CBI South East Regional Dinner
Baroness Shriti Vadera, Minister for Economic Competitiveness and Small Business (jointly with Cabinet Office)
Gatwick, 12 June 2008
Thank you Graeme for that introduction. As you acknowledge we’ve made progress in some areas but we know there is no room for complacency in any area, not least in the current global economic climate. And the acid test for BERR’s performance is not if we can deliver for business in areas under our remit, but if we can ensure that the voice of wealth creators influences all policy.
The four areas you chose - tax, skills, innovation and a reduced burden of regulation are key to us delivering for your success and therefore Britain’s long term competitiveness. I would add a 5th - continued investment in infrastructure, whether in transport or energy. These have been our priorities in the last 10 years and are central to Britain being able to win from the opportunities of globalisation. The opportunities from a doubling of global ouput, a billion more customers in the next 20 years and a global middle class that will grow twice as fast as the rest of the population.
I know that we’re currently facing a testing time in the economy, but I really truly believe this century can be Britain’s century. Globalisation plays to our strengths: we have one of the most open and flexible economies in the world. Our businesses are global leaders. We have a history of free trade, creativity and innovation and we own the international language of business.
You know and face everyday the challenges of global competition unleashed by technology and the rise of emerging economies. But the south east has shown us we can compete successfully.
You are a true engine of our economy whether illustrated by output - the largest share of any UK region outside of London; by exports – the largest share overall; by job creation – the largest rise of any region outside London. Or as I saw when I met with large and small businesses in Slough last Friday, through innovation. Jim Brathwaite and I spoke to some of you who I can see in the audience and I was impressed by your constant adaptability in the face of competition.
The government’s job is to help you in the areas you identified and create the best place in the world to do business and to start and grow a business. I want to respond to Graeme’s concerns but then also to talk about current economic conditions.
Firstly, tax - I know that for you - stability, certainty and predicability as well as the overall burden of tax are key. We are committed to consult, listen, take advice, respond and ensure that businesses can plan effectively for the future. And that is why the chancellor has set up the multinational tax forum which Richard Lambert sits on.
I'm not going to tell you getting business tax right is easy in a globalising world with rapidly increasing cross border activity and production chains fragemented across the world.
And i'm not going to tell you there isn't a balance to be struck. We have to fund priority areas, especially skills and infrastructure also vital for business competitiveness. But we know we have to maintain tax competitiveness and incentives to invest and grow.
I would like to put the issue of tax competitiveness in context:
- CGT is less than half what it was in 1997 and one of the lowest amongst all the significant economies in the world.
- the small companies rate, which 95% of UK businesses pay, is lower than in 1997 and the lowest effective marginal rate in the G7.
- on corporation tax. It is the lowest we have had in the UK and the lowest headline rate in the G7.
But we know that competition is no longer just the G7 or Europe and that the source of competition is changing as economic weight moves from west to east. Obviously the UK does not aspire to compete with tax havens. But we know tax rates have to be globally competitive and businesses cannot be the fiscal fall guy. As the Prime Minister and chancellor have said our aim is to reduce corporation tax even further when we can afford it.
More than any other issue I believe the globalisation challenge is a challenge about people. The creation and utilisation of skills and world class research and scholarship. The countries that rise to this challenge will succeed and those that do not will fail.
I can assure Graeme that the decision to allow employers to award their own qualifications was not a flash in the pan. We know we need to go further in simplifying the skills system, making it more responsive to business needs, and being much better at anticipating and responding to strategic skills shortages.
I also believe we need to work together to raise leadership and management skills, which research suggests account for ten to fifteen per cent of the productivity gap between the UK and the US. We will be increasing funding for leadership and management training for SMES.
On regulation I am determined that we meet our target of cutting 25% of the administrative burdens of regulation by 2010, saving businesses £3.5 billion per annum. Indeed we were instrumental in persuading the EU to follow suit in setting a 25% target by 2012.
In the last few weeks, I’ve had meetings with businesses who for the first time have told me that they can see the impact of some of the things we are doing on regulation. I don’t want that to be misinterpreted as complacency on my part. It’s just that after years of effort, I was delighted that there was some impact being felt on the ground, which after all is the only thing that matters.
We recognise we need a different approach to the flow of regulation. One that treats the cost to you as a real cost to government. I know from my time at the Treasury what government departments respond to – budgets. And you know that from running your businesses. So – as a world first - we will consult on the introduction of a new system of regulatory budgets for departments that would limit the cost that can be imposed on you from new regulations.
On innovation: we all know Britain can compete; not because of raw materials, capital or low wages, but because of its creative ideas in products, processes and services that can be turned into profits.
We understand, however, that innovation is about more than spend on science and R&D, although they are an important foundation. Much of our continued economic success rests upon a different brand of innovation that is not captured by the traditional science and R&D metrics.
For example, our new manufacturing strategy which we will publish later this year shows that manufacturing investment in intangibles such as design, brand and training is outstripping traditional measures of capital investment in the sector. And I must say it never ceases to amaze me how much manufacturing remains the unacknowledged success of the British economy.
