Economy: Enterprise, Taxation and Manufacturing

– in the House of Lords at 11:39 am on 22nd May 2008.

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Photo of Lord MacLaurin of Knebworth Lord MacLaurin of Knebworth Conservative 11:39 am, 22nd May 2008

rose to call attention to the role of enterprise in the United Kingdom economy, the effect of taxation on the competitiveness of small and large businesses, and the current situation and future direction of manufacturing; and to move for Papers.

My Lords, it is a great privilege to open this debate and to see so many of your Lordships here to take part.

The success of business and enterprise is fundamental to a free and prosperous society. Yet for too long we have heard too little about what industry and commerce contribute to the wealth of our country and too much about how much money is being spent. It seems to have become a badge of pride to spend while the need to earn it first is forgotten. More and more of the nation's earnings, which are desperately needed for future investment, are being spent and wasted today—past earnings that are stored in pensions, present earnings that must be fought for every day in a harshly competitive world, and future earnings that are mortgaged increasingly by reckless government borrowings. This would worry me at the best of times, but now that the clouds of economic slow-down are gathering, even the Governor of the Bank of England says that the nice times are over. This makes today's debate especially timely.

It would be easy to look back and be critical of the hubris that declared an end to boom and bust or that failed to prepare in the good times for the harsher days that inevitably come, but it is important that this nation should do what every good businessman must do—analyse and learn from past mistakes, look forward to ways in which we can first minimise the effects of the coming downturn, rebuild this country's competitive edge in a rapidly changing world and strengthen our manufacturing base.

Our best companies still thrive on excellence, know-how and entrepreneurial drive, but they face difficult times. The credit crunch will obviously have an impact on business investment, but rising inflation poses other risks. If strikes in the public sector spark inflationary pay claims in the wider economy—fortunately there is little sign of this at present—even more jobs will be jeopardised. We are already seeing cutbacks in financial services, in retailing and in construction, and I have no doubt that other sectors such as distribution and transport will soon join them.

Ministers are right to say that some factors are beyond their control, but that makes it doubly important that we deal with the challenges that we can remedy. In my business career, I have been privileged to work for some of Britain's finest and most innovative companies. My experience of large, medium and small start-up companies is that every business shares similar hopes. We all need a business environment that embraces stability, offers certainty, practises simplicity, rewards success and attracts the most talented. Far from there being simplicity, business at every level is being encased in complexity. Annual Finance Acts of around 600 pages are frankly shameful, and it is even worse when Ministers reverse financial rules that they have only just put into place. Constant changes to the tax system undermine certainty and are a disaster for long-term planning. We have to face an annual crop of new taxes, new revenue-raising regulations and new rules that affect the workplace. It is unpredictable, unsettling, and worst of all wholly unproductive for front-line managers trying to control costs, to improve services, to motivate staff, to win new orders and to develop new ideas. It is simply ludicrous when medium-sized companies complain that they are spending more on accountancy fees than they can afford to pay job-creating managers.

Companies are not experimental playgrounds for Ministers and civil servants. Where changes are wanted, they must be properly considered and consulted on. The bodged form of capital gains tax was another classic example of inadequate consultation triggering unforeseen consequences. While there was widespread acknowledgment for the need for reform and probably support for moving to a simple flat rate, without proper consultation the ship struck rocks that could so easily have been avoided. It was bad for business, bad for Britain and bad for Ministers, whose reputation suffered, probably irreversibly.

Then again, the threatened exodus of companies relocating themselves abroad in response to government plans to tax foreign profits shows how easily the wrong decisions can undermine our country's competitive appeal to international businesses. International competitiveness is fragile. You have to work to maintain it every day, and then come in the next day and, maybe, start all over again. There is immense mobility in a modern economy and unprecedented freedom to relocate. Tax is a major consideration for any business, and poorly thought-out action by government may win a headline one day or a party conference cheer the next, but it is not much good when the lights go out in offices across the City of London. Imposing tax on worldwide income will inevitably impact on the UK's competitiveness compared to other countries, not just tax havens but other EU states.

I am ready to join those who salute the benefits of economic immigration, but economic emigration is far easier to do and far harder to prevent. Poor consultation and a failure to listen are at the heart of this and other problems. I urge Ministers to stop levying new taxes, stop introducing complicated structures that only lawyers will read in pairs and stop thinking that they know better than people who have a lifetime of experience in business running successful companies. Proposals such as the supplementary business rate and the community infrastructure levy will only add to the burdens and complexities that businesses face. Increasing tax on business in a time of economic slowdown is akin to shop owners putting up their prices when customers stop walking through the doors. It does not work on the high street and it certainly does not work for our country.

My right honourable friend David Cameron struck a chord with millions when he said that the tax burden has risen beyond the tolerance of mortal man, and certainly beyond the capacity of large and small businesses in this country to absorb. On business tax, do Ministers agree that a cut in the main rate of corporation tax from 28 pence to 25 pence would provide a real boost to the competitiveness of British business in these troubling times, even if that means some reliefs have to be withdrawn? I cannot ask the Minister to write a new Budget: we have just had two in two months, and I certainly do not want a third. However, I hope that she will take that message to her colleagues.

Excessive and invasive regulation is another major worry—not just the principle, but the unprecedented scale and bureaucratic interference that is now belching out of Whitehall like an old lorry's polluting emissions. This regulatory culture represents a real threat to enterprise and business in the United Kingdom, both through direct costs and also through the uncertainty and inefficiencies that it generates in the business environment. The ABCC has estimated that the financial burden of new regulations on business has reached a staggering £65 billion since 1998.

Since the Government came into office, I am told that an average of 14 new regulations have appeared every working day. Yet, despite repeated assurances, promises and task forces, the Government are still manufacturing regulations like widgets. This Session there was yet another Bill before this House on deregulation. Incredibly, it contained new powers—as your Lordships exposed—to allow bureaucrats to impose penalties without independent appeal and without trial. Clearly, Big Brother is watching us all. Inevitably, it is the small businesses that will be the first to be caught up in this mess. It can and must be stopped.

Cutting regulation means cutting tasks, cutting jobs and accepting risk. Unless we have more courage, we will go on as we have been: one week enacting new regulations and the following week promising fewer. In the mean time, companies and managers are worrying whether what they are doing today might be unlawful tomorrow. I hope noble Lords will join me in commending a formula to Ministers. Regulations should be compatible with enterprise and the public interest. Their impact should be fully costed in advance. They should have sunset clauses where they can be renewed only if they have proved to have been worth while. Regulations which cost jobs should be repealed. Regulations which cost more than the benefits they provide should be scrapped. Regulations which have perverse effects should be suspended immediately. Finally, regulations should be applied fairly and efficiently.

None of us wants to see companies exempt of any regulation. Equally, however, we must never allow the companies on which our prosperity depends to be second-guessed and micro-managed by platoons of political appointees and civil servants. The current trend to give regulators far-reaching investigatory powers backed up with threats of draconian penalties may sound consumer-friendly but if the consequences are suspicion, fear, wariness and fatter bills for the lawyers, neither customers nor shareholders will benefit.

What targets do the Government have to cut the number of regulations affecting business in the next 12 months? What assurances will the Minister give on behalf of the Government not to introduce new regulations in the next 12 months? I will ask an easier question. How many regulations has the Minister personally scrapped in her time in office?

I conclude by saying a few words about the state of our manufacturing industry. Since the 1970s, there has been a steady decline in the number of jobs in this sector. In 1978 7.13 million were employed in this sector. In 1997, the figure was 4.53 million. In the three months of this year it fell to an all-time low of 2.9 million—a fall of more than 30 per cent in a decade. Despite this decline, many businesses have adapted to changing markets and developed new products. In recent months, exports have risen as a result of the falling pound. However, a combination of tighter credit and rising inflation could certainly be damaging.

What effect do the Government expect tighter credit to have on levels of business investment next year? I remind the Minister again that lower taxes, stable taxes and fewer regulations will be warmly welcomed. At the same time, how do the Government intend to tackle the scandal of underperforming schools that see thousands of young people leaving full-time education lacking basic skills and the aptitude for work? Our country is already losing some of the competitive advantages that we won in the 1980s. If we are to weather the difficult times ahead, encouraging enterprise and new business start-ups is essential. The Government say they want to listen. The language is welcome but I remind the Minister that in business, only deeds matter.

