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Then again, the threatened exodus of companies relocating themselves abroad in response to government plans to tax foreign profits shows how easily the wrong decisions can undermine our country’s competitive appeal to international businesses. International competitiveness is fragile. You have to work to maintain it every day, and then come in the next day and, maybe, start all over again. There is immense mobility in a modern economy and unprecedented freedom to relocate. Tax is a major consideration for any business, and poorly thought-out action by government may win a headline one day or a party conference cheer the next, but it is not much good when the lights go out in offices across the City of London. Imposing tax on worldwide income will inevitably impact on the UK’s competitiveness compared to other countries, not just tax havens but other EU states.
I am ready to join those who salute the benefits of economic immigration, but economic emigration is far easier to do and far harder to prevent. Poor consultation and a failure to listen are at the heart of this and other problems. I urge Ministers to stop levying new taxes, stop introducing complicated structures that only lawyers will read in pairs and stop thinking that they know better than people who have a lifetime of experience in business running successful companies. Proposals such as the supplementary business rate and the community infrastructure levy will only add to the burdens and complexities that businesses face. Increasing tax on business in a time of economic slowdown is akin to shop owners putting up their prices when customers stop walking through the doors. It does not work on the high street and it certainly does not work for our country.
My right honourable friend David Cameron struck a chord with millions when he said that the tax burden has risen beyond the tolerance of mortal man, and certainly beyond the capacity of large and small businesses in this country to absorb. On business tax, do Ministers
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Excessive and invasive regulation is another major worry—not just the principle, but the unprecedented scale and bureaucratic interference that is now belching out of Whitehall like an old lorry’s polluting emissions. This regulatory culture represents a real threat to enterprise and business in the United Kingdom, both through direct costs and also through the uncertainty and inefficiencies that it generates in the business environment. The ABCC has estimated that the financial burden of new regulations on business has reached a staggering £65 billion since 1998.
I am told that an since the Government came into office, average of 14 new regulations have appeared every working day. Yet, despite repeated assurances, promises and task forces, the Government are still manufacturing regulations like widgets. This Session there was yet another Bill before this House on deregulation. Incredibly, it contained new powers—as your Lordships exposed—to allow bureaucrats to impose penalties without independent appeal and without trial. Clearly, Big Brother is watching us all. Inevitably, it is the small businesses that will be the first to be caught up in this mess. It can and must be stopped.
Cutting regulation means cutting tasks, cutting jobs and accepting risk. Unless we have more courage, we will go on as we have been: one week enacting new regulations and the following week promising fewer. In the mean time, companies and managers are worrying whether what they are doing today might be unlawful tomorrow. I hope noble Lords will join me in commending a formula to Ministers. Regulations should be compatible with enterprise and the public interest. Their impact should be fully costed in advance. They should have sunset clauses where they can be renewed only if they have proved to have been worth while. Regulations which cost jobs should be repealed. Regulations which cost more than the benefits they provide should be scrapped. Regulations which have perverse effects should be suspended immediately. Finally, regulations should be applied fairly and efficiently.
None of us wants to see companies exempt of any regulation. Equally, however, we must never allow the companies on which our prosperity depends to be second-guessed and micromanaged by platoons of political appointees and civil servants. The current trend to give regulators far-reaching investigatory powers backed up with threats of draconian penalties may sound consumer-friendly but if the consequences are suspicion, fear, wariness and fatter bills for the lawyers, neither customers nor shareholders will benefit.
What targets do the Government have to cut the number of regulations affecting business in the next 12 months? What assurances will the Minister give on behalf of the Government not to introduce new regulations in the next 12 months? I will ask an easier question. How many regulations has the Minister personally scrapped in her time in office?
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I conclude by saying a few words about the state of our manufacturing industry. Since the 1970s, there has been a steady decline in the number of jobs in this sector. In 1978 7.13 million were employed in this sector. In 1997, the figure was 4.53 million. In the three months of this year it fell to an all-time low of 2.9 million—a fall of more than 30 per cent in a decade. Despite this decline, many businesses have adapted to changing markets and developed new products. In recent months, exports have risen as a result of the falling pound. However, a combination of tighter credit and rising inflation could certainly be damaging.
What effect do the Government expect tighter credit to have on levels of business investment next year? I remind the Minister again that lower taxes, stable taxes and fewer regulations will be warmly welcomed. At the same time, how do the Government intend to tackle the scandal of underperforming schools that see thousands of young people leaving full-time education lacking basic skills and the aptitude for work? Our country is already losing some of the competitive advantages that we won in the 1980s. If we are to weather the difficult times ahead, encouraging enterprise and new business start-ups is essential. The Government say they want to listen. The language is welcome but I remind the Minister that in business, only deeds matter.
I look forward to hearing the contributions of those noble Lords who follow me in this debate. I beg to move for Papers.
11.55 am
Lord Bhattacharyya: My Lords, I congratulate the noble Lord, Lord MacLaurin, on securing this important and timely debate. He is a successful and distinguished business leader and the whole House respects his credentials on the economy.
