UK 'caught in a trap of low growth and high taxes'

• Government has adopted OBR’s forecast of 1.3 - 1.7% growth for coming years
• This won’t be enough to avoid permanently high taxes given spending pressures
• CBI calls for radical policy shifts, including a permanent 100% Investment Deduction for businesses when Super Deduction expires

The CBI is today calling on the Government not to settle for a future of low growth and high taxes, but instead, break conventional Westminster policy thinking and aim higher if it wants to meet its own ambitions for the economy.

In a speech to business leaders and policymakers at a joint CBI/Centre for Policy Studies event, Tony Danker, CBI Director-General will challenge the government to set its sights on the kind of growth rates – around 2-2.5% – that were once typical in the UK’s recent past.

He will say that: “The current settlement isn’t working. There are rising spending pressures; too much tax; and too little growth…we’re caught in a trap…The Government are in a tough spot in all of this of course. They say we can’t afford to spend more on growth. But I say we can’t afford not to. Simply put, we will not pay down today’s debt, extend public services and reduce taxes on 1.6%.”

In his speech, Tony will set out brand new proposals on how to transform future economic growth:

1. When the Super Deduction ends in March 2023, replacing it with a permanent Investment Deduction – a 100% tax deduction for capital spending;
2. Replacing the Apprenticeship Levy with a new Skills Challenge Fund to ensure the UK catches up with European average skills investment – one that incentivises more flexible training to meet skill shortages and rewards firms who invest beyond their apprenticeship levy levels;
3. Doubling-down on green growth – by closing the public investment gap with our competitors on the primary areas of our net zero competitiveness, and setting out a Contracts for Difference model for hydrogen by the Budget;
4. Establishing an Office for Future Regulation – to support a regulatory framework that is future-focused, agile and dynamic for post-Brexit Britain – as a follow-up to the Government’s new post-Brexit regulation strategy published on Monday;
5. Creating an independent Council for Future Skills – to optimise training towards future economic demand and recommending where we will need visas for international skills to overcome shortages in home-grown talent. It would therefore set the Shortage Occupation List.

On the Government settling for low growth, Tony Danker, CBI Director-General, will say:

“V-shaped recoveries around black swan events are not a time for credit or blame. The downward nosedive is not an accurate judgement of economic performance and nor is the climb back up.

“We get a much-needed dose of reality from the independent OBR. Their forecast is their judgement on the UK’s economic trajectory: once the rebound is complete in the next 18 months, we will grow as an economy by 1.3 – 1.7%. For a country that is used to growth at 2 – 2.5% it is simply not good enough.

“And what’s truly worrying is that the Government has accepted the forecast as the target. "The trajectory as the potential. Everything the Government is currently trying, to get growth going, merely achieves a new normal of low growth.

“We have lowballed the UK. It’s in our numbers, and it’s in our plans. But at the CBI, we think we can do better.”

On why it matters, Tony will say:

“Let me be clear why this is such a problem. Today’s high spending, high taxes and low growth is a vicious cycle that’s hard to break.

“Cutting spending is far from straightforward, which is why no political party wants to do it.

“In 2019, a record 4.4 million people in England were waiting for routine hospital appointments. By the end of 2021, that had risen by a third. And there are backlogs in the courts, school pupils behind on learning and transport funding models being squeezed.

“Meeting the needs of an ageing population in the years ahead will put even more pressure on the public purse. By our calculations, by 2030 we may need to find an additional £40bn-£50bn a year to cover the costs of an ageing society, and more than double that by the middle of the next decade.

“So, how do we pay for that? The Treasury are naturally turning to taxation. But can we really raise taxes further? The UK tax burden is already at the highest sustained level in peacetime.

“On corporation tax, analysis by the Centre for Policy Studies and the Tax Foundation shows we’re currently 11^th most competitive in the OECD – in part because of the value of the Super Deduction. But when this ends next year and the Corporation Tax rate increases, we’ll fall to 31^st place. 

“And before the government says the UK is still competitive on business tax – by looking only at the Corporation Tax rate – it should accept that’s comparing apples and pears. It doesn’t include for example the UK’s eye-watering property taxes – the fourth highest in the OECD.

“To be clear, we’re not talking growth by any means. We’re talking sustainable, long-term growth that stems from more investment, innovation and productivity.”

Setting out his proposals to transform the trajectory of economic growth, Tony will say:

“The Government has a plan today. But it’s a plan for only 1.6%. It’s a plan that increases business taxes massively without reliefs for investment following suit. It’s a plan that funds green investment more than before but less than our competitors. It’s a plan that funds a narrow apprenticeship programme while skills shortages continue to hinder growth. It’s a plan that stops immigration for skills we need but offers no alternative to get them.