I look forward to hearing the contributions of those noble Lords who follow me in this debate. I beg to move for Papers.

Photo of Lord Bhattacharyya Lord Bhattacharyya Labour 11:55 am, 22nd May 2008

My Lords, I congratulate the noble Lord, Lord MacLaurin, on securing this important and timely debate. He is a successful and distinguished business leader and the whole House respects his credentials on the economy.

I wish to concentrate on the challenges faced by small and medium-sized businesses in the UK manufacturing sector. This is not a new issue for policy makers. One can go back to the Macmillan report of 1931 to learn of the difficulties that such enterprises have. It is worth remembering that while government can help or hinder businesses, the success or failure of any particular company is decided by the skill of the entrepreneur.

The first question we should ask is whether there is a problem in manufacturing. Manufacturing output as a percentage of GDP has indeed fallen dramatically over the past 40 years. Today manufacturing is only 13 per cent of British GDP. That is partly due to restructuring, but we should also remember that many companies have outsourced functions such as IT, legal, design, personnel and so on. These functions are now counted as services, which radically reduces our estimate of the manufacturing share of GDP. That change is mirrored in every G7 country, but is more apparent in the UK as we have been at the cutting edge of outsourcing.

As a professor of manufacturing, I am more optimistic about this sector today than I have been for years. Manufacturing output is 22 per cent higher than it was at the start of 1980, while manufacturing productivity has grown by 50 per cent since 1997. Look at the profits some of our companies are making. Take the aerospace sector. We have virtually 35 per cent of the world's air engine market. Then there is the car industry; we are producing more cars today than we have done over the past 25 years. Even companies that were supposed to have lost their credentials, such as Jaguar and Land Rover, have produced billion-dollar profits. I would not say that we have never had it so good, but we are having it okay.

Firms with fewer than 250 employees are responsible for about 40 per cent of our manufacturing value-added. These companies are a vital part of our economic landscape, and they have been exposed to increasingly tough global competition. As open markets have extended, they have affected manufacturing sectors in different ways. Some that have a high value-added technological content, like aeronautics and the automotive industry, have outsourced but retain manufacturing in the UK. Electronic components and clothing have faced huge pressures from overseas competitors. That is not a bad thing, as the consumer has benefited from the competition. We hear a great deal about the movement of investment to China and India, but, beyond the sectors I have mentioned, most of the investment in those countries is for their domestic markets, not to re-import to the UK.

Companies have also changed the way they work. Today many companies make more profit from design or servicing than from physical manufacture. In fact, it is not hard to tell which companies are purely service and which are manufacturing. Many of our best new businesses operate in this area.

Many competitors have asked what government should do to help manufacturing. The first response is to say bluntly, "Get out of the way". Manufacturers are good at being blunt. The burdens of regulation and taxation fall most heavily on the businesses with the tightest margins. We have seen the pressure of regulation increase. We all agree that regulation for its own sake must be eliminated, yet regulation is important. It is the way society reflects needs that are not met by the market. Good regulation improves our quality of life. Imagine what would have happened if tougher regulations in California had not sparked a wave of innovation in the drive to lower emissions. In the UK the minimum wage and health and safety regulation matter to us as a society. So while it is easy to call for deregulation, it is much harder to do. The new Mayor of London is a doughty believer in the perils of over-regulation, yet his first act as mayor was to issue a no-drinking regulation on public transport. I happen to agree with the regulation but I cannot help but smile at the irony. Last year the Legislative and Regulatory Reform Act came into force. The Government are currently considering how to use their powers to reform consumer protection regulation to help small businesses. These are welcome steps and we need to give the new powers time to make a difference.

The burden of taxation is one which all businesses complain about, and rightly. The good news is that corporation tax has fallen from 30 per cent to 28 per cent, yet small manufacturers are concerned about the increase in the corporation tax they pay to 22 per cent next year. Yet that change should be considered alongside the new measures that help small businesses—the new £50,000 tax-free capital investment allowance, the increase in the R&D tax credit to 175 per cent, the increase in the small firms loan guarantee from £60 million to £360 million, and the extension of the enterprise investment scheme to offer tax relief up to £500,000. The Government have also made the right decision in providing an entrepreneurs' relief on capital gains tax. These measures are in addition to services, such as the Small Business Service, which have seen major increases in funding. Economic competitiveness means more than just headline tax rates. We should focus on growth, being an economy with a good infrastructure and research base, high skills levels, a supportive fiscal framework and a focus on investing in the future.

One area where we have had enormous success is inward investment. This is because the perception of the UK abroad is that our fiscal and regulatory framework is second to none. The UK is now the second greatest beneficiary of inward investment in the world, with $1,135 billion of foreign direct investment stock in 2006. That is more than twice the amount invested in Germany and almost a third more than France. Inward investment has brought secure jobs in the long term. These companies need a supply chain, and this will be predominantly made up of small and medium manufacturers. These have improved enormously by learning from inward investors. Indeed, they have improved so much that they are now being targeted by inward investment companies themselves. These companies benefit from the challenge of improving business systems and increasing flexibility. Those skills will lead to rewards with other customers. The task of government is to help small businesses innovate, and here we have done an enormous amount. I welcome initiatives such as technology demonstrators which will help major inward investors and smaller companies innovate together; the work of the Technology Strategy Board in driving forward research funding; and regional development agencies' support for small business innovation and sector clusters.

For the past 40 years I have heard that the British economy needs more skills. This is a subject with a long and thorny history in British policy-making. I have to say to those on the Benches opposite who call for more direct government intervention in skills that this was not the approach they took in office. I am proud that this Government have invested a huge amount in skills. The budget of the Learning and Skills Council is now over £10 billion—an enormous sum. I did an apprenticeship when I graduated which stood me in good stead for the future, so I applaud the Government's modern apprenticeship programme.

I also welcome the Government's commitment to increase the funding of the Train to Gain programme from £200 million to nearly a billion pounds by 2010. Of course, when the economy is doing well and the demand for skills is high, companies will complain that they cannot recruit enough scientists and ask the Government to solve the problem for them. My first response to such calls is to ask, "Well, what are you doing about it?". The number of STEM graduates has increased from 60,000 to 85,000 in the past decade. Indeed, our universities are in many ways the envy of the world. Some complain that we are not recruiting enough indigenous students into the workforce. Yet, when one goes to the most innovative companies and research institutes in America, one sees that they are incredibly multicultural. They are interested only in recruiting the best, wherever they come from, because they know that their companies will get the benefit of their work.

I hope that the new points-based immigration system will make it easier for the highly skilled to be ambitious in Britain. Today, too many British science graduates end up in sectors other than manufacturing. Why is that? It is because young people today have many choices of career. Raise the pay, develop the career structure and quality of life you offer and more will want to train and work for you. That is why the pharmaceutical sector is so successful. Manpower planning by Governments is always dangerous. In a fast-moving economic field it is the market that has to decide what labour is needed and ensure that it is trained. I fear that companies which demand that the Government do more while they invest little themselves really want to reduce the price tag of their recruits. I do not think that that is the way to invest in future success.

So, what has happened over the past 10 years? This Government have created fiscal and regulatory frameworks and a flexible labour force. We know that business success is not in the hands of the state, but we believe that, by working together, we are on the right path.

Photo of Lord Cope of Berkeley Lord Cope of Berkeley Conservative 12:06 pm, 22nd May 2008

My Lords, I, too, am grateful to my noble friend Lord MacLaurin for initiating this debate. All my political life I have been concerned about small businesses, both those continuing businesses, which are always likely to remain small, and new start-up businesses which have the potential to grow much larger. We need them both. I am concerned particularly about the weight of all types of regulation but in this debate I want to discuss the ever-increasing complexity of the tax legislation.

Two of the ministerial posts that I had the honour to hold laid particular emphasis on small businesses so I know from personal experience the reaction when one says to a market trader, "I'm from the Government. I'm here to help you". It is not always positive. However, as the noble Lord, Lord Bhattacharyya, said, when small businesses are asked what they want from government, they usually answer first, "Just get the Government off our backs". That is, of course, a plea for deregulation. However, I know the difficulties involved in that.

First, new regulations are usually designed to remedy some perceived ill and are supported by those who have been hurt by it. The ill may be tax avoidance or something else. Secondly, when regulations or tax breaks are designed to help small businesses, they have a cut-off point which is difficult to decide and inevitably creates a boundary wherever it is set, making life difficult for businesses just above it. Thirdly, special provisions designed to help small businesses have to be known to them. Sometimes it is complicated to choose between alternative schemes. I have in mind particularly VAT schemes.

