Orders of the Day — Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 6:35 pm on 10th March 1999.

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Photo of Mr David Chidgey Mr David Chidgey Shadow Spokesperson (Business, Innovation and Skills), Shadow Spokesperson (Foreign and Commonwealth Affairs) 6:35 pm, 10th March 1999

I am pleased to see the Secretary of State still in his place. It is unusual to see a Secretary of State here this late in the day. I am grateful, and I compliment him on being here. There are some things in the Budget that we can welcome.[Interruption.]In spite of Ministers' interventions from a sedentary position—although we always say with the Minister of State that we are not sure whether he is sedentary or not— I will try to get on with my speech.

The Chancellor has shown some recognition of the difficulties facing our economy, and we welcome that. We obviously applaud the fact that the aims that he sets out for tackling those difficulties are close to our own in many respects. However, aims are one thing and the means to achieve them are another. It is on the means that we have some disagreement with the Chancellor and some concerns. Some of the means that the Chancellor proposes run the risk of being clumsy, unfocused or, at worst, ineffective. That is not only our view but that of a number of respected analysts, not least the Institute for Fiscal Studies which, like us, has repeatedly warned of the problems building up in the economy. In earlier exchanges, the Secretary of State expressed his doubts about the IFS view, but we hope that he will tell us why he does not accept that the IFS has genuine reservations about some of the measures in the Budget.

The Chancellor's statement and the Red Book set out many of the problems in our economy in stark relief. They concentrate on poor productivity, low investment in research and development and low skill levels. Earlier today, the Secretary of State issued a statement on competitiveness. It is a good read. I had the opportunity during earlier exchanges to read it, and it was more enjoyable than the speech from the Conservative Front Bench. The statement refers to milestones and target dates for the process, but nowhere can I find targets for outcomes. I put that point back to the Secretary of State. I know that it is difficult, challenging and dangerous for the Government to set down outcomes, but if we are serious about improving our competitiveness, we should ask for a little more from the Government.

The United Kingdom produces less per person than other major economies. As was mentioned earlier, there is a gap of 40 per cent. between our productivity and that of the United States and more than 20 per cent. between our productivity and that of France and Germany. It reflects weaknesses of long standing in our economy. I do not blame the Government for that, but they recognise it, and I expect them to propose some positive measures to do something about it.

We invest less in research and development than our competitors. The United States invests 50 per cent. more as a share of GDP. It is in the Red Book, so it must be true. The United States and Germany invested 40 per cent. more per worker on new capital equipment than we did in the last economic cycle. Those are the stark facts. Those are the problems. Added to that, the skills gap in the United Kingdom is fast becoming a chasm. Twenty-two per cent. of our adult population has poor literacy skills—twice as many as in Germany.

In spite of the Chancellor's protestations to the contrary, he has been forced to admit that the predictions that we made earlier in this Parliament about the plight that manufacturing industry would suffer were right. He now accepts that manufacturing is in recession and that the recession will be quite deep—1 to 1.5 per cent. in 1999. The result will be unemployment in what is normally a skilled sector. Instead of being flat, as the Government predicted, unemployment will rise by about a quarter of a million in the next two years. That is a worrying figure, particularly for those involved. Hon. Members on both sides should show genuine concern about that, not just try to score cheap points. It is a huge problem which Parliament should address.

The Chancellor should not just carry on saying that the problem is all due to the collapse of the global market and the economic failures in Asia, Russia and Latin America. Those factors have not helped—no one is suggesting otherwise—but we export more to the Netherlands than to those three areas put together. Treasury figures show that business in our key export markets is growing at nearly 6 per cent. a year. Sadly, our take-up of that business is growing at only 0.5 per cent a year.

In our key export markets, British business is missing out on opportunities for growth. The reasons are crystal clear—the high value of sterling and high interest rates. Sterling is still 10 per cent. higher than its level when the Government came to office. No wonder the export forecasts of companies in my constituency have dropped by up to 50 per cent. this year. With interest rates 1 or 2 per cent. higher than in the rest of Europe, the extra cost of investment adds to our uncompetitiveness.

The Chancellor knows what he needs to do. It is the word that dare not speak its name. He knows that a clear commitment to a programme for Britain to join the euro would remove those burdens of an over-valued pound and high interest rates at a stroke. The boost that that would give to British industry would leave the gimmicky tinkering measures in the Budget in the shadows. We would get some real progress straight away.

The Chancellor has set out a wide range of measures that command broad support in principle from various sectors of industry and commerce. However, we must try to determine their impact in practice. We need to quantify and qualify the measures that he has set out. The Government have proposed a new small business service to co-ordinate advice and support small and medium enterprises. We are told that it will be staffed by civil servants and people drawn from business and that it will help business to comply with new Government regulations. That seems like an admission by the Government that the host of new regulations that have been drawn up by one group of civil servants are so complex that we need another group of civil servants to explain to business what to do about them. That is not what the Government intended, but it is beginning to look that way.

Would it not be better to have simpler, clearer regulations that were kept to a minimum? The Secretary of State for Trade and Industry and the Prime Minister have both said on the record that they want to modernise and simplify regulations. We should be able to see that happen in practice, rather than passing legislation that adds more regulations to the statute book and more burdens to business.

We need to know how the new Small Business Service will operate. Will it be just another centralised quango controlled from Westminster, or will it get to grips with the needs of small businesses? I hope that the Government will follow the best practice of the American model. It has not been mentioned so far, but I am sure that the Secretary of State is well aware of the practice that I am talking about. The stated objectives of the United States small business administration scheme are to aid, counsel, assist and protect the interests of small business. It aims to ensure that small business gets a fair share of Government purchases and contracts. It makes loans to small business and small investment companies, working with banks and lending institutions to provide loans and venture capital to small firms which cannot secure financing through normal lending means. It is a proactive organisation which is not there just to explain the red tape that the Government have introduced. It is not a centralised organisation. There are 900 small business development centres across the United States servicing more than 500,000 small firms, in partnership with federal, state and local government and community and private sector groups.

