now.
The UK has a packed autumn ahead ─ with the Global Investment Summit, Budget, Comprehensive Spending Review and COP26. And we have strategies galore due to come out in the weeks to come.
It’s the best possible time to make choices.
To invest in the UK and to show the world we mean business.
The CBI has a mantra – seize the moment.
It’s our imperative to government but also to business.
Together we can choose investing in the UK. Investing by the UK. Let that be the legacy of Brexit; let that be the legacy of Covid; and let that be the path to a net zero world.
Thank you.
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