Fourthly, the effects of regulations are not usually all one way. Most benefit some and cause difficulties for others. The useful report of the noble and learned Lord, Lord Davidson, on EU regulations came up with a very interesting example of gold-plating regarding MoT tests for cars. The EU directive says that at the least we should test cars more than four years old every other year. In fact, for many years we have tested cars more than three years old every year. That clearly is a burden and a cost for motorists over and above the EU minimum. However, if we cut this regulation down to the EU minimum, we would immediately cut out 50 per cent of the work of garages doing MOT tests, which would damage all those garages. It is an interesting example of what can happen.

I understand the difficulties. Nevertheless, it is very important to make progress on deregulation. I realise that the Government prefer to speak about better regulation, rather than deregulation, but what we need are fewer regulations.

This House is dealing with 12 statutory instruments today—eight by the affirmative and four by the negative procedure. That is just one working day, and most negative instruments never come to us. The noble Lord, Lord, Filkin, and his colleagues on the Merits Committee have a mountain of statutory instruments to filter for us every week. Every business needs a Lord Filkin to filter which regulations are important and which apply to it.

The Government announced last year the administrative burdens reduction exercise. It is now more accurately called the administrative burdens reduction programme, which is better. It would be interesting to know how that is getting on.

The first problem in setting targets for reducing regulations is how to measure regulations. The National Audit Office has done some good work in this field; I was struck by how familiar one set of comments in a recent report was. It said:

"Businesses rated the following activities as particularly burdensome: keeping up-to-date with changes in existing regulations"—

My noble friend referred to that earlier—

"the time it takes to go through the whole process of complying; the lack of information about which regulations apply; and finding information and guidance".

Those comments reflect the stability that my noble friend Lord MacLaurin spoke so strongly and wisely about a few moments ago.

Given my views on the sheer weight of regulations, I was struck by a passage in the Government's draft legislative programme for the next Session of Parliament which was published last week. The Lord President read out these words from the Prime Minister's Statement:

"Advancing our enterprise agenda, the Government will consult on the idea of regulatory budgets—for the first time giving departments that seek new regulation a strict annual limit on what they can impose". [Hansard, 14/5/08; col. 1005.]

That sounds very interesting and a new idea, but what does it mean in practice? As it appeared in the draft legislative programme, I duly studied the great document that came out at the same time, setting out the details of the various Bills that are to be in our programme for next year. It is wonderfully clear on most of the proposals, setting out the main elements of the coming legislation—the perceived benefits, the process of consultation and the timing. But I cannot find anything in the 80 pages about the regulatory budget idea. I assumed, as it was listed in the legislative programme, that there will be a Bill, a statutory limit on new regulations from departments. That is all very interesting, but I am not sure how it would work. What would the sanctions be? Would Ministers go to jail if they had too many regulations, or pay a fine? I do not think it is really going to be like that. In any case, there are difficult questions to be addressed, such as how the limits are to be expressed and the problem that the NAO has referred to of measuring regulations.

In some ways, a crude measure is the number of pages of regulations. It may be crude, but it is not altogether out of this world to think of that as a measure because, after all, the number of pages that a business must read to get on top of the various regulations matters. Also, the impact assessments try to measure the costs of complying once you have read the regulations. I do not expect the Minister to set out definitive answers to all these questions today, but I hope that she can indicate the meaning of that sentence in the legislative programme.

The Minister recognises that enterprise is stifled by overregulation because in a recent speech to the Trade Association Forum, she set out a reduction in the burden of regulation as the first, essential criterion for enterprise to flourish. She is, anyway, the Minister responsible for the Better Regulation Executive. Government words, consultations and studies in fewer and better regulations are a vital component of fostering enterprise, but their actions and their effect will really matter. I hope that the proposed regulatory budgets will help, but, so far, we cannot be sure.

Photo of Lord Bilimoria Lord Bilimoria Crossbench 12:16 pm, 22nd May 2008

My Lords, as I mentioned in my maiden speech in your Lordships' House, when I came to this country in the early 1980s as a 19 year-old from India, from my higher education, Britain was the sick man of Europe with no respect in the world economy. The City of London, where I worked and trained to qualify as a chartered accountant, was a closed shop. What has happened to transform the Britain of a quarter of a century ago into the Britain of today? I believe that three fundamental factors have enabled that transformation.

First, we are today one of the most open and free markets in the world. Without the "big bang" and the opening up of the City of London in 1986, there is no way that the City of London would today be the pre-eminent global financial centre of the world. This openness has also made the British economy one of the most attractive destinations for foreign investment. Without this openness, there is no way that I, as a 27 year-old with £20,000 in student debt to pay off, would have been able to start a beer brand from scratch in the most competitive beer market in the world. And the competition means that the biggest beneficiary in any sector is the consumer, who is in the driving seat demanding more variety, more choice and better quality. The bar is continually being raised.

The second factor is that in the Britain I came to just over 25 years ago, the word "entrepreneurship" conjured up images of Del Boy. In the Cambridge University that I attended in the late 1980s, the words "business" and "entrepreneurship" did not exist in its vocabulary. Today, I am proud to say that Cambridge has the Judge Business School, which this year was ranked as one of the top 10 business schools in the world.

Today, we encourage entrepreneurship throughout all universities in this country. I am proud to be the national champion for the National Council for Graduate Entrepreneurship set up by the Prime Minister, when he was Chancellor, spreading the spirit of enterprise and entrepreneurship through every university in this country.

The third factor is taxation. There is no question about it—where business is concerned, high taxes are stifling. I am grateful to the noble Lord, Lord MacLaurin, for calling this debate to address these crucial issues.

So what is the role of government with regard to business? Many would say that the best role for government is to get out of the way and to let business get on with it. But I believe that government, regardless of political party, has played a very important role in the transformation of Britain over this past quarter of a century. Government can be a helper, supporter and a catalyst for business. Most importantly, government can create the environment in which business can flourish.

I will give one example from my experience: that is the Government's small firms loan guarantee scheme, of which we have been a beneficiary. They guaranteed 75 to 85 per cent of the loans that we raised.

I remember that, in 1993, one of these loans saved me from having to give away 25 per cent of my company to a venture capitalist. That enabled me to save the equity of the company, so that everyone in my company now has access to a share option scheme. Having started £20,000 in debt, I still own the majority of my company. This is an example of how government can be a supporter of, and enabler to, business. I am delighted to hear the Prime Minister say in a recent speech that this scheme will be expanded. I urge the Minister to expand it in a big way.

Coming back down to earth, we have a situation today where, over the past 12 months, the Government, which had done so much until then to help business, have removed taper relief, which reduced capital gains tax to just 10 per cent, encouraged investment and was aimed primarily at entrepreneurs and entrepreneurship. They have removed the lowest 10p rate of tax, affecting 5.3 million individuals and families. The Chancellor, in the last Budget, reduced corporation tax for large companies, yet increased corporation tax for small companies.

Then we had Northern Rock, which clearly demonstrated a lack of clarity, accountability, responsibility and communication between the triumvirate of the Treasury, the FSA and the Bank of England. The happy merry-go-round in what the Governor of the Bank of England called "a nice decade" became a miserable blame-go-round. The Government had to inject £25 billion to rescue Northern Rock and then had to nationalise it. I do not think that we in this nation, or the world, have grasped the magnitude of a company being rescued to the tune of £25 billion—more than has ever been spent to save any company on this planet.

We had the charge being imposed on non-domiciled individuals, threatening the openness of our economy and alienating many key individuals who have invested so much and brought so much talent to this country. More recently, we had the furore over the taxation of UK companies' overseas activities. I am sorry to say that, with all these changes, the Government have, without consultation and often without having thought through these changes, alienated and upset virtually every part of the business community in this country.

There is talk of simplifying taxes, yet the tax burden in this country has continually and steadily increased. Companies are moving, and talking about moving, their headquarters to countries such as Switzerland and Ireland, which has a 12.5 per cent rate of corporation tax. In a snap poll by the Federation of Small Businesses two months ago, 93 per cent of small business owners said that their confidence in the Government had decreased since last year.

