Prime Minister Theresa May’s speech at CBI’s annual conference today revealed plans for policies designed to boost productivity, including cutting corporation tax and increasing investment.
While the announcement was generally met with applause from the business community, scepticism seems to linger.
Cutting corporation tax
“My aim is not simply for the UK to have the lowest corporate tax rate in the G20, but also a tax system that is profoundly pro-innovation.” – PM May
This announcement comes shortly after US president-elect Donald Trump said he aims to set corporation tax at 15 per cent. By 2020, UK corporation tax will fall to 17 per cent, the lowest rate among the world’s advanced economies.
“It is heartening to hear the Prime Minister wants to slash corporation tax, as that will attract investment in a competitive global economy and could mean higher wages for workers too. Let’s hope that the Chancellor follows this up with a plan to abolish it altogether,” John O’Connell, chief executive of the TaxPayers’ Alliance, said.
The 2020 Tax Commission – a joint project between the TaxPayers’ Alliance and the Institute of Directors – proposed the replacement of corporation tax with a tax on income distributed from capital.
“It is equally important to keep in mind that deregulation is a crucial part of helping businesses to set up and thrive, so the announcements on an industrial strategy are less welcome. Politicians should look into reducing bureaucracy wherever possible and fight the temptation to intervene, as that can end up creating more problems than it solves for both businesses and taxpayers.”
Promoting research and development
“In the Autumn Statement on Wednesday, we will commit to substantial real terms increases in government investment in R&D – investing an extra £2 billion a year by the end of this Parliament to help put post-Brexit Britain at the cutting edge of science and tech.” – PM May.
In her speech, PM May stressed that the R&D investment will be targeted at emerging fields like robotics, artificial intelligence, industrial biotechnology, medical technology, satellites and advanced materials manufacturing.
According to Stuart Veale, managing partner at venture and growth investor Beringea, the UK still has a way to go in terms of becoming a global frontrunner within these growth sectors. “But by increasing funding and support for both startups and scale-ups within these sectors, the government is taking necessary steps towards closing the funding gap between the UK and Silicon Valley,” he said.
While boosting investment and increasing R&D tax credits can only work in favour of our post-referendum economy, the risk may be that by overplaying sectors such as AI and biotech could reinforce the myth that R&D is only for niche, high-tech businesses. The current reality is that SMEs accounted for more than 80 per cent of all UK R&D claims in the 2014-15 tax year. The number of SME claims increased by 16 per cent, while large company R&D claims decreased by 38 per cent.
For British serial entrepreneur Martin Leuw, “it was a speech full of soundbites, but short on detail of how anything will work.”
Leuw currently heads up Growth 4 Good, a business accelerator that partners and invests in high growth sustainable technology businesses, which is he welcomes the government’s renewed focus on innovation and social contract between businesses and the wider society.
“But whereas the government’s much flagged infrastructure spending initiative involves concrete (plans), sadly the industrial strategy lacked anything concrete and fails to build the foundations for future growth, productivity and prosperity,” he explained.
While the new commitment to spend £2 billion a year on R&D and innovation may be encouraging for start-ups and scale-ups, Leuw argues it’s not clear how and when this will be injected. “More urgency is required on this front. And we already have a system of R&D tax credits – why can’t we build on that asap rather than reinvent the wheel?”
Bridging the scale-up gap
“There is no point having great ideas, great products, great start ups, if you can’t get the investment you need to grow your business here. For while the UK ranks 3rd in the OECD for the number of start-ups we create, we are only 13th for the number that go-on to become scale-up businesses…we are backing the innovators, and backing the long-term investors.” -PM May.
Leuw, as an entrepreneur and investor in social enterprise, revealed why it was encouraging to hear the Prime Minister speak about the need for a ‘social contract of business’. “This resonated with me as currently only a third of people in the lowest income brackets have trust in business. I would like to have seen a lot more about collaboration between business, universities and charities. More needs to be done to build on Social investment Tax Relief which was introduced two years ago – it needs more impetus behind it to incentivise innovation and collaboration,” he said.
“And the Prime Minister also spoke on the need for more ‘patient capital’. While I thoroughly support the principle, I have to admit to being surprised that recommendations are coming from Sir Damon Buffini, the former head of Permira – private equity has never been know for its patience and focus on long term goals.”
Boosting productivity: automation, employee rewards, apprenticeship schemes
“While the UK’s recovery since the financial crisis has been one of the strongest in the G7, our productivity is still too low. But if we want to increase our overall prosperity, if we want more people to share in that prosperity, if we want bigger real wages for people, if we want more opportunities for young people to get on, we have to improve the productivity of our economy.” – PM May.
There is a huge gap between productivity levels in the UK and those of other G7 economies. According to the Office for National Statistics international estimates of productivity in 2014 revealed that output per hour in the UK was now 36 percentage points behind Germany, 30 points below the US and is trailing France by 31 points.
Until recently, many businesses may have reasoned that it was unnecessary to invest in productivity enhancing technology if labour was so cheap. However, that scenario is clearly changing.
“High availability of flexible, low-cost labour has allowed low-productivity business models to survive in the UK – but for how much longer? If retailers and manufacturers are to grow their businesses, and still offer customers what they demand in terms of service, then productivity must be significantly improved and that comes down to introducing higher levels of automation to boost the productivity levels of those individuals working in the distribution centre,” automated logistics firm Dematic’s Matt Hatson explained, highlighting the scope for automation in bumping up the nation’s output.
Rather than focusing on central taxation and investment alone, UK businesses should also look to bolster their own productivity by engaging their existing workforce by fundamentally evolving the way they reward employees, said Tom Castley, VP EMEA at Xactly. According to recent research from Xactly, for over a quarter of UK employees, a financial bonus is their main motivator, yet a large portion of employers do not run any kind of monetary incentivisation programme. “As a country, we must move away from the old-fashioned salary economy to the performance economy. Rather than paying people based on their position and tenure, employees must be rewarded for their output,” he explained.
“This isn’t about throwing money at the problem, but instead requires smart, performance-based financial rewards. Businesses must assess their workforce and identify what they need to do to be successful, decide on the corporate metrics to monitor and apply technology that can automate and monetise the execution against those goals. This will enable leaders to better motivate their teams, improve the company culture and ultimately increase productivity. UK businesses taking action in parallel with the government will help to solve the UK productivity gap more quickly.”
For City & Guilds group chief executive, Chris Jones, more than 30 years and 65 secretaries of state later, the UK is still in danger of making the same mistakes all over again when it comes to finding ways to improve productivity.
Touching on government apprenticeship schemes over the years, Jones explained how the UK has taken some really positive steps to enhance the skills system, and raise the profile of apprenticeships and technical education. “Support for apprenticeships is ever-increasing, and there has been a real drive to simplify the system and boost its reputation. But when it comes to implementation, it’s a case of two steps forward and one step back. Issues such as lack of organisational memory and consultation persist, which put any progress we’ve made over the past few years at risk,” he said.
“If the government truly wants a skills system that boosts our country’s competitiveness and productivity, it has to take its time rather than rushing straight for the finish line. That means working with employers and skills experts to shape implementation so that our skills system meets the needs of our economy now, and in the short and long-term future.”
Watch the full speech below.