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Economy: Enterprise, Taxation and Manufacturing

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.