Britain's manufacturing industry is still responsible for one-sixth of the UK's output. It accounts for more than half of UK exports and undertakes 75 per cent of all business research and development. It employs 3.5 million people, and many more indirectly through the supply chain. I am very proud of British manufacturing—the cutting edge, high-value-added manufacturing of companies such as Rolls-Royce. Sir John Rose, in an FT article earlier this year, said:

"Having a mixed economy in which both manufacturing and services are important gives a stronger base".

I give a quick example from my own company. Until this month, we produced more than two-thirds of our European production of Cobra in Poland. It was cheaper and more efficient to produce it in Poland, even after paying the distribution costs to bring it into the UK. However, now we have found a ground-breaking and innovative manufacturing model and we are moving our production back to three breweries in the UK; bottling and packaging in an integrated manufacturing, bottling and distribution plant, created and built with Irish inward investment near Manchester. This will save us several million pounds from day one. Who said British manufacturing was dead?

As an enterprise leader for the Prince's Trust, I was delighted last week to hear the Minister announce that the Government will support the Prince's Trust business programme, which celebrates its 25th anniversary this year. The Prince's Trust has done a marvellous job in helping 70,000 businesses, not only through providing loans, but also through its fantastic mentoring scheme. The Minister said that the Government would contribute £1 million to support the Prince's Trust. The Prince of Wales then took the podium and said that he was delighted that in the audience was the noble Lord, Lord Young of Graffham, who, in 1988, when he was Secretary of State for Trade and Industry, supported the Prince's Trust and, to celebrate the prince's 40th birthday, said that, "For every pound you raise, we will match it". The Prince's Trust, even in that dreadful economic climate, raised £27 million and, reputedly, the Government matched it with £27 million.

Is it the case that the Government are giving £1 million in support this year, versus £27 million in 1988? They are giving £25 billion to rescue Northern Rock to maintain financial stability. If only we could support small businesses the same way in which the American small business service has done for decades, with tens of billons of pounds of support; imagine what we could do with entrepreneurship, enterprise, manufacturing and innovation in this country. Imagine where we could be.

Something dawned on me when I opened the fourth Joint Economic and Trade Committee meeting in my role as UK chairman of the Indo-British Partnership and the chairman of the UK India Business Council. I welcomed the Indian Minister for Commerce and Industry to his fourth meeting in a row, and I welcomed our Secretary of State for business to his first meeting. He was our fourth Secretary of State in four years. Are the Government taking business seriously? The Secretary of State for business should be one of the great offices of state, but unfortunately it is not. In my role as chairman of the UK India Business Council, I have seen how far £1 million of support can go. The support that we get from UK Trade and Investment genuinely allows us to promote trade, business and investment bilaterally.

Britain is still one of the sixth largest economies in the world. We have only 60 million people—we are a tiny nation in comparison with the giants of China and India—and yet one in five school-leavers is still unable to read and write properly and, despite our enormous wealth and in spite of us being able to provide free education, free health, roofs over our citizens' heads and a safety net of welfare, we still have child poverty and huge areas of deprivation. We have much to do. It is fundamental that, particularly in the current economic climate, the Government put business first, because, as my friend, the noble Lord, Lord Jones, constantly reminds us, it is business that creates the profits and the jobs that pay the taxes that provide the public services. Actually, business is at the heart of it all.

Goldman Sachs predicts that in 2050 China and India will be the largest two economies in the world but that Britain will still be one of the 10 largest economies in the world. We have always punched above our weight and we have always been adaptive, flexible, creative and innovative. By putting business first, we will always keep the "great" in Great Britain.

Photo of Baroness Buscombe Baroness Buscombe Conservative 12:27 pm, 22nd May 2008

My Lords, I, too, thank my noble friend Lord MacLaurin for introducing this important and timely debate on a crucial subject concerning the role of enterprise in the United Kingdom. I declare my interests as chief executive of the Advertising Association and as a non-executive director of Three Valleys Water plc, which is a water company. I will focus my contribution on three areas: regulation, the creative industries and the disproportionate and disruptive power of some non-governmental organisations.

UK businesses are now facing massive economic uncertainty. A decade of Labour Government has meant a major increase in taxation, as well as a raft of new regulations. Let us be honest; regulation is taxation by another name. It is essential that the UK remains the most attractive and competitive location for larger businesses to base their offices. We must never forget that most businesses can just as easily conduct their operations from New York, Hong Kong, Dubai or Mumbai. It is also essential that we continue to resist unnecessary regulation and over-taxation, which would drive business and investors elsewhere.

Sir Martin Sorrell, chief executive of the advertising firm WPP, has warned against the planned tax changes that would see large chunks of multinational companies' overseas profits brought within Britain's tax net. He said:

"If the measures ... are introduced, ratified, confirmed and implemented, we will be taking a very serious look at the advantages and disadvantages [of moving]. I think the proposals will lead to the exodus of a number of multinationals. I have been surprised by the number of our clients and non-clients who are considering this action".

Earlier this week, at the annual CBI dinner, the president of the CBI said:

"What business needs is clarity, certainty and competitiveness—what we have got is more cost, complexity and capriciousness—and we can't go on like this".

Let us take the creative industries as an example. They are collectively a huge and growing contributor to the economy, but I know from my own experience that they are feeling particularly fragile in the current economic climate of uncertainty and high taxation. More needs to be done to give this sector freedom to thrive and there are a number of ready solutions. For example, we should look to exempt the creative industries from changes in legislation such as TUPE and capital gains tax, which damage free and fair competition in the market and undermine entrepreneurialism.

TUPE has been extended to certain professional sectors such as the advertising industry, for which it was never well adapted. It threatens to strip advertising agencies of the flexibility they need for the development of new ideas and concepts for new clients. TUPE particularly hurts the smaller agencies, the small businesses that do not have the legal and personnel resources to manage it. My experience of working in the creative industries is in stark contrast with my experience as a director of a company in a heavily regulated industry. That is simply because there is an enormous difference between working in an inflexible, bureaucratic and heavily regulated environment and working in an industry with clearly defined boundaries of self-regulation.

It is no accident that the creative industries are growing at twice the rate of the rest of the economy when they are not unnecessarily constrained by the heavy hand of regulation and compliance. Advertising regulations deliver fast, free and flexible, albeit strong, consumer protection and, as a bonus, the whole regulatory process is paid for by the industry at no cost to the consumer. We should therefore look to adapting existing self-regulation models to more business sectors, not to additional legislation, to set standards.

I wish to consider another sector constantly undermined by regulation. A survey conducted last year by the University of Reading among industry leaders found that regulation, particularly poorly drafted and non-evidence-based regulation, was perceived to be the biggest single threat to the future competitiveness of the UK food and drink manufacturing sector. Given that food and drink is the largest single manufacturing sector in the UK, with a turnover of £74 billion, and accounts for 14 per cent of the total manufacturing sector, its views must be listened to.

One of the things that struck me in recent years has been the extent to which industry appears to be fixed in the headlights of non-governmental organisations. There seems to be a conventional wisdom that the more industry concedes the better for everybody. In my experience that is entirely wrong. NGOs are insatiable and the more conceded the more damage they do and the ever more they demand. Many NGOs appear simply to want to undermine trust in business and to believe that their rationale is to cause damage. It is disappointing that NGOs lobbying the Government and opposition parties often pursue an agenda of their own, focusing on a single set of issues. They have no duty to refer to the wider picture. In some cases, especially in relation to consumer affairs, consumers can be bombarded with mixed and negative messages without fully comprehending the nature of the source of criticism. The fallout from this in some instances significantly and unjustifiably affects the balance sheet by damaging the reputation of business. Shareholders and consumers lose out.

Given my eight years here in your Lordships' House as a shadow Minister across seven different briefs, I can attest to persistent, powerful and very professional lobbying by NGOs across different sectors. But should that not be largely the function of the taxpayer-funded National Consumer Council? It would be much healthier if NGOs sought to work with industry and government to tackle complex social problems in the round.

The Government's priority should be to build a more enterprising society in which all who have the initiative, skills and drive have the opportunity to start and run a successful business. The Government should create the best environment in the world to start and grow a business and to tackle specific barriers that inhibit successful enterprise. Enterprises do not want government to be a burden on their backs; they want government to be an understanding and supportive friend at their side. The Government should seriously question whether they should intervene at all, not, as they currently do, take it for granted that they must.

At this week's CBI dinner the Chancellor of the Exchequer said of competitiveness:

"We will do nothing to jeopardise that".