I wish to concentrate on the challenges faced by small and medium-sized businesses in the UK manufacturing sector. This is not a new issue for policy makers. One can go back to the Macmillan report of 1931 to learn of the difficulties that such enterprises have. It is worth remembering that while government can help or hinder businesses, the success or failure of any particular company is decided by the skill of the entrepreneur.
The first question we should ask is whether there is a problem in manufacturing. Manufacturing output as a percentage of GDP has indeed fallen dramatically over the past 40 years. Today manufacturing is only 13 per cent of British GDP. That is partly due to restructuring, but we should also remember that many companies have outsourced functions such as IT, legal, design, personnel and so on. These functions are now counted as services, which radically reduces our estimate of the manufacturing share of GDP. That change is mirrored in every G7 country, but is more apparent in the UK as we have been at the cutting edge of outsourcing.
As a professor of manufacturing, I am more optimistic about this sector today than I have been for years. Manufacturing output is 22 per cent higher than it was at the start of 1980, while manufacturing productivity has grown by 50 per cent since 1997. Look at the profits some of our companies are making. Take the aerospace sector. We have virtually 35 per cent of the
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Firms with fewer than 250 employees are responsible for about 40 per cent of our manufacturing value-added. These companies are a vital part of our economic landscape, and they have been exposed to increasingly tough global competition. As open markets have extended, they have affected manufacturing sectors in different ways. Some that have a high value-added technological content, like aeronautics and the automotive industry, have outsourced but retain manufacturing in the UK. Electronic components and clothing have faced huge pressures from overseas competitors. That is not a bad thing, as the consumer has benefited from the competition. We hear a great deal about the movement of investment to China and India, but, beyond the sectors I have mentioned, most of the investment in those countries is for their domestic markets, not to reimport to the UK.
Companies have also changed the way they work. Today many companies make more profit from design or servicing than from physical manufacture. In fact, it is not hard to tell which companies are purely service and which are manufacturing. Many of our best new businesses operate in this area.
Many competitors have asked what government should do to help manufacturing. The first response is to say bluntly, “Get out of the way”. Manufacturers are good at being blunt. The burdens of regulation and taxation fall most heavily on the businesses with the tightest margins. We have seen the pressure of regulation increase. We all agree that regulation for its own sake must be eliminated, yet regulation is important. It is the way society reflects needs that are not met by the market. Good regulation improves our quality of life. Imagine what would have happened if tougher regulations in California had not sparked a wave of innovation in the drive to lower emissions. In the UK the minimum wage and health and safety regulation matter to us as a society. So while it is easy to call for deregulation, it is much harder to do. The new Mayor of London is a doughty believer in the perils of overregulation, yet his first act as mayor was to issue a no-drinking regulation on public transport. I happen to agree with the regulation but I cannot help but smile at the irony. Last year the Legislative and Regulatory Reform Act came into force. The Government are currently considering how to use their powers to reform consumer protection regulation to help small businesses. These are welcome steps and we need to give the new powers time to make a difference.
The burden of taxation is one which all businesses complain about, and rightly. The good news is that corporation tax has fallen from 30 per cent to 28 per cent, yet small manufacturers are concerned about the increase in the corporation tax they pay to 22 per cent next year. Yet that change should be considered alongside the new measures that help small businesses—the new £50,000 tax-free capital investment allowance, the increase in the R&D tax credit to 175 per cent, the increase in
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One area where we have had enormous success is inward investment. This is because the perception of the UK abroad is that our fiscal and regulatory framework is second to none. The UK is now the second greatest beneficiary of inward investment in the world, with $1,135 billion of foreign direct investment stock in 2006. That is more than twice the amount invested in Germany and almost a third more than France. Inward investment has brought secure jobs in the long term. These companies need a supply chain, and this will be predominantly made up of small and medium manufacturers. These have improved enormously by learning from inward investors. Indeed, they have improved so much that they are now being targeted by inward investment companies themselves. These companies benefit from the challenge of improving business systems and increasing flexibility. Those skills will lead to rewards with other customers. The task of government is to help small businesses innovate, and here we have done an enormous amount. I welcome initiatives such as technology demonstrators which will help major inward investors and smaller companies innovate together; the work of the Technology Strategy Board in driving forward research funding; and regional development agencies’ support for small business innovation and sector clusters.
For the past 40 years I have heard that the British economy needs more skills. This is a subject with a long and thorny history in British policy-making. I have to say to those on the Benches opposite who call for more direct government intervention in skills that this was not the approach they took in office. I am proud that this Government have invested a huge amount in skills. The budget of the Learning and Skills Council is now over £10 billion—an enormous sum. I did an apprenticeship when I graduated which stood me in good stead for the future, so I applaud the Government’s modern apprenticeship programme.