The American model works. If we are going to follow their best practice, the Small Business Service must have a network of regional centres working in tandem with the regional development agencies. The emphasis must be on providing advice and support from the established business community to new entrants, not more red tape from bureaucrats based in Whitehall.

We welcome the Chancellor's proposals to widen employee share ownership. We have long argued for an expansion of share ownership as part of our belief in developing a stakeholder society. Improved access to, and tax relief for, employee share schemes will help to align the interests of employees with those of managers and shareholders. It will help to spread incentives across the board. However, there are some problems to overcome. If new employees are to be offered share ownership, it helps if the share value is rising. In too many cases, the share value of small firms has fallen significantly. Employee share options are not attractive if the option exercise price is higher than the share market value.

An increase in employee share ownership is unlikely on its own to change the City culture of demanding a quick return on investment. As long as institutional investors and investment fund managers are driven by a need to maximise dividends in the short term, there will be little room to invest profits to gain stability and long-term growth. We have to change that culture.

The Chancellor has put forward some novel ideas on company taxation, targeted on reducing the productivity gap. They are aimed at small firms, but they will have little effect on aggregate research and development or investment, because the bulk of both is done by large firms. I asked the Secretary of State earlier about the rationale of targeting the incentive of research and development tax credits on small firms. It will be cheaper to implement than a scheme that applies to all firms, but it will also have much less impact on the economy because, although small firms employing between one and 99 people accounted for 36 per cent. of employment last year, they carried out only 9 per cent. of total business research and development. The Government are hitting the wrong target. Only just over half our small and medium firms are innovators, compared with nearly three quarters of large firms. Any extra incentives should be targeted where there will be most take-up.

The Government want to improve capital allowances for small firms. A move from 25 per cent. first year allowances to 40 per cent. implies an increase in the present discounted value of capital allowances of less than 3 per cent. Given that SMEs account for a relatively small proportion of investment in plant and machinery, the impact on the total level of investment is unlikely to be significant.

The measures on venture capital challenge are interesting. In 1997, UK venture capital firms invested more than £4 billion—£3 billion in this country. However, the investment in early-stage companies was a mere £159 million, of which only £58 million was in start-up firms. We should question the extent to which the provision of tax incentives for the formal venture capital sector affects early-stage financing for start-up firms. Estimates suggest that, in America and the United Kingdom, informal venture capital provides more finance to start-up firms than does the formal sector. We need to learn from that.

We welcome the extra money for individual learning accounts, to go to up to 1 million account holders. However, we have two main concerns. First, what will the administrative costs be? Secondly, how much of that £150 million will result in new training rather than simply a transfer of people who have done the training anyway?

The proposals for greater incentives to recruit high-quality managers come without any argument about whether equity-based remuneration is disadvantaged under the current tax rules, without any evidence of the success of past schemes and without suggesting how the incentives could be used selectively for certain managers without being susceptible to abuse. We need clarification on that. Many hon. Members will remember the effects of the original discretionary scheme, which operated until 1996 and allowed employers to target specific employees rather than offering a scheme to all employees. The previous Government abolished that on the recommendation of the Greenbury committee, whose report argued that there was no case for one form of remuneration to receive preferential tax treatment over another. Are we going through the loop again? We should be clear.

The Secretary of State for Trade and Industry has made a great deal of the importance that the Government place on research and development. Yet the examples that he has given to me recently—particularly on one of our most important industries, the aerospace industry—do not tie up with what he says in the House. I am sure that he does not mean to mislead us. Many assume that the aerospace industry comprises a few giant international companies, but the truth is far from that.

It may well be that the industry employs more than 120,000 people, has an annual turnover of more than £15 billion and contributes significantly to our balance of trade. However, three quarters of aerospace firms in the UK are small to medium enterprises. It is vital that then-interests in investing and research and development are maintained and encouraged. At present, we invest in aerospace research and development proportionately less than any of our major European competitors.

I have raised this question with the Secretary of State, who has agreed that Government investment through the civil aircraft research and technology demonstration programme has been vital to the industry, and has made a significant contribution to competitiveness in the industry, and to other industries outside aerospace. He has said also that we invest far less than our competitors from DTI funds into the industry.

The Secretary of State could not tell me whether he would maintain the minimal budget of £24 million, which is under threat. I think that I am right in saying that £24 million is about half the level invested in France, and a quarter of the level invested in Germany. We are talking about one of our few remaining world-class industries— providing a bright future that could spread research and development opportunities and synergy through manufacturing—and the Government cannot make up their mind whether to keep the tiny, miserly budget on which the industry depends for innovation and new ideas.

My concerns are that the Budget fails to tackle some of the major concerns of industry. The Government claim that prudence is a virtue—maybe it is, but lacking ambition is not. The Budget tinkers around the edges, and tends to ignore the major issues. My party's priorities are to reduce the burdens on business and to simplify the tax system. We want to introduce annual tax audits to reinforce those aims, and to state clearly the extra costs of administration on business.

Our aim is to have less regulation, not just better regulation which burdens business. We want to simplify the tax system, and bring in higher tax thresholds—not introduce targeted tax wheezes which will have a limited effect in specific areas. We want a firm commitment to a programme for entry into the euro, which would boost exports and industry at a stroke.

We recognise that the key to Britain's future success lies in improving the level of skills and education of the work force. Rather than playing to the gallery with a penny in the pound tax cut, we would have invested the £5 billion that the Chancellor has given away on education, targeting the money on reducing class sizes, improving standards and creating the skills base that is vital to our long-term economic future.