I have to say that all those sitting in Grosvenor House listening—more than 1,000 businesspeople—found that statement completely breathtaking. I say in response to the Chancellor and to the Minister, please prove it.

Photo of Lord Sheikh Lord Sheikh Conservative 12:35 pm, 22nd May 2008

My Lords, this is a very relevant and timely debate, and I congratulate my noble friend Lord MacLaurin of Knebworth on bringing the issue to the House. The general economic climate should be a cause of great concern to most economic actors in the United Kingdom and, as we face the challenges of a global economic turndown, we need to be clear that our positions on taxation and regulation put us in the optimal place to minimise any damage that may be caused as a result of this situation.

I am concerned that the credit crunch and the scourge of inflation may cause real harm to our manufacturing sector. The impact on household disposable income is weakening consumer markets and the message from the Governor of the Bank of England last week was that we should expect household incomes to become further eroded in the months ahead. In consequence, it is important that we maintain and promote our position in the field of export, particularly in specialised products—machinery and vehicles. Companies in this country are increasing levels of investment in niche markets and it is essential that they continue to do so. In addition, considerable wealth is generated from overseas by insurance, financial services, media and IT companies. It is essential that enterprise is allowed to flourish without hindrance and is given every support.

I am sure that noble Lords will all agree that most of the companies in the United Kingdom are SMEs which provide excellent service and employ a considerable number of people. We need to promote and protect SMEs for their growth and even their survival.

One of the most common complaints, which we have great cause to be concerned about and which my noble friend mentioned, is the impact of taxation. The tax burden on business in this country has increased in absolute terms and relative to our competitors. A few years ago, this country was proud to lead the field on corporation tax rates, but that has been squandered. European Union accession countries enjoy lower tax than us, as do a host of our other competitors. China is set to achieve its fastest growth rate since 1993. India is now the second most attractive venue for foreign direct investment, after China—ahead of the United States and Russia. Indian companies have been proactive in acquiring foreign companies and affording them access to new technologies and strengthening their position in global markets.

However, the rate of corporate taxation is not our only problem. Businesses rightly complain about the increasing complexity of the tax system in this country. Complexity causes costs to companies and the more time that businessmen have to spend trying to understand the regulations and taxes imposed upon them, the less time is available to them to generate the wealth that keeps our economy afloat. Much of this complexity directly derives from the previous Chancellor of the Exchequer's desire to micromanage business by tinkering with tax rates and special concessions.

At one time, when British firms merged with foreign partners it was attractive to locate the parent of the combined group in the UK. Now instead we see a steady flow of companies choosing to emigrate from the UK. They are leaving because of the burden and complexity of our tax system, a system that threatens to become even more burdensome with the Government's proposed revision to the taxation of foreign profits.

Unless the Government change their attitude to the taxation of enterprise, that steady flow risks becoming a flood of departures. The Government may have been forced into a turnaround on the 10p tax rate, but that case is depressingly symptomatic of a wider malaise at the Treasury. It is increasingly apparent that the Government are unwilling to or incapable of thinking through their proposals with a view to our competitive position and the difficulties facing businesses in this country.

Businesses have a right to demand predictability from the Government. Whatever the merits or otherwise of particular measures taken by politicians, we have a duty to minimise the disruption caused to those constructing business plans, as unnecessary change not only increases the costs for them, but inspires a growing frustration towards tax authorities. I strongly urge the Minister to reflect on that in her response, as it is a serious cause of concern among the business community and a major hassle for our nation's wealth creators.

Predictably, compliance is a greater problem for new and smaller businesses, which have the most to gain from assistance and simplified requirements. We need to make it a priority to reduce the regulatory burden on small businesses and to simplify the tax system for them, including reforming the incredible complexities of the system of government support for small and medium-sized enterprises.

I place on record my congratulations to those firms that have invested in research and development, and that are continuing to thrive in both domestic and international markets despite the challenging complexities and disadvantages imposed on them. It is imperative, however, that continuous training programmes are led by the industries, training bodies and employers. We need to ensure that people are adequately trained in science, in technology subjects and in every other way.

My business is insurance and financial services, and we lead the world in this field. That is mainly due to our expertise and quality of people. We create considerable revenue for the country, and the Chartered Insurance Institute, the British Insurance Brokers Association and insurance companies are actively involved in training schemes. Our example can be followed by others. We need to invest in people for our well-being and growth.

We need to be innovative and invest in opportunities abroad. Over the past year, I have visited India and countries in the Middle East several times. There are growing markets in which we can participate and we need to be proactive, otherwise we will be left behind and others will overtake us. In conclusion, I return to my original thesis: despite the challenges confronting those who create wealth for our country in the ever more competitive global market, we have some grounds for optimism. That optimism is established on our export markets, as we witness a decline in growth in domestic markets, and ever greater pressures placed on consumer spending.

If we are to weather the storm, we need the Government to recognise that they have been part of the problem in recent times and they need urgently to relieve small, medium and large enterprises from the excess burden of regulation and the damages caused by the complexity and level of taxation. I look forward to hearing the Minister's assurances that the Government have learnt that lesson and that we can allow the enterprise sector in our economy to do what it does best: to generate wealth through innovation that retains our country as a major economic player in this increasingly competitive global market.

Photo of Lord Astor of Hever Lord Astor of Hever Shadow Minister, Defence 12:45 pm, 22nd May 2008

My Lords, I will concentrate on the British motorsport industry and declare an interest as the unpaid president of the Motorsport Industry Association.

I start by reminding the Minister what she said in her response to my Question during the debate on the motorsport industry on 6 March about the Motorsport Development UK(MDUK) programme. She said,

"we know that in a fiercely competitive global environment, there is absolutely no room for complacency".—[Official Report, 6/3/08; col. GC 181.]

Five years previously, the then Minister, the right honourable Patricia Hewitt, announced government support of £16 million to sustain and develop the British motorsport industry, saying that it,

"is exactly where the future of British manufacturing lies ... In such a fiercely competitive market, we cannot afford to be complacent".

Anyone reading those positive statements would applaud the Government for their plans to sustain one of the few globally successful British engineering clusters. However, reality has proved to be a long way from the rhetoric. Complacency is exactly what is evident, along with inaction.

First, the highly publicised £16 million budget for MDUK was, as the Minister admitted in March, significantly reduced to £10 million, but the total reduction covered by the Minister's explanation amounted to just £4.5 million, not the complete £6 million. What has happened to the lost £1.5 million—an amount perhaps of little interest to her department but of very great interest to those in the motorsport sector who were expecting that support? Such casual oversights and misinformation smack of complacency.

The MDUK board delivered an annual report in January that was devoid of any financial detail. The Minister agreed in the March debate to provide a clear, detailed financial breakdown of MDUK performance and expenditure, including salaries, overheads and expenses, and an explanation of its value or effectiveness to the industry and the taxpayer, with regional budget and spending.

Eleven weeks have now passed. I have received no information—no letter, no answer from the Minister. Indeed, I had to table a Written Question on 12 March in an attempt to get a response from the department—which, after all, led this funding programme.

The chairman of MDUK, when presenting his report, said that the UK motorsport industry was in,

"a healthy state, particularly at the high end", and stable. In the March debate, I pointed out, in contrast, that in fact it faces a dramatic downturn at the high end. The noble Baroness did not share my view but since then, one of the seven UK-based Formula 1 teams has appointed an administrator. Many highly valued engineering jobs have been lost in this country. During the same period, Ferrari launched its new Italian-built and engined A1 GP car. Excellent UK companies, Zytec and Lola, have lost that global race series to Italy.

The noble Baroness tried to placate my fears by explaining that,

"the majority of the A1 GP contract apparently lost to Italy has been subcontracted to UK companies". —[Official Report, 6/3/08; col. GC 179.]

That response has proved incorrect. Furthermore, that advanced engineering business is not being lost to the emerging nations of China or India, but to our most dangerous competitors in high value-added engineering: those located in the US, Italy and Germany. In the Minister's response, she referred to MDUK research, saying:

"The sector is supported by 2,500 engineering companies".—[Official Report, 6/3/08; col. GC 179.]

She added, I believe incorrectly, that "those companies are growing".

