Wrong time for Tory tax war. Big economic decisions needed now for UK to catch up with rivals – CBI Director General

• Green Growth is stalling; investment is falling; and the labour market is failing – time for critical actions on growth
• UK is getting less competitive: it has lost out on estimated £4.3bn of green growth market value in Europe alone and in April will fall from 5th to 30th place in OECD table on tax competitiveness overnight
• PM is right to resist calls for mass tax cuts. But that means bigger decisions needed on growth

The Prime Minister and Chancellor ended 2022 by successfully stabilising the economy after fixing the economic fallout of last autumn. It has been a vital first step, executed very well. But as they try to get growth going in 2023, the Government cannot take small decisions: they need to take big ones to ensure the UK is not going backwards but forwards. The Government is likely to comfortably meet its economic targets this year, but sustaining growth thereafter depends on taking some very big decisions right now, not waiting until 2024.

In a major speech today (Monday) at UCL, the Director-General of the CBI, Tony Danker, will say that “Growth still matters. This is people’s livelihoods and life opportunities. The PM set out less than a year ago what is needed to transform our economy. The ideas are there. Let’s stop second guessing ourselves and get on because there is money on the table to capture right now.”

Danker will go on to argue that “our international competitors in Europe, Asia and the US are going hell for leather on green growth and getting firms investing. We are behind them now and seem to be hoping for the best.” Early data shows that the UK could stay stuck in a low growth trap as the major drivers of productivity grind to a halt. This makes the Chancellor’s Spring Budget a key point in the Government’s turnaround strategy. But there is grave concern that the Government could “shy away from the hard decisions that can reverse the UK’s trajectory’ with a General Election on the horizon.”

In his speech, Danker sets out four big solutions:

(1) Replace the soon-to-be expired super-deduction or watch investment tail off.

• Danker will outline a new Investment Tax Roadmap proposal for the coming Budget with staged uplifts to full expensing – providing certainty to underpin confidence in the UK’s investment environment. The Spring Budget needs to be the moment to see a significant uplift to capital allowances, to at least 50%, before moving to 100% within three years. 
• With the super-deduction, the UK had the fifth most competitive tax system in the OECD for capital investment. Without it, we could be back to 30th out of 38 – at the bottom of the pack, just like our business investment, which ranks alongside Turkey and Greece.

Investment incentives allow firms to offset certain capital spending against their corporation tax bill and the super-deduction was widely used by CBI members – more than half reported that they would use the scheme in 2022. At the same time this ends, Corporation Tax will rise 6 points overnight. This double whammy makes the UK less competitive and less likely to see firms investing. 

(2) The UK needs to up its game on green growth in response to fierce global competition for market share. The UK cannot compete with US and EU subsidies so it must be smart and strategic

• The CBI estimates that £4.3bn in European green growth market value will be lost by 2030.
• Green growth is one of the big opportunities in the coming years for the UK economy, so the Government must improve its record of delivery, in particular by reforming consent process for green infrastructure.
• It needs to bring forward market-making mechanisms like the Contract for Difference that have proven success in renewables and could be applied to other promising technologies like hydrogen, carbon capture and sustainable aviation fuels.
• The Government needs to use regulation to stimulate domestic demand for green technologies as is being done for electric vehicles.

Green growth is one of the big opportunities in the coming years for the UK economy. Automotive firms are increasingly moving towards electric vehicle production – currently the UK is estimated to lose out on around £3bn in EV assembly and battery production by 2030. 

Hydrogen electrolysers offer carbon-free routes to fuel, power industry and production of chemical gases. The UK has slipped 1% in the global production market since 2020 which will account for £1.3bn worth by 2030 lost. 

(3) Outline a bigger and bolder approach to tackle chronic labour and skills shortages. 

• The Government wants to reduce the UK’s rocketing inactivity. And if the Government wants to reject using economic migration to fill immediate vacancies – something business disagrees with - then their labour market interventions must be the boldest in the world.
• The Government needs to develop credible pathways back into work for those who’ve had to leave, fixing tapers, cliff-edges and disincentives that exist in the benefits system and childcare support. 
• Businesses must play their part - many firms have already developed successful programmes to support people back into work, but more should ensure that their offer to employees, including on skills and benefits, keeps them from leaving the workforce.