You will also find John Denham is totally convinced of the power of government procurement to drive innovation. His department continues to work on how to realise this potential. For example, each government department will be required to have an innovation procurement plan to create a demand-led pull for innovation.
In addition to these issues I said that we believe long term investment in infrastructure is essential to underpin business activity. Real term expenditure over the last five years on rail and road in the south east has increased by almost half, bringing much needed improvements for example to the M25, the A3 Hindhead tunnel and Reading station.
The planning bill currently going through parliament will bring a much needed shake-up, along with the government’s review of delays and unnecessary burdens in the planning application process.
While these issues are vital to deal with now in order to prepare for the medium term, pictures of fuel and food driven demonstrations and conflicts around the world are salutory reminders of events in the international economy.
I know that many of you will be facing an uncomfortable time with a combination of sudden rises in oil and fuel prices creating pressures on margins, weakening consumer confidence or even tighter credit. I understand certain sectors are particularly under pressure. Such as construction and energy intensive companies, and those like retail directly facing reduced consumer spend in the last few weeks.
But like Martin Broughton i think it is important not to talk ourselves into thinking that is all doom and gloom. We are well placed to weather the storm compared to previous times and to most of our competitors. Employment is high, the corporate sector recorded a surplus in excess of 2% of GDP, corporate profitability has been high, debt is relatively low and the overwhelming majority of investment is funded from retained profits. Despite risks, the IMF still expect the uk to be the fastest growing economy in the G7 in 2008.
As you may have seen from the Prime Minister’s press conference earlier today, he and every member of government has committed as our highest priority in the coming year, action on the economy. We will bring forward measures to help businesses and households for the short and medium term.
The recapitalisation of banks we all hope bodes well for stability in financial services. But of course we remain vigilant. We will continue to act when we need to, for example with provision of the bank of england’s liquidity facility. And we will provide assistance where we can. For example with first time buyers or small firms that have problems accessing credit.
While there may be an element in the oil price of investment fund activity and the decline of the dollar, there is an underlying long term shift in the global economy that we need to understand and be prepared for. We have already seen many gains from globalisation by way of cheaper goods and dis inflation exported by china in the main. And we will continue to benefit from the productivity gains of global competition and technological diffusion.
But we are now also beginning to see some of the flip side – international inflationary pressures and increased demand for commodities, especially oil and food from both an increase in population and in prosperity. An American population of 300 million owns 240 million cars. 1.3 billion Chinese are not going to be satisfied for long with their 37 million cars. We can do the math for oil demand.
We will continue to work with business and consumers to reduce oil dependency and also meet our environmental targets through both energy efficiency, substitution and new technologies. And we have made a clear decision about investing in a new generation of nuclear power to replace existing capacity. And as John Hutton has said the government would like to go further and see nuclear supply a greater proportion of the country’s energy mix.
Dealing with demand is the first step but even with these measures we know global oil demand is growing faster than supply. And it is the volatility from reduced spare capacity and the forward price of oil that remains as much of a problem for business investment as the spot price. And of course the price of most commodities is linked to oil.
It will not be lost on you that the two commodities creating problems – oil and food – do not in fact function as effective international markets.
Structural increase in demand from the middle east and from china and india – account for half of the increase in demand. But subsidies by these and other countries amount globally to $250 billion each year which reduces responsiveness to prices.
On the other hand supply is not increasing as you would expect despite the fact that reserves are not a constraining factor in the medium term. Over 70% of oil production and 90% of proven oil reserves are controlled by nationally owned state companies who have technological and capital constraints in managing reserves and exploiting marginal deposits. So capacity constraints abound. And this is before of course we consider security and political difficulties in some oil producing countries.
All of us in this room believe in open markets and know that, however tempting and expedient, the wrong reaction to these challenges would be price controls, subsidies and what some have termed “resource nationalism”. This is a global problem and the only real solution has to be global.
We are committed to improving the functioning of energy and oil markets and are discussing bilaterally and at the eu and g8 a series of detailed proposals that we have made. Uncertainty of future trends in demand during periods of high prices has historically put oil producers off investment. So we need clearer signalling and transparency of short and long term demand from all the major oil consumers and we need to remove the barriers to investment and capacity in oil producers.
While we obviously do not control these – they are international actions - we punch above our weight on the international stage. The Prime Minister has committed himself to personal leadership on this issue.
Following his discussions with the king of Saudi Arabia and several G8 leaders about a producer consumer dialogue, the Saudis have convened a high level meeting in Jeddah a week on Sunday which the Prime Minister will launch with King Abdullah.
And I commit to you, I will do everything i can to ensure that as a government, front and centre of our mind will be the immediate pressures you face. And we will continue to focus on improvements we need to make to the business environment with tax, skills, innovation, regulation and infrastructure. We will not ever forget that you are the source of the prosperity and success we have enjoyed and that we need to ensure we do everything we can to maintain your success.
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