“There are however plenty of exceptions to this rule – moments where Government really has made bold interventions in pursuit of better growth. The Super Deduction was a super-exception to the normal incremental approach to business investment. It was the boldness we need.

“The offshore wind market – based on contracts for difference – was the moment UK Government realised they could use their balance sheet to unlock high growth markets while also serving the national and global interest.

“All these measures have one thing in common – they overcame orthodoxy in public policy. They represented bolder thinking. And that is what we need across government now.”

“First, we need to use this moment to transform private sector investment. So how about we leverage the 6-point Corporation Tax shock of next April to stimulate unprecedented business investment and innovation. Any salesperson knows that a price rise is a great moment to introduce a discount. So, when the Super Deduction ends a year from now, let’s replace it with a new permanent Investment Deduction – so companies can straight away see the value of their investments in a lower tax bill.

“Two, let’s talk about skills. We have a new idea for what are very new times.

“We get why the apprenticeship levy was introduced. Apprenticeships were the only option for technical skills. But today’s reality is that we’ve got T-levels, Higher Technical Qualifications and the new game in town: bootcamps. On top of apprenticeships.

“The Government then was also worried that overall UK businesses were spending far too little on talent. Or that the training was poor quality. Or that we chose to import whatever we needed. Well, we agree but that all seems ancient history now.

“Today, at every level, in every sector, and in every part of the country, firms are facing acute skills shortages. And the Government is saying we can’t import them, we have to grow them. Overnight!

“It’s time to turn the Apprenticeship Levy into a Skills Challenge Fund.

“We would allow businesses to buy training modules with their levy funds, not just full qualifications. So, not only could young people get the training to get into work; adults could get the new skills to stay in work.

“We would allow greater flexibility on the types of training. A portion of the funding could still be reserved for apprenticeships, while the rest could be turned to other recognised training that better meets businesses’ needs.

“And we would incentivise and reward firms that go the extra mile to train their people, with an upside kicker for any business that spends more than their levy.

“Third, we must go for green growth. We must accelerate our plans and target the green markets where we know the UK can lead the world. For this, there are three things government must do now…

“1) Close the public investment gap and spend competitively on the most important green growth areas. Energy efficiency, for example – where we need an extra £3bn every year to drive investment to properly retrofit our homes and businesses and bring down everyone’s energy bills.

“2) By the Budget, Government must publish the contract for difference business models for hydrogen…We need to spark this market and show the world this is the place to put your money to work.

“And 3) Launch a new UK scorecard for green competitiveness, to ensure Government and Business are joined at the hip in winning the economic prizes from decarbonisation.

“Fourth, we need to take up the Brexit opportunity we now have on regulation. This is not about a bonfire of regulations or diverging for the sake of it. This is about becoming something altogether smarter and better for our competitiveness – the most future-focused regulatory environment in the world.

“So, we propose setting up a new Office for Future Regulation. A new office doesn’t sound so radical. But its mission would be.

“To date, UK regulation has only aimed to protect low prices for consumers and fair competition. It has completely deprioritised UK competitiveness, investment and innovation. That needs to change now. We need to focus on regulation that unleashes a fast-growing economy – not the way any government has viewed it before.

“Fifth, let’s get serious about having the workforce for the future.

“Last autumn business and Government had a pointless quarrel over HGV drivers and butchers. The Government ignored the obvious evidence that the UK couldn’t train enough new ones in time. Government said tough luck – unless we close the borders, business will never change. Great rhetoric, poor results.

“Shall we get serious now about how we can generate more of the skills we need at home – so we can rely less on immigration?

“Nadhim Zahawi, the Education Secretary, is onto something by announcing a new Unit for Future Skills, designed to look at the data and evidence of where skills gaps exist and in what industries.

“Let’s supercharge the plans, break out of the current silos, and build an independent Council for Future Skills. It would take a holistic look at our workforce needs for today and tomorrow, and then work out how Government policies can fulfil them. It would optimise training towards future economic demand. And it would give independent recommendations on where we will need visas for international skills to overcome shortages in home-grown talent. It would therefore set the Shortage Occupation List.”

In conclusion, Tony will say:

“Don’t get me wrong. It’s not all on Government. This is a speech deliberately addressed to a political audience. But the CBI in the year ahead will be using every week, every month to promote serious growth to businesses across the country.

“We will ask them to increase business investment. In net zero. In innovation and digital transformation. In exports. In skills. In the health and wellbeing of their workforce. And we will gather them in clusters around the country to deliver levelling up the only way it can be done – by the private sector through better skills, jobs and wages.

“But to Government I say - now is not a time to lowball our ambitions. To settle for a new normal of low growth.

“After a disappointing economic decade past, this is our second chance.

“Let history show we seized the moment.”