There are more than one million job current vacancies in the UK with many firms across multiple sectors struggling to fill roles.

(4) Mirror the serious reflection and consideration of Sir Patrick Vallance’s review of future regulation when approaching the EU Retained Law Bill. 

• There are real opportunities for the UK to regulate markets more smartly than the EU but the Government’s current plans for the expiration of EU-generated law risks throwing industry into some chaos just at the time we’re trying to exit recession’ at the end of the year.

The Vallance Review will work with industry to advise on pro-innovation regulation in key growth sectors, including: digital technology; life sciences; green; creative industries and advanced manufacturing.

Speech Excerpts

On growth Tony Danker, CBI Director-General, will say:

“And why do we care so much about Growth? It isn’t about economics. Or politics. It’s about people. People in this country who’ve had pay rises but not as high as price rises; people who know their jobs are changing and want to be reskilled or upskilled for new and better-paid jobs. This is about people who recognise that the health service needs more money; schools need more money; transport needs more money. But there isn’t any more money. Because there isn’t any growth.

“Now, I am no doomster or gloomster. I am a British boomster! And I’m not here today to talk the UK down. I believe the Prime Minister and the Chancellor have done a really good job of stabilising our economy after the fallout of the Autumn. Both – alongside the Business Secretary and the Trade Secretary - are solid proponents of growth. The Chancellor upheld high levels of capital spending despite requiring a £55bn consolidation in his budget. And he’s begun to sow seeds to return to, in his March Budget.

“Despite an election looming, there is also consensus around what we need: higher levels of business investment, the right labour market and skills; and Britain winning in future innovation markets. So, the imperative and the opportunity for action – especially in the upcoming Budget – is now.

“But I’m also a realist. And denial of where our economy is right now compared to our international competitors, is the surest way to leave the UK’s growth prospects faltering this decade. The current CBI forecast is that the PM should comfortably hit his pledge of getting the economy growing by the end of the year – by 0.1%. But my argument is that if our policies today aim for 0.1% growth, it’s the most we’ll ever achieve”

On capital investment, Danker will say:

“As Chancellor, Rishi Sunak accepted that the UK’s tax incentive regime for investment is lower than the OECD average. But, as of right now, the super deduction – which expires in a few weeks – is not set to be replaced. With it, the UK had the fifth most competitive tax system in the OECD for capital investment. Without it, we’re back to 30th out of 38. Just like our business investment, which ranks alongside Turkey and Greece.

“The CBI forecasts UK business investment to fall this year, and to still be 9% below its pre-pandemic level as 2024 ends. And, across the country, I’m speaking to firms putting their investment plans on ice because they need to divert cash to deal with higher energy costs, higher wage bills and higher tax rates.

“The UK’s problem of low business investment isn’t behavioural, it’s structural. That’s what makes the rationale behind the super deduction – and the PM’s original commitment to replace it – so powerful.

“This incentive alongside an overnight six-point increase in corporation tax would be a cultural game-changer. You can manage your business however you want, but if you hoard cash and focus on profit-making to pay your shareholders, you will pay more tax. If you reinvest, you’ll pay less.

“So, let’s finish the job the Government started. We propose full expensing for capital investment. It’s not about a more generous tax system but using it in a smarter way. It allows us to raise investment now – by enabling cash to flow back to firms when they make their investment, not drip feeding the benefits, sometimes over 30 years.

“The Government have said they believe in this policy but can’t afford it. That’s because they don’t want the hit to their annual accounts. I don’t think that’s good enough and nor do Britain’s investors.

On green growth, Danker will say:

“The Skidmore Review is devastating. And echoes CBI analysis of the UK’s performance against our competitors in future green industries. The UK is falling behind rapidly – to the Americans and the Europeans, who are outspending and outsmarting us.

“We’re behind the Germans on heat-pumps, insulation and building retrofits, the French on EV charging infrastructure, and the US on operational carbon capture and storage projects – despite the UK’s North Sea advantage. We’re lagging all three on hydrogen funding.

“We are leaving huge amounts of money on the table here. In the last two years alone, the UK has lost market share in green tech, equivalent to the potential value of £4.3bn by 2030.

“That’s approximately £3bn in EV assembly and battery production, and £1.3bn on hydrogen electrolysers. Even before we get into the growth possibilities of emerging tech, like Carbon Capture and Storage.