There will soon be significant reductions in the spending budgets of Formula 1 teams in the United Kingdom. These companies are at the top of the R&D and investment pyramid of world motorsport. As the majority are still based in the UK, this reduction will affect our specialised supply base far more than others in Europe. Each Formula 1 team relies on a network of these relatively small specialist suppliers, spread throughout the UK. These cutbacks will affect the employment of technicians and engineers, who are skilled in advanced, innovative, value-added, high-performance engineering. These individuals are a special asset to this country's engineering and must, at all costs, be retained. What are the Government doing to ensure that we do not lose them?

The recent Prime Minister's Strategy Unit paper, Future Strategic Challenges for Britain, identified UK motorsport as a prime example of Britain hosting world-class, high-performance innovation and engineering leaders, where SMEs collaborate successfully with global manufacturers and global innovation networks, bringing ideas and technologies together from many places. Such global collaborations are the bedrock of a supply network in the UK motorsport industry, which now needs Government help to beat overseas competition. We cannot afford to stand by, responding with rhetoric and false promises, while such coveted UK engineering business is lost.

Six years ago, this industry, through its trade association, the MIA, told the then Minister that it required a series of,

"urgent co-ordinated actions to ensure the leading position of our industry is retained in the face of increasing overseas competition".

The chairman of MDUK admitted that it had not achieved much in the area of business development in the past four years, yet this is the specific area in which the industry asked the Government to focus their support. The government response has singularly failed and now, sadly, the fears of those original industry advisers have become reality.

We must start with young people to ensure the long-term competitiveness of the engineering industry. The Minister reported the success of MDUK-funded programmes, such as the Motorsport Academy and the learning grid which,

"develop an enthusiasm for engineering amongst younger students, and to develop skills once these young people are in the workforce".—[Official Report, 6/3/08; col. GC 181.]

I therefore remind the Minister that, following the collapse of the company that her department appointed to manage the Motorsport Academy programme, motorsport industry suppliers, including the trade association, have been left with significant unpaid debts. I am surprised to hear that the Minister plans to relaunch this programme, even though industry-supported debts remain unpaid. Do the Government realistically expect to attract industry support for this, in spite of this unacceptable situation? What are the Government doing to ensure that all industry debts are paid before this project is relaunched?

The Minister recently reassured the House that she was,

"passionate about the UK industry's competitiveness and what it represents in modern manufacturing, advanced engineering and world-class skills", and that she wished to,

"seize the benefits that this can bring to manufacturing and the economy more widely".—[Official Report, 6/3/08; col. GC 178.]

Why, then, am I given no answers, or misleading answers? What more can I do to get some answers? I am truly incensed by the Government's complacency. I have always approached my position as president of the MIA in a non-partisan way. Indeed, I have often gone out of my way to support the Government over the past 10 years in decisions that they have taken affecting the motorsport industry. That industry, now still the world's leader, is entitled to expect some straight answers, less indifference and stronger support from the Government.

Photo of Lord Cotter Lord Cotter Spokesperson in the Lords (Small Businesses), Department for Business, Enterprise and Regulatory Reform, Spokesperson in the Lords (Skills), Innovation, Universities and Skills, Shadow Spokesperson (Business, Innovation and Skills), Shadow Spokesperson 12:54 pm, 22nd May 2008

My Lords, "enterprise" is a word that is synonymous with much of the history of these islands. Being enterprising comes naturally, as they say. We must encourage enterprise in a specific field—that is, business—but also in a wider way, by encouraging people, through our educational system and community outlook, to be innovative, ambitious and open-minded. The dead hand of officialdom can sometimes kill off enthusiasm; it must not.

While coming up to Parliament this week, I read about small businesses in Wiltshire being threatened with prosecution by the council if they did not remove signs from roadside fields, indicating who, what and where they were. For example, according to the Western Daily Press, Tony Dene, who runs the Farmer Giles Farmstead, received a letter from the council giving warning. It was a bolt from the blue. He said:

"These are modest signs, about 3 feet square, which have alerted motorists to our presence for many years. We strongly rely on this sort of trade. Now, after all these years, we have been ordered to take the signs down".

Pubs and a hotel were also included in this threat. It seems that the Highways Agency made a complaint and the local council was quoted as saying that it was duty bound to take action. My point is that we all need to encourage enterprise—local government, national government, the community and, indeed, those in business themselves.

Before entering Parliament 10 years ago I spent my working life in small business, latterly as managing director of a plastics manufacturing company. In my early years I came up against a "can't do" boss. The result was that we "didn't do". This could have put me off business for life. It did not, but business in this country needs to be inspirational and welcoming to newcomers.

This leads me to apprenticeships, which are seen as an extension of education, in a way. The Government will, I believe, bring in legislation; we on these Benches look forward to examining it. We welcome the initiative, but it is important that there should be wide consultation. "Consultation" is a much used word, but it is sometimes not carried out terribly well.

To encourage business and enterprise, businesspeople must be fully engaged. I have raised this before, but say again that addressing skills in this way is important. Small businesses in particular need to be involved and helped—including financially—to participate. Only yesterday, for example, Parliament was lobbied by the YWCA, which helps disadvantaged young women. I am not suggesting quotas, but encouragement is needed for young women, as for others, and for those who are disadvantaged. I hope this will be taken on board.

I thank the noble Lord, Lord MacLaurin of Knebworth, for securing this debate, which gives us an opportunity to range over a wide and important area. The noble Lord spoke about inflationary pressures, the credit crunch and, along with other noble Lords, regulation and the importance of small business.

The Government have launched a new enterprise strategy and I headline the points: a culture of enterprise; knowledge and skills; access to finance; regulatory framework; business innovation. There are fine words from the Government about enterprise, but there need to be tangible actions and an economic regulatory and financial background to achieve those aims.

It is welcome that the Government have over the past few years listened to the strong call for stability. Modestly, I would say that their adoption of the independence and detachment of the setting of interest rates from government has helped. I do not why I should be modest about this, since it was, and still is, a fundamental policy of the Liberal Democrats which we were glad to see adopted.

It is also welcome that since this Government have been in office we have had a good record on employment. We have had consistently low unemployment, which is currently below the average EU, G7 and OECD rates. But it is forecast that our unemployment rate will rise above that of the OECD for this year and next year, which is a concern. Indeed, we see from a newspaper headline today that more firms are to cut staff.

I well remember how when the Conservatives were in power, those years were marked by the phrase, "boom and bust". We still have the basis for stability of interest rates, but it is disturbing to hear the words boom and bust again when referring to the cycle in bank lending, which has contributed to the instability of the housing market, and in general lending. It therefore has a spill-over effect for business and industry in all sorts of ways. More could have been done to deal with this, but we are where we are.

Note should be taken of concerns expressed recently from the City, which was referred to earlier, about the uncompetitiveness of the UK tax regime against others. But a recent report from the City also raised concerns about the certainty of interpretation, the predictability and the attitude of the tax authorities. Certainty and stability are important to business.

The Government need to listen to business to emphasise that they are business-friendly and, in particular, that they are the friend of small business, to which I shall refer later. A recent press release from the Federation of Small Businesses asked the Government to lay off small firms. It said that the taxation of small businesses is disjointed and inconsistent. The Liberal Democrats would simplify the tax system and reduce corporate tax by 1 per cent, as well as simplify and clarify the system. We would also offer substantial business rate relief for small businesses with less than £25,000 rateable value and provide a continuance of independence when setting interest rates.

The game is for the Government once again to focus on working with business. Small business has recently felt a bit neglected. The Government made a good start 10 years ago and they must renew their efforts. In past few years, there have been a number of initiatives. The late payment of debt was addressed by a Bill, but efforts need to be renewed. I ask the Minister to look particularly at the Government's record with regard to paying Bills. It is welcome that they have a goal to give at least 30 per cent of procurement to small and medium-sized businesses. That will need to be backed up with action.

As has already been mentioned, renewed efforts are needed on regulatory impact assessment. That has been one of my hobbyhorses since I have been involved in Parliament. We have seen improvements but we must be careful to ensure that these are kept up or improved. I should like to see an organisation which is independent of government to carry out these assessments. We must keep down the regulatory burden.

Ten years ago, the Government laid a lot of emphasis on small business being at the heart of government, perhaps with a tsar. The Small Business Service was good in theory, but in practice it was not independent enough. As the noble Lord, Lord Bilimoria, rightly said, there is a constant need for focusing on small business and for a high-profile Minister for small business who is not for ever chopping and changing. We need constant emphasis on the small business sector. I urge the Government to get back to that. They started well, but they need to renew their efforts. We need a business-friendly climate, stability and a stepping up of our emphasis on skills.

