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A letter to the MIA from the CBI Director-General
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A letter to the MIA from the CBI Director-General

Richard Lambert's reflections on the coalition's first 100 days:

"Dear Member,

One hundred days into the life of the coalition government seems like a good moment to review its progress so far from a business perspective. The following impressions are based on discussions with CBI members across the UK in recent weeks.

The overall judgement to date is positive. Business has a strong interest in the success of the coalition – the last thing it wants is a period of drift and political uncertainty. And it has been impressed by the speed and direction of policy-making to date.

This applies in particular to the government’s determined efforts to get the public finances back into shape. June’s Budget was seen as bold and audacious, and it needed to be.  Although there are many risks and uncertainties ahead, the dangers of inaction on fiscal policy seemed to most business people to be even greater, given the unsustainable policies inherited from the previous government.

And it is not just in economic matters that this government is turning out to be more radical than expected. In the early days, the concern was that the price of agreeing a coalition would be hesitancy, and a tendency to choose the lowest common denominator in forming new policies. If anything, the worry now is that the government is attacking on such a broad front – with big reforms proposed in the health service, education, policing, welfare and more – that the process might start to become unmanageable.


Those changes that most directly affect business conditions can be grouped under three broad headings: a green light, meaning that policies are seen to be heading in the right direction; amber, where there are still some business concerns about how things might work out; and red, where companies fear that new policies might adversely affect job creation and economic recovery.


Green light


Fiscal policy. Public borrowing in 2009-10 hit a peace time record, equivalent to 11 per cent of gross domestic product, and the IMF said in May that the deficit this year would be the highest among the G20 countries. The June budget promised to fix this problem largely within the lifetime of the current parliament, with borrowing down to 2.1 per cent of GDP by 2014-15 – a much faster retrenchment than had been proposed by the Labour government. And just as the CBI had argued, the Chancellor proposes to do most of the work by cutting spending, rather than raising taxes. This makes sense for two reasons: first, a heavier weight of tax increases would have damaged recovery prospects, and second, the size of the state has ballooned in recent years, with public spending up from 37 to 47 per cent of GDP since 2000.


Of course there are anxieties about this programme. One is that capital spending faces heavy cuts, with damaging consequences for the UK’s infrastructure. The government should indicate that the balance here will be restored once the economy has recovered. The same applies to the current high level of personal taxes. They may be politically necessary now, but they will need to be reduced over time.

Some have argued that the government should also propose a Plan B – a less aggressive approach to public spending cuts that might need to be adopted if the economy fails to gather momentum in the coming months. But the increase in VAT planned for the New Year could always be delayed if necessary, and now does not feel like the right moment to be taking the heat off the spending departments.


The Chancellor’s approach to corporation tax also gets a green light. He has recognised the importance of certainty and consistency in business tax policy, and although there is little room for cutting rates now, he has set out a strategy that will make the UK a more competitive place to do business in the years to come.


The coalition has not yet had very much new to say about deregulation since the election. But its general approach and the tone it uses in discussing this vital issue also qualify for a green light.

The decision to undertake an urgent review of public sector pensions gets a bright green light. The present arrangements are building very large liabilities for future generations of taxpayers, and are completely out of step with private sector provision.

Amber light


Innovation and skills. Business recognises that the necessary spending cuts will be very painful. But election pledges to ring fence the health service and overseas aid, and subsequent promises to give relatively favourable treatment to education and defence, mean that unprotected departments could face truly savage spending cuts.


This is a particular threat to the Department of Business, which spends most of its budget on items that are critically important to future innovation and economic growth in the UK – namely, further and higher education, and science. Universities have been threatened with cuts of 35 per cent between 2011 and 2015, which would have serious consequences both for them and for their contribution to economic dynamism. There is a clear risk that future growth prospects could be damaged if the cuts are so heavily biased in this direction.


Energy security and climate change. The government has not yet shown a sufficient sense of urgency about the need to develop a diverse supply of low carbon energy at competitive prices over the next decade. And its approach to climate change appears to place too much weight on very expensive renewable sources like wind power and micro-generation. New coal-fired power stations will not be allowed unless fitted with as yet unproven technology for carbon capture and storage, and recent warm words on nuclear now need to be backed up with action.


Rather than vague promises to make even further cuts in greenhouse gas emissions in the next decade, the priority should be to provide certainty and consistency in policymaking underpinned by clear economic analysis, and to set out a pathway to establish the kind of robust price for carbon that will be required if the £150 billion investment needed in low carbon generation is to go ahead in a timely way.


Financial reform. The coalition has made a good start in its plans for a radical upheaval in City regulation, and the sense of direction is now much clearer than it was ahead of the election.


But there is much more to be done on the banking side. Banker bashing is still in vogue, and little progress has been made in setting out the regime under which banks will be expected to operate in the future. So they remain under a cloud of uncertainty – about their capital and liquidity requirements, and about whether their existing structures might be forcibly changed by government mandate. While that uncertainty remains, banks will be cautious about supporting the credit expansion that the economy is going to require in the next few years.


Trade. The Prime Minister has shown a welcome support for multilateral and bilateral trade negotiations, and for British business in the international marketplace.  But it seems odd that a dedicated trade minister has not yet been appointed.


Red light


Regional development. Most CBI members do not want to die in a ditch in defence of the Regional Development Agencies, although the further north you go in England, the more they will be missed. But there is real concern about the approach so far to the proposed Local Enterprise Partnerships between business leaders and local councils that are intended to take on some of the RDAs’ role. Although the government says they are to be business-led, it is not clear where the real power will lie, and nor do we know how many LEPs there will be or how they will be funded. Some business leaders fear they will turn out to be no more than council-dominated talking shops with no sense of strategic priorities and little economic impact.


Planning.  The government’s promised approach to this vital economic issue was always likely to worry business, and indeed it has. It is too soon to judge how the promised abolition of the Independent Planning Commission will affect approvals for major industrial projects in the UK: what we need here is a clear timeframe for decision making in the new system.  But the decision to abolish the Regional Spatial Strategies, which had the authority to override local opposition to new housing, is already causing hackles to rise. Some house builders fear that the new policy is a recipe for nimbyism. Others worry that approvals for new projects will go on hold until the government develops its plans for incentivising local councils to approve new homes, and that could take some time.


Retirement. The decision to abolish the default retirement age should not have been made without measuring the potential regulatory cost. Workforce planning and staff development will be harder to manage, and there is a risk of increased litigation as a result. Government now needs to make the transition as workable as possible for both employers and employees.


Conclusion


Of course, 100 days is far too short a period in which to form a serious judgement on the new government. The real testing time will come in the months and years ahead, as its completes and implements its spending reviews, as it converts its raft of new policy proposals into practice, and as it faces the opposition which is bound to build in intensity against many of its initiatives.


But the verdict of the financial markets is “so far, so good”. The trade-weighted value of sterling has climbed by 4 per cent over the past 100 days, while the spread between 10-year bonds issue by the UK and German governments has narrowed somewhat. UK equity prices have fallen a little, but no more so than  in other big European economies.


The business community broadly shares this positive view. There are lots of stresses and strains to come, and the government is going to have to work very hard to sustain business and consumer confidence in the difficult months ahead. But CBI members in general are taking a much more positive view of Westminster than was the case a few months ago.


As always I would be very interested to hear your views – especially if you think I have missed important points, or got the tone wrong.

 

Best regards

Richard Lambert"

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17-Aug-2010
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