The private sector has to lead on the UK Government’s levelling up agenda by driving the scaling up of industry clusters identified as having global potential, including the compound semi-conductor initiative in South Wales, says director-general of the CBI Tony Danker.
On a visit to Wales, Mr Danker said he would be supportive of a Welsh Government seeking new powers to provide more favourable investment deduction and tax credits as a means of attracting inward investment and boosting skills and clusters, rather than any devolving of corporation taxes.
On the UK Government levelling up agenda, he said the CBI last year had identified a set of priorities to level up the UK economy, through its Seize the Moment agenda, including driving the international competitiveness of the UK’s nations and regions over the next decade.
He said: “Our main prescription for that (levelling up) has been a private sector response rather than a government one. What the levelling up White Paper tries to do is essentially rewire the way central government spends money to level up the allocation of funds. I think that is necessary, but not sufficient.
What you need is high value sectors with high value firms, jobs and wages in every part of the country. Therefore, the private sector's levelling up strategy is what really interests us. And our major thinking has been around cluster development and what is likely to drive, in places like Wales, more high quality jobs, wages and skills. It is distinct local competitive advantage, combined with private sector commitment to invest, and in turn partnerships with institutions like universities and colleges. And here in Wales we are excited about the compound semi-conductor cluster, which I feel has real potential.”
He added: “What we want to see happen is government policy far more orientated towards the development of private sector cluster success, because everything in government white papers and everything that the Welsh Government might do, doesn’t really change the economic prosperity of people’s lives unless it engages the private sector in driving up value added.
“So, what has never really been done is that you go to areas where there is clear potential and already anchor institutions and the private sector investing to ask them, ‘what do you need for this thing to scale?’ And if we want the Welsh semi-conductor cluster to really be the best in the world you ask what it would take for us (private sector) to put in real money and build one clear economic success with secondary support service sectors around it, which in turn has a trickle down effect on the economy. And I think that is what you will start to see once you do serious private sector driven cluster development.”
Corporation tax
He said cutting corporate taxes, apart from the Republic of Ireland’s success in having a markedly lower rate than European competitors - although there is now a global agreement on closer tax level harmonisation - as a government intervention aimed at boosting economic output, can be overplayed. The UK Government is on track to increase the main rate of corporation tax from 19% to 25% from next year.
Mr Danker said: “I wouldn’t overreach on how bringing down your overall corporate tax transforms the game. It does if you go as far as the Republic of Ireland did, but I don’t think with George Osborne having done it you could claim it was an overnight success. However, if you were to say to me the Welsh Government would be much more interested in thinking more aggressively about investment deduction, or tax credits or deductions for inward investment, clusters or skills developments, then I do think those things would have a behavioural effect.”
Mr Danker said Chancellor Rishi Sunak, in his recent Mais Lecture and Spring Statement, was right to prioritise measures to support increasing business investment, which is seen as key to improving the UK’s relatively poor productivity levels.
The director-general added: “The three areas are around incentivising capital investment, which is what comes after the super deduction, R&D and innovation and also skills so that we don’t just have the Apprenticeship Levy. So, that is incredibly good news, but the Chancellor is not going to do anything about those things until October, but I am highly confident that he will as he deeply believes in it and we have talked to him and his officials about that for a long time.
“However, in the short run I think it was a judgement (Spring Statement) that he doesn’t need to go further on consumption or on business confidence until October. That is the risk inherent in the judgement that he took.”
Asked if investment was more about the mindset of individual firms, rather than government levers on reliefs, he said: “I agree with that, but we have to ask, 'do we think in aggregate that this should be a high innovation, high skills and capital investment cycle?' I think it should be, as first of all we are coming off the back of six years of inactivity by UK firms because of uncertainty with Brexit followed by Covid, which meant they haven’t invested. And I am definitely seeing people coming out of the blocks looking to invest, grow and innovate.”
Economic picture
On the economic outlook, he said the war in Ukraine had changed the narrative, after positive tailwinds from the ending of Covid restrictions earlier the year.
He added: “I think it has changed because of the war, but I don’t think it has gone completely the other way as people have still got growth and high levels of demand, but the overall war situation effects business confidence to invest. If you think about the cost of living crisis it is hitting a lot of poor people now. It is not hitting people like me, but it will start to hit everyone towards the end of the year. So, there is now a concern about the overall economic climate. The one thing that is most immediate is energy costs for firms many of whom having renegotiated their energy contracts have seen a three to four times increase.
"The energy increase is a big deal and the only positive light at the end of the tunnel, and I have been talking to Welsh firms about this, is that business leaders are pretty resilient after two years of Covid. They kind of feel confident that they will be able to cope somehow. However, on the flipside there isn’t anybody leading a UK company today that was leading one 30-40 years ago when we last had high inflation, so it is new for all of us.”
Exports
The Office for Budget Responsibility (OBR) last month forecast that UK international trade would continue to be 15% less than if the country had remained in the EU.
Mr Danker said: “I think the truth is it has been very hard to unpack Brexit-related factors, both in terms of skills and export markets. That said the OBR was pretty clear before that there is a 4% hit to the UK economy. If you are what I would call a superstar exporter, which means say you are exporting 10 products to 10 countries, you are therefore practiced at the art of exporting and those guys keep exporting regardless. The problem is, and what I think we are going to see a lot of, is SMEs that were exporting to one or two markets and they were all in Europe - and by the way around 90% of SME exports were to the EU - and that is too painful now.”
On revisiting the UK’s trading relationship with the EU, he said: “I think the only real agenda at the moment is can we resolve the Northern Ireland Protocol situation, because if we can I think there is a high level of confidence that both sides will, once the political tension is removed from the relationship, become much more pragmatic about making the current TCA (Trade and Cooperation Agreement) work.”
On the relationships between the devolved governments of the UK and the Westminster one, he said: “The variability in Covid restrictions clearly illustrated that economic and political borders are not the same thing. That variability might have made political sense, but it made no economic sense. I am not questioning who was right on the Covid calls (restrictions) amongst the devolved leaders, as that is absolutely not in our lane, but what I am saying is it revealed that we do have an economy that crosses devolved nations’ borders. That means that business want maximum alignment and co-operation between devolved nations and Westminster as it is just good business. “
GDP measure
Asked whether the traditional way of gauging the standing of economies through the lense of GDP and gross value added needed to be revised due to the impact of seeking continued global growth on climate change, he said: “There are a lot of people who think GDP isn’t the right metric anymore, but I am less convinced by that argument. That argument for me is often the argument of very middle class people who think there is more to life than earnings. I don’t subscribe to that point of view.
"However, I do think that the way we think about accounting and investment in government absolutely needs to change because of climate concerns. So at the moment the Treasury and the national accounts would score building a hospital the same as building renewable energy. It is just not (the same), as building renewable energy has a fundamental and existential issue for us and in the long-term an economic one as we know getting to net zero will get harder the longer you defer it. There is currently nothing in government accounting that recognises that and I think that should change. But should we all get off GDP and start to measure happiness? No.”
Energy strategy
On the UK Government’s new energy strategy, expected to be published next week, he said: “All the CBI members that are players in this sector would tell you, that it is expediting of things like planning and regulatory approval where all this falls down.
"What my message to government would be that the MHRA proved that you can do high-quality regulation fast and they did vaccine approval in four months that would normally take four years. The energy strategy next week doesn’t have comparable acceleration for approvals, planning regulations and business model agreements to unlock private sector investment.”