I also welcome the Government’s commitment to increase the funding of the Train to Gain programme from £200 million to nearly a billion pounds by 2010. Of course, when the economy is doing well and the demand for skills is high, companies will complain that they cannot recruit enough scientists and ask the Government to solve the problem for them. My first response to such calls is to ask, “Well, what are you doing about it?”. The number of STEM graduates has increased from 60,000 to 85,000 in the past decade. Indeed, our universities are in many ways the envy of the world. Some complain that we are not recruiting enough indigenous students into the workforce. Yet, when one goes to the most innovative companies and
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I hope that the new points-based immigration system will make it easier for the highly skilled to be ambitious in Britain. Today, too many British science graduates end up in sectors other than manufacturing. Why is that? It is because young people today have many choices of career. Raise the pay, develop the career structure and quality of life you offer and more will want to train and work for you. That is why the pharmaceutical sector is so successful. Manpower planning by Governments is always dangerous. In a fast-moving economic field it is the market that has to decide what labour is needed and ensure that it is trained. I fear that companies which demand that the Government do more while they invest little themselves really want to reduce the price tag of their recruits. I do not think that that is the way to invest in future success.
So, what has happened over the past 10 years? This Government have created fiscal and regulatory frameworks and a flexible labour force. We know that business success is not in the hands of the state, but we believe that, by working together, we are on the right path.
12.06 pm
Lord Cope of Berkeley: My Lords, I, too, am grateful to my noble friend Lord MacLaurin for initiating this debate. All my political life I have been concerned about small businesses, both those continuing businesses, which are always likely to remain small, and new start-up businesses which have the potential to grow much larger. We need them both. I am concerned particularly about the weight of all types of regulation but in this debate I want to discuss the ever-increasing complexity of the tax legislation.
Two of the ministerial posts that I had the honour to hold laid particular emphasis on small businesses so I know from personal experience the reaction when one says to a market trader, “I’m from the Government. I’m here to help you”. It is not always positive. However, as the noble Lord, Lord Bhattacharyya, said, when small businesses are asked what they want from government, they usually answer first, “Just get the Government off our backs”. That is, of course, a plea for deregulation. However, I know the difficulties involved in that.
First, new regulations are usually designed to remedy some perceived ill and are supported by those who have been hurt by it. The ill may be tax avoidance or something else. Secondly, when regulations or tax breaks are designed to help small businesses, they have a cut-off point which is difficult to decide and inevitably creates a boundary wherever it is set, making life difficult for businesses just above it. Thirdly, special provisions designed to help small businesses have to be known to them. Sometimes it is complicated to choose between alternative schemes. I have in mind particularly VAT schemes.
Fourthly, the effects of regulations are not usually all one way. Most benefit some and cause difficulties for others. The useful report of the noble and learned
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I understand the difficulties. Nevertheless, it is very important to make progress on deregulation. I realise that the Government prefer to speak about better regulation, rather than deregulation, but what we need are fewer regulations.
This House is dealing with 12 statutory instruments today—eight by the affirmative and four by the negative procedure. That is just one working day, and most negative instruments never come to us. The noble Lord, Lord, Filkin, and his colleagues on the Merits Committee have a mountain of statutory instruments to filter for us every week. Every business needs a Lord Filkin to filter which regulations are important and which apply to it.
The Government announced last year the administrative burdens reduction exercise. It is now more accurately called the administrative burdens reduction programme, which is better. It would be interesting to know how that is getting on.
The first problem in setting targets for reducing regulations is how to measure regulations. The National Audit Office has done some good work in this field; I was struck by how familiar one set of comments in a recent report was. It said:
“Businesses rated the following activities as particularly burdensome: keeping up-to-date with changes in existing regulations”—
my noble friend referred to that earlier—
- “the time it takes to go through the whole process of complying; the lack of information about which regulations apply; and finding information and guidance”.
Those comments reflect the stability that my noble friend Lord MacLaurin spoke so strongly and wisely about a few moments ago.
Given my views on the sheer weight of regulations, I was struck by a passage in the Government’s draft legislative programme for the next Session of Parliament, which was published last week. The Lord President read out these words from the Prime Minister’s Statement:
“Advancing our enterprise agenda, the Government will consult on the idea of regulatory budgets—for the first time giving departments that seek new regulation a strict annual limit on what they can impose”.—[Official Report, 14/5/08; col. 1005.]
That sounds very interesting and a new idea, but what does it mean in practice? As it appeared in the draft legislative programme, I duly studied the great document that came out at the same time setting out the details of the various Bills that are to be in our programme for next year. It is wonderfully clear on most of the proposals, setting out the main elements of the coming legislation—the perceived benefits, the
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In some ways, a crude measure is the number of pages of regulations. It may be crude, but it is not altogether out of this world to think of that as a measure because, after all, the number of pages that a business must read to get on top of the various regulations matters. Also, the impact assessments try to measure the costs of complying once you have read the regulations. I do not expect the Minister to set out definitive answers to all these questions today, but I hope that she can indicate the meaning of that sentence in the legislative programme.
The Minister recognises that enterprise is stifled by overregulation because, in a recent speech to the Trade Association Forum, she set out a reduction in the burden of regulation as the first, essential criterion for enterprise to flourish. She is, anyway, the Minister responsible for the Better Regulation Executive. Government words, consultations and studies in fewer and better regulations are a vital component of fostering enterprise, but their actions and their effect will really matter. I hope that the proposed regulatory budgets will help, but, so far, we cannot be sure.
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