Photo of Baroness Wilcox Baroness Wilcox Shadow Minister, Business, Enterprise and Regulatory Reform 1:05 pm, 22nd May 2008

My Lords, my noble friend Lord MacLaurin of Knebworth has given us a wonderful opportunity to discuss the effect of taxation on the competitiveness of small and large business, and the current situation and future direction of manufacturing. On today's showing, his experience and wisdom should be shared with this House more often. He has reminded us that the success of business and enterprise are fundamental to a free and prosperous society.

For too long, we have stopped encouraging, rewarding and applauding what and who have led to our free and prosperous society. We have watched this Government spend more and more of the nation's earnings that should have been used for future investment. Past earnings stored in pensions are funding the hugely growing public sector and its pensions. Present earnings are sliced away for doomed projects and future earnings are increasingly mortgaged by reckless government spending.

My noble friend Lord MacLaurin reminded us that our best companies still thrive on excellence, know-how and entrepreneurial drive. We destroy that at our peril, as the noble Lord, Lord Bilimoria, so ably showed from his experience, and as my noble friend Lord Astor demonstrated with his appalling experience of the Government's treatment of his motor racing industry. All speakers have emphasised the need for a business environment which provides stability, practises simplicity, rewards success and attracts the talented.

How can an enterprise economy break through when the Government preside over systematic, stifling red tape; a discredited planning regime; and a society which becomes more politically correct and risk-averse by the day? Those are not my words, but the words of our BERR Minister of State, the noble Lord, Lord Jones, who, apparently, is unable to be here to respond on the subject about which he constantly tells us he bangs the drum for Britain.

A noble Lord:

He is probably in Crewe.

Photo of Baroness Wilcox Baroness Wilcox Shadow Minister, Business, Enterprise and Regulatory Reform

The proportion of businesses achieving an annual turnover of £1 million after five years has fallen from 48 per cent in 1997 to 16 per cent in 2006. I wonder to what the Minister attributes this dramatic decline. Perhaps my noble friend Lord Cope identified it in the weight of regulation and tax complexity, which is debilitating, distracting and defeating.

On tax, it is evident that business at every level is being encased in complexity. Constant changes to the tax system undermine certainty and are a disaster for long-term planning. Do the Government agree with the opinion of the CBI task force? It states:

"The competitiveness of British business is increasingly compromised by the UK corporate tax system".

I hope that the Minister will answer the question of my noble friend Lord MacLaurin on whether a cut in the main rate of corporation tax from 28p to 25p, funded by reductions in capital allowances and the abolition of complex reliefs, would be a real boost to the competitiveness of our businesses.

Turning to the manufacturing industry, if the Government can have only one speaker in this important debate, they could do no better than have the noble Lord, Lord Bhattacharyya—Professor Bhattacharyya. I worked for the noble Lord when I chaired the National Consumer Council and he was there to guide me all the way. He is a wonderful engineer who knows so much about the motor industry. I have no doubt that he has a little sympathy for my noble friend sitting behind me.

As my noble friend Lord MacLaurin has said on the state of our manufacturing industry, there has been a steady decline in the number of jobs in the sector since the 1970s. In 1978, there were 7.5 million jobs and there are less than 3 million this year. What does the Minister think are the implications of falling employment in the manufacturing sector for the wider economy? The recent Bank of England inflation report suggests that the credit crunch would have an impact on that business investment. To what extent does she believe that it will affect the manufacturing industry?

Finally, today's debate has been especially timely. We are out of the high spending easy times. Business needs to be freed up to fight for its place in the markets of the world and, like all fighting forces, it needs light armour, good boots, the right supplies and a leader with a will to win, a good plan, a clever strategy, confidence and courage. Listening to our speakers, that does not look likely and I do not envy the Minister's task in responding to the debate.

Photo of Baroness Vadera Baroness Vadera Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform

My Lords, I am grateful to the noble Lord, Lord MacLaurin, for calling this important debate on enterprise, tax and competitiveness, and manufacturing and indeed for his insight and long experience, which we all value. I apologise that it is possible that in the time given I will not be able to answer all the questions but I will follow up.

As the noble Baroness, Lady Wilcox, said, this is a timely debate. The noble Lord also commented on the fact that we are facing a testing period in the economy. We are facing the first real international economic crisis of globalisation. With the small start in Irving, Texas, the global credit crunch is combining with international oil prices closing yesterday at about $130 per barrel, which is about 82 per cent up on this time last year. That is also impacting on food prices. We therefore face an uncomfortable situation of global liquidity squeeze still being worked through in the US and rising world commodity prices, driven largely by Asian demand, but we must not let the immediate economic issues hide from us the long-term seismic shifts that are taking place in terms of patterns of production and consumption.

This is a difficult debate but I strongly believe that the United Kingdom is well placed to face these challenges. We have been the fastest growing G7 economy in the past year and we are going to be the fastest growing G7 economy in the coming year. We have, thanks to the business sector and the corporate sector, high business profits and low business indebtedness. I was astonished to learn last night that we have for the first time since 1860 overtaken the US in terms of GDP per capita in dollar terms.

I should like to echo the words of the CBI president a couple of days ago that we should not fall into the trap of talking ourselves into a recession. I am surprised that the noble Lord and others have commented that we do not believe that wealth creation is centre stage. I cannot think what else is centre stage when it comes to the well-being of the British people. I echo the sentiments of the noble Lord, Lord MacLaurin, if not his analysis or tone, that we need to curb the regulatory culture that can exist in Whitehall, that we need to create tax stability and that an enterprise culture is one of the most important things we do, particularly in a world in which jobs, people, business orders, investment and companies are all amazingly mobile.

My response to the legitimate concerns that noble Lords have raised is, first, to suggest that we look at the facts and debunk some myths so that we can focus on the real challenges that Britain faces and, secondly, to reassure noble Lords that we will do everything we can to maintain the UK's economic competitiveness, particularly in difficult times. I do not accept the picture painted by the noble Lord, Lord MacLaurin, that small businesses have been made uncompetitive by the weight of tax and regulation because it has not been borne out by the facts. Of course business should always demand more and we should always strive to improve conditions, but let us look at the facts. There are three quarters of a million more small businesses than there were 10 years ago. I will not inundate noble Lords with numbers, but those businesses now survive longer and they are more productive and more innovative. They aspire to grow more, they employ more people and there are more women entrepreneurs, which has been a big source of the gap with the US on entrepreneurship. Most importantly, more people, especially the young, aspire to start a business now than 60 years ago and they believe that they have the skills to do so.

Not all of that would be the result of the poor and unstable business environment as has been implied in a somewhat wholesale fashion. The OECD says that the UK now has the lowest barriers to entrepreneurship of all OECD countries. The World Bank has ranked us second in Europe in terms of the ease of doing business and consistently among the top 10 out of the 178 that it ranks. Of course—I understand that this term might cause irritation—there is no room for complacency, and particularly when it comes to enterprise we need to catch up with the US which has more businesses per head and more growth businesses. I am grateful to the noble Lord, Lord Cotter, for pointing out the enterprise strategy that we put out during the Budget which set out the enablers that we outlined. The first was the issue of regulation, which is a subject close to my heart. It is interesting that someone could become passionate about it but I do. I have no embarrassment about talking about deregulation at the appropriate time as well as better regulation.

The noble Lord, Lord Cope, asked what we were doing particularly on administration burdens and on the target to cut them by 25 per cent, which would produce £3.5 billion of savings by 2010. We have already delivered £800 million of savings and are on track to meet the target. I wholeheartedly agree with the view that small businesses in particular need to feel a decreased level of regulatory burden because they have high comprehension costs and do not always have the legal departments and HR departments that big businesses do. We are therefore in the process of instituting a policy on SME exemptions so that every piece of legislation needs to be looked through to ensure that we have considered the position of small businesses, whether the legislation needs to apply to them and, if it does, whether it could be done in a simplified form. I hope that noble Lords will provide adequate scrutiny on this issue and more power to my elbow.

Noble Lords also referred to the fact that the regulatory budget was mentioned in the legislative programme but no further details were given. That is because it is not intended that this needs to be legislated for. Just like the comprehensive spending review, it is an allocation. We are consulting currently. My department and I are consulting on how we might do this. As your Lordships might imagine, it is a world first and an exciting idea. We are looking at the methodology of how we might do that and what sanctions would be imposed.