“While our competitors across Europe, Asia and the US are making their move – and going hell for leather, we seem to be second guessing ourselves – and hoping for the best. It’s time for us to take those hard decisions, generating the forward momentum not only to limit recession this year but also get us really growing next. And in turn, deliver wages that really are higher; skills that really do matter; and public services restored at last.

“Let’s get back to winning not losing in green by making smart regulatory changes and using public money specifically to unblock private sector investment.  We did this on offshore wind – we can repeat that successful formula.

“The UK Government protests that it’s increased its green investment. But we are not racing against ourselves. We’re in a race with our competitors, and this is where the lion’s share of growth for Britain will come – or not – in the years ahead.

On regulation and the retention of EU laws, Danker will say:

“On the UK’s regulatory divergence from Europe, the Government is convinced this is a major opportunity for growth. I agree it can be too. But it’s a bit more complicated than scrapping overnight many of the terms of trade we’ve used for decades.

“I’ve never felt Brexit was about the economy. It was about sovereignty.  But now we’ve done it we must explore the potential prizes.

“Divergence is high-stake politics and economics. Often, we don’t consider the EU’s possible counterplay, and where they could outcompete us. We also need to recognise that divergence will often shrink our market size or add a skip-load of red tape.

“While it can definitely work – witness the historic success of the City of London and our rapid Covid vaccine approval – you have to run the numbers to make sure it’s not a complete own-goal. And it will take far more than a regulation play to make the UK win global share of global sectors. So do it smart, do it where appropriate, and do it when government and business are ready for bold and joint action.

The Chancellor has appointed Sir Patrick Vallance to lead a thorough review into securing possible prizes in five high-growth sectors. This is the right approach. Serious reflection and consideration.

“The complete opposite in fact of the Retained EU Law Bill -– which says that at the end of 2023 all retained EU law in the UK expires. It’s creating huge uncertainty for UK firms.

“Companies are asking will we really erode maternity and paternity regulation or health and safety standards like the General Product Safety Directive? Or rapidly change regulations on REACH, which governs the use of chemicals? With billions of pounds of industry costs? Or create the potential for firms being underinsured because it’s harder for analysts – who don’t know what laws will be retained – to effectively price risk into products?

“Do we really want to subject the public – and industry -– to another round of mass confusion and disruption, just when we’re trying to exit recession. Is the Prime Minister really going to undermine his own second pledge of five -– to get the economy growing this year?

“Instead, let’s review, retain, reform and – where appropriate – repeal EU law the Vallance way. Smartly. Not the Retained EU Law Bill’s way. Foolishly.

On people and skills, Danker will say:

“Everyone in politics agrees, the UK’s labour market is struggling.

“In the wake of the pandemic, tens of thousands of older workers have left the workforce. There is a growing number of people unable to work because they’re experiencing long-term ill-health. Just when the NHS is on its knees trying to cope with current demand.

“Childcare is expensive in the UK – amongst the highest in the OECD. And it’s keeping parents who want to work at home or limiting their hours.

“While automation is increasing in some sectors, it’s harder to do in others. And the post-Brexit immigration system is very expensive for higher-skilled roles and doesn’t offer a solution at all for where some of the most acute shortages exist today.

“And in skills – just 24% of the UK’s public education spending goes to post-secondary education and vocational training and skills compared to the OECD average of 66%. That’s the smallest percentage of all 38 OECD countries.

“These are complicated issues that require a multifaceted, joined-up response. They call it a labour market for a reason. But we don’t have that currently – with different Whitehall departments all responsible for dealing with different parts of the problem. And no-one is accountable for the overall impact of the different solutions deployed. That matters.

“I share the politicians’ ambition for a high-wage, high-skill economy. But it’s currently an empty promise. Because we aren’t paying anywhere close to what it takes for higher skills. And we’re not letting immigrants help do the lower-skilled, lower-wage jobs every economy has. There are high-wage, high-skill economies who’ve all made different choices to UK political parties. Serious and honest choices. I worry our politicians are just trying to change the conversation.

“Economic migration to improve labour supply has been rejected by the Government. If that remains their choice – and I disagree with it - then other labour market interventions must be fast and substantive to try to compensate for that choice.”

“I want companies to play our part here too. From long term sickness, to prevention, to training – employers will be and must be at the forefront of this work.”