Tomorrow’s Summer Budget is the first that chancellor George Osborne will deliver as a member of a purely Conservative government.
So will there be dramatic changes as he no longer has to make concessions to his coalitions partners? Not having Vince Cable as business minister will surely impact the policies announced; but how?
Only time will tell, but gauging from the loudest voices in business there are three key areas people want addressed by Osborne tomorrow. Here we take a look at all three.
Throughout the economic recovery the inability of UK employers to increase productivity has been the perennial elephant in the room. The productivity puzzle is one that has baffled economists and politicians alike – to the extent that George Osborne now sees fixing it as something of a personal crusade.
So what can the chancellor announce in his speech that would go some way to fixing the problem?
There are several theories out there but tellingly not many people seem to agree on a solution. Entrepreneur and cross-bench peer Lord Bilimoria, the man behind Cobra Beer, believes the key lies with reviving the UK’s largely dormant manufacturing sector.
A report by the British Chambers of Commerce (BCC) this week warned of a two-tier economy in the UK; with manufacturing lagging behind services. Whereas growth indicators for services companies are largely positive, in many manufacturing companies they are now below 2007 levels.
Lord Bilimoria believes reviving the sector should start with a programme to “increase the skills of the workforce and the investment in R&D”.
“Though, in Britain, manufacturing takes a smaller share of GDP than other industries, the sector makes up 45 per cent of all our exports,” he said.
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“A strong manufacturing sector therefore plays a vital role in increasing the strength of our bonds with worldwide partners and the promises the chancellor makes now will be fixed in the agenda for talks with the Indian prime minister on his visit to the UK this Autumn.”
Boosting the sector would also help to provide more jobs where they are needed, claimed Bilimoria. But he warns that further investment in R&D is necessary to ensure all of the benefits are felt.
“The Chancellor will no doubt be aware that the UK invests less in R&D as a percentage of GDP than the US, EU, and the whole of the OECD, and this deficit is reflected in Britain’s poor labour productivity performance, currently around 15 per cent lower than where it would be if it continued at a pre-crisis rate of growth. This is not the case in the United States, where strong R&D investment supports a stable manufacturing economy,” he concluded.
Work Foundation senior economic adviser Ian Brinkley believes that backing the ACAS workplace initiative would give productivity a much-needed jumpstart.
“The UK has consistently lagged behind its EU counterparts in terms of productivity, despite heavy government investment in education and business investment in new technology,” he said.
“Something is clearly missing and that something is missing INSIDE businesses. ACAS is calling for a united approach from businesses, trade unions and other social partner institutions to tackle cultural issues within the workplace that are stifling productivity; such as skilled management, building trust and clarity on responsibilities.
“Government needs to recognise ACAS’ wisdom in championing this joined up approach to tackling the productivity problem. It needn’t cost them any money, it just needs Ministerial support and enthusiasm.”
Whatever the solution is, if the UK economy is to take the next step it’s clear productivity is a puzzle that needs to be solved. Expect at least one big announcement from Osborne on the subject.
Annual Investment Allowance
In March 2014 Osborne announced that The Annual Investment Allowance (AIA) would be increased to £500,000 until the end of 2015. This hugely popular policy means that until December this year small businesses can enjoy a 100% tax relief for the year on certain capital invested in growth.
In March 2015 Osborne was non-committal on the subject of what would happen from 2016 onwards. This is something many people want addressed now that the election is out of the way and the new government is calling the shots once more.
Crowe Clark Whitehill head of corporate tax Laurence Field wants Osborne to be bold and go even further than his 2014 pledge.
“Annual Investment Allowance is a 100% relief on the first £500,000 capital investment. This limit expires on 31 December 2015,” he said.
“The chancellor didn’t indicate last March at what level it would be renewed. This is seen as a valuable relief by many businesses and an increase from 1 January 2016 to £750,000 would be seen as a real statement of intent to boost productivity and set the tone for small and medium sized business for the rest of the parliament.”
Earl Yardley, a director at Industrial Vision Systems, echoed these views but admitted he would be happy with a renewal at the current rate.
“The chancellor should ensure he fulfils his promise previously set prior to the election that the AIA for capital allowances will be kept at £500,000,” he said.
“We have already seen a significant increase in investment made in new automated production lines and cells across the UK manufacturing base. By establishing a long term rate, this would boost productivity and help leverage the UK at the forefront of the global manufacturing sector.”
The AIA is one of the big success stories for Osborne in terms of his relationship with business. It would be surprising if he didn’t extend it into 2016, but at what rate it is set will be the big question. Raising it further would certainly help with the related aim of boosting the manufacturing sector, but is this something that’s on Osborne’s radar?
The culture of late payments is a recurring nightmare small businesses just can’t seem to wake up from. Everyone knows this needs to be fixed, but can the government effect that change at a political level?
Richard Morley, director of European development at Liquid Finance, wants Osborne to put right a glaring omission from his March Budget.
While the coalition regularly paid lip service to the need for reform, in truth SMEs were left bitterly disappointed by the lack of action. This is something Morley desperately wants to change.
“A major issue for SME’s is late payment from suppliers – an eye watering £55bn is currently owed to UK SMEs in outstanding invoices. This is yet another example of larger businesses profiting at the expense of the little man,” he said.
“De-regulation and “cutting of red tape” around late bill payments is often discussed but what we need now is some real action to address the issue.
“In tomorrow’s budget we would like to see plans to introduce a new government funded body to support SME’s, helping them to recoup more than £55bn owed to them in late bill payments.”
Late payments will always be a problem for small businesses. Would de-regulation help? £55bn is an amount SMEs can ill-afford to have out of their accounts, so hopefully the chancellor will take the opportunity to put this right.