In response to the noble Baroness, Lady Wilcox, who is attached to my noble friend Lord Jones of Birmingham, while I cannot aspire to step into his shoes I should point out that every issue that she quoted him on is under my portfolio and therefore I am here and he is fulfilling his job in his portfolio. I believe that we are creating a different regulatory climate. It is not the easiest thing to change culture in Whitehall, but I suggest that we look at the matter in context. I quote the OECD:

"Deservedly the UK has a reputation for having a regulatory environment that is among the most supportive of market openness and global competition in the world".

As the noble Lord, Lord MacLaurin, says, it is only deeds that matter. I am pleased to say that we are beginning to see a change in the way that small businesses in particular are experiencing regulation on the ground, because for the first time in a survey that I monitor closely, the proportion of SMEs citing regulation as the main barrier to success has fallen.

I should like to answer the point put by the noble Lord, Lord Bilimoria. Exactly as the noble Lord suggested, we did expand the small firms loan guarantee scheme in the Budget, in particular to help with issues around the credit crunch. I simply respond by referring to the announcement we made in support of the Prince's Trust, and the rather generous £27 million matching announced made by the noble Lord, Lord Young. I was advised when I questioned it that he did not anticipate that it would be £27 million because he had underestimated the ability of the Prince of Wales to raise funds. The matching was therefore scrapped by that Government immediately thereafter. The noble Lord might wish to note that it was not intended.

I understand the issues around taxation that have caused concern. We have taken some difficult decisions recently, particularly for small businesses. But again I should like to put the issue of tax competitiveness into context with facts that do not bear out the blanket assertion that taxation has been radically increasing over the past 10 years. First, the small companies rate of corporation tax, paid by 95 per cent of UK businesses, is lower than it was in 1997 and is the lowest effective marginal rate in the G7. Recent changes that targeted the incorporation by individuals motivated by tax actually contained a package of investment allowances for small businesses that are genuinely investing, so that 95 per cent of them can write off all their capital expenditure in the year of investment.

The issue of capital gains tax was raised. First, the top rate of CGT is 18 per cent, which means that it is less than half of the 40 per cent it was in 1997 and one of the lowest among the significant economies of the world; and secondly, entrepreneurs' relief on CGT means that 90 per cent of entrepreneurs will pay CGT at 10 per cent. On corporation tax, as a result of the 2 per cent cut announced in the Budget last year, we have maintained our position as having the lowest corporation tax level in the G7. Indeed, as both the Prime Minister and the Chancellor have said, our aim is reduce corporation tax even further when we can afford it. I want to respond to the specific question of whether we would reduce corporation tax to 25 per cent, as suggested by the Opposition, and pay for that through allowances. I should point out that I do not think that making an unfunded tax pledge is the best way to ensure certainty. It would be unfunded because allowances would not compensate for it, and indeed the allowances are considered to be very important by manufacturing, telecoms, retail and other capital-intensive sectors. I am sure that the noble Lord has already seen the analysis and discussion of this point, and the debates between the Government and the Opposition.

I shall say again that there is no room for complacency because although these tax rates are competitive in relation to Europe and the G7, we know that the source of competition is changing. While we are not a society that aspires to be a tax haven or a very low tax economy which has a different economic structure, we are committed to ensuring that we have globally competitive tax rates and that British businesses cannot be, to quote the Chancellor, the fiscal fall guy. We need the right corporate tax structure to compete over the next 10 to 20 years, and the Chancellor has therefore formed a group of business experts to examine how we can ensure that Britain remains a competitive place in which to do business, deliver our aim to reduce taxes, and look at the issue of foreign profits and dividends, which was also raised. I have some personal knowledge of this area. The issue was raised in consultation at the request of business last year. As the Institute of Chartered Accountants said, it is a little unfair to characterise consultation as a climb-down or U-turn when we are genuinely trying to consult business in this area.

I am grateful to my noble friend Lord Bhattacharyya, and it is difficult to say anything authoritative after hearing him speak on the issue of manufacturing, but I will try to do so by saying that the one thing that continues to baffle me is why manufacturing is an unrecognised success in Britain, to the extent that many people think it is a failure. It is one of the most productive sectors in the UK economy. It has increased its productivity by 50 per cent, twice the level of the rest of the economy. We make more cars than we did 25 years ago, and 19 of the 20 top auto producers in the world have a manufacturing presence in the UK. We are leaders in aerospace, electronics and bioscience, and indeed are now moving into low carbon and nano technology. My only explanation for the lack of popular recognition is that manufacturing is so transformed that it is no longer recognisable as manufacturing to most people. As Keynes said, the difficulty lies not so much in developing new ideas as escaping from old ones, and I believe that that is the trap manufacturing is in. Of course transformation has caused heartache in terms of jobs that have been lost over the course of many years, but the sector has become a global success. We all need to take on those who talk down manufacturing and show that Britain is building from the base that we have established of modern manufacturing strength.

I apologise to the noble Lord, Lord Astor, for the delay in responding to him, and I shall clarify the position. Because I am passionate about the motorsport industry, I did not find the answers I received satisfactory and therefore I have asked for them to be considered again and I have asked the Permanent Secretary to look into the matter. The noble Lord may be assured that the delay is not because we do not care, but because we do care and I do not want the noble Lord to have to look into it and ask the questions; I am doing that on his behalf. I was unaware that any of my statements were misleading and I would be deeply shocked if they were. We debated the issue at some length recently, and I shall come back to the noble Lord in due course.

The one thing that we do not recognise in manufacturing is something that the noble Lord, Lord Bilimoria, illustrated graphically in his remarks: there are different global trends at play in this area. The ability to bring back processes to the United Kingdom because of new technology is interesting. Because of global fragmentation of the value chain, we are able to foster specialised, niche industries. They are not necessarily household names, which may add to the problem of perception, but they are global leaders whether they are behind measuring instruments, dentists' equipment or brewing. Companies have transformed themselves from their old manufacturing identity. I recall how one company that used to be involved in shipbuilding is now a global leader in electronics. We also have things that play to our natural strengths. Intangible assets are becoming much more important for manufacturing, so that intellectual property issues and brand marketing are growing. Indeed, the differentiation between services and manufacturing is blurring, and I believe that that is due to the fact that we have maintained an open and flexible market that allows manufacturing to ride with global trends.

I have disagreed with many of the assertions made by the noble Lord, Lord MacLaurin, but I agree profoundly with him on the fundamental question in terms of the success of the economy. We need to focus on the relentless competitiveness of the global economy. There are some long-term issues and trends, and I believe that those are things we should be considering. It is not quite as straightforward as saying that it is just about tax or regulation. It is about those elements, but not only those. It is also about skills and infrastructure to enhance business competitiveness. Further, every single survey that has been undertaken on behalf of business shows that companies rank skills and infrastructure above tax and regulation. Moreover, I should remind noble Lords that skills and infrastructure need to be funded by taxation.

I should also like to suggest that we look again at the facts. Other than the US, we maintain a globally competitive business environment with the highest levels of stock and flow of foreign direct investment, and we are maintaining our competitiveness for the location of headquarters, although we understand the instability that has been caused and we are in discussions with the companies concerned.

I have flooded noble Lords with facts because, in the words of John Adams, facts are stubborn. It is important to consider these issues in the context of those facts so that we can truly examine—not in a partisan way but because this is so important—a debate that looks at the long-term challenges. China and India no longer aspire to compete solely on the basis of low-cost manufacturing or cheaper call centres. China has spent 20 per cent more on R&D in the past year than it did before. We understand that, although this is a competitive challenge, it is also an opportunity. China will create 1 billion new consumers and will be the source of a doubling of global output, and we need to consider how well placed we are as an economy on tax, regulation and competition, as well as on skills and infrastructure.

I understand the points that have been made about stability and certainty. We are completely committed to stability and certainty by listening and being responsive to what business is saying and by ensuring that it can plan effectively to ensure the success of the British economy.

Photo of Lord MacLaurin of Knebworth Lord MacLaurin of Knebworth Conservative 1:30 pm, 22nd May 2008

My Lords, I thank all noble Lords for their contribution to this debate. There is much that the Minister can take away from what we have heard today. I hope that we will see business high on the Government's agenda. I beg leave to withdraw the Motion for Papers.

Motion for Papers, by leave, withdrawn.