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Charles Levy
Senior Economist
Charles  Levy

Autumn Statement needed less on populist, wasteful measures and more on capital spending

Authors: Charles Levy Charles Levy

06 December 2012

Last week, I argued that this year’s Autumn Statement would be one of the most difficult economic speeches delivered for years. Unfortunately yesterday's statement was modest and immediately forgettable.

As we argued in our submission, the UK faces a growth problem, and without significant economic growth the recent labour market recovery can not be sustainable. We urged the chancellor to fully commit to this agenda by setting out a credible strategy. While the statement had its highlights, it appears the chancellor has repeated too many of the mistakes of the past and spread his bets too thinly.

A £5bn capital spending package is exactly what is needed. Increased spending on roads, rail, broadband, science and research infrastructure, further education and new schools are all things we have called for since the start of the recession. Increasing the size of the Regional Growth Fund, new monies to help Local Enterprise Partnerships and funds to support firms who are trying to export are all to be welcomed.

The trouble is that yesterday the chancellor also spent billions on three costly, and rather wasteful measures:

  1. Further corporation tax cuts – costing £875m a year by 2016/17
  2. Dramatic increases in tax allowances for plant and machinery – these will cost £910m in 2014/15
  3. Scrapping the rise in fuel duty – costing £1,600m by 2013/14

The appeal of each of these is easy to understand. Corporation tax cuts must surely make the UK look attractive to foreign investors. Everyone can understand how buying a new digger would increase the output from a highways maintenance firm so surely larger capital allowances are to be encouraged. Half the country must buy petrol or diesel so directly benefit. The trouble is that these policies are expensive, have a high deadweight cost (they subsidise activities that would happen in any event) and reflect an out of date understanding of how our economy creates value.

Corporation tax rates are only one of many factors that investors consider when looking at the UK. The activities likely to be influenced by price signals such as these shouldn’t be central to inward investment strategies. We can not aspire to become a low-cost destination. Growth will not come from doing more low-wage work; instead we need to focus on boosting the unique strengths of the UK. This will attract high-value businesses to invest. This means a relentless focus on what drives innovation.

Tax allowances for plant and machinery are another cost measure, but worse are ones biased towards a narrow segment of our economy. Our modern knowledge economy increasingly creates value from investments in intangible assets, brands, research and development, human and organisational capital. Even in manufacturing, this type of policy could push businesses away from models such as manu-services which, in many cases, offer the greatest opportunities for the sector.

While scrapping the fuel duty rise will benefit a great many individuals and organisations, it will only be a marginal gain. If the UK is going to create the next generation of high growth firms, if we are to nurture the next Google, the next GlaxoSmithKline or the next Unilever, then the evidence suggests that these firms need more. It will take significant and specific investments to build a new generation of managers able to lead the next wave of these firms. An overhaul of our financial services will be expensive. Industrial policy needs significant backing if it is to support the development of new markets.

This means that this Autumn Statement is a real missed opportunity.

Comments in Chronological Order (Total 2 Comments)

Hoover

13 Dec 2012 9:36AM

I don't understand who will provide the £5 billion this article asks for.

Charles Levy

13 Dec 2012 3:22PM

Had the chancellor avoided the cuts in corporation tax, investment allowances and fuel duty (things I don’t think will kick start a recovery) then he would have had more than enough funds available to double the capital package.