Chamber News: Spending Review: Chancellor must be brave and reprioritise spending towards growth

The British Chambers of Commerce is today (Wednesday) publishing its submission for the government’s Spending Review, which will be announced later this month. Following extensive research into business’ priorities for the Spending Review, the business group is calling on the Chancellor to shift government spending away from current spending towards capital investment that will help get the economy back on track.

In April, the BCC polled nearly 1,800 firms across the UK, from which three clear messages emerged:

1. Lower public spending matched by lower taxes would deliver the best outcome for the UK economy

• Almost half (42%) of businesses ranked the reduction in public spending and taxes as their preferred option to boost the health of the UK economy
• This compared to only 13% of firms who listed higher public spending and higher taxes as their first choice
• The BCC believes that maintaining departmental ring-fences for short-term political gains is not consistent with a long-term vision of a low-tax, enterprise-friendly and internationally-competitive economy.

2. The top three areas that businesses would like the government to prioritise were economic development, education and transport. Foreign aid and social security were the lowest.

• Economic development (which includes trade promotion and business support) came out as the top priority for government spending at 68%, with education second (57%) and transport third (47%).
• Only 1% see foreign aid – currently protected by a ring-fence from cuts – as a priority area and only 6% see social security – the largest area of spend – as a priority for government spending.
• While the BCC is not calling for the protection of any specific Whitehall department budgets, we reiterate our long-standing call to shift state spending towards supporting the economy.

3. The present balance between capital investment and current spending is far out of line with business perceptions and expectations

• On average, UK businesses wanted to see a 3:1 split of current and capital spending in budget allocations after learning of the actual ratio, which is closer to 13:1.
• This suggests businesses would like to see a massive boost to capital expenditure, which would require a radical reprioritisation of government budgets.
• The BCC is calling for a greater focus on investing in capital assets including transport, energy, education, digital and other local economic infrastructure, such as road maintenance and house building.

PRIORITY SPENDING MEASURES TO BOOST GROWTH

The following priority areas are consistent with the business opinion identified from our survey, and would have a significant impact on economic growth. They are costed, and we believe the government can offset these costs through cutbacks to other, less growth-focused, areas of spending.

Promote access to finance for growing businesses

• The BCC welcomed the initial £1 billion commitment to the new British Business Bank as an important first step, but investment must be on a greater scale if it is to succeed in supporting growing companies
• An additional investment of £9 billion from the government over the next three years would provide the necessary capital base to allow the Business Bank to start lending directly to businesses.
• The government and the Bank of England should use their balance sheets to extend the backing of the Funding for Lending scheme’s billions to the embryonic Business Bank. This would energise a crucial player in the lending market, and help to solve the long-term structural gap in finance that continues to strangle far too many growth businesses across the UK.

Direct Exchequer cost: £3 billion per annum

Immediate infrastructure stimulus to boost house building and road maintenance

• The BCC believes that continued underinvestment in road maintenance will lead to further deterioration in the state of Britain’s road networks; whereas additional investment would boost employment, support local construction and underpin local economies more generally.
• The BCC continues to call for a Road Repair and Renewal Fund, which would need to be at least £12 billion over the next three year period. This would help to address the current backlog of repairs which stands at £9 billion and is growing by nearly £800 million per year.
• We urge the government to directly invest in much-needed new social housing, and for 100,000 more new homes to be added to the Homes and Communities Agency (HCA) target to 2015.
• The BCC strongly believes that house building, not uncertain mortgage market interventions as announced in this year’s Budget, is required to boost the economy and help remove distortions in the housing market.
• Investment in more affordable housing would directly boost the economy through employment in the house-building sector and would benefit mostly UK-based companies.

Direct Exchequer cost: £4.8 billion per annum

Promoting exports

• If we are to successfully rebalance the economy towards exports, the government must do more to enhance the level and effectiveness of support available to UK companies trading internationally
• In the Autumn Statement, UKTI was allocated a budget of £70 million to deliver services to more small- and medium-size exporters and help to refocus UKTI activities on the highest-value opportunities and emerging markets. To date, a small proportion of this funding has been allocated towards the direct support of SME exporters.
• The BCC is urging the government to allocate more funding towards supporting SME exporters, with more funds going directly to the coal face rather than into Whitehall-driven programmes.
• Trade missions, development of in-market support and promotion of market opportunities to companies in the UK must be prioritised. An extra £33.3m per annum over the course of the Spending Review period, if split between the 20 priority markets identified by UKTI, would yield a market development budget of £1.65 million per annum. This equates to £5m per market over the whole Spending Review period.
• The government has issued an export challenge, and wants to see 100,000 more British firms exporting by 2020. Without additional export support on a large scale, achieving this will be difficult.

Direct Exchequer cost: £33.3m per annum

Long-term commitment to renewing Britain’s infrastructure

• Without significant efforts from the government to accelerate and deepen reforms to attract private investment in the country’s infrastructure, the UK’s ability to compete internationally will be further undermined. The government must go further and faster to de-risk private investment in infrastructure. • The Bank of England could also help to lever private investment in infrastructure by providing guarantees to make involvement attractive to investors • Mechanisms that would support infrastructure investment over the longer-term could include establishing a government-backed Infrastructure Investment Bank or a ‘Reverse Sovereign Wealth Fund’. This would allow institutional investors to invest in projects indirectly and at a guaranteed rate of return.

TOTAL COST OF RECOMMENDED MEASURES: Approximately £8bn per annum

Commenting, John Longworth, Director General of the British Chambers of Commerce (BCC), said:

“This is the Chancellor’s last chance to make a real difference to the health of the UK economy, this side of the next general election. Our Spending Review submission, based on business opinion, is calling for a radical shift of focus towards areas like infrastructure, economic development and skills – the big enablers of an enterprise-friendly economy. Our submission proves that the government can have its cake and eat it. It can continue to reduce the deficit while investing heavily in measures that will support growth.

“It is unacceptable that ministers continue to ring-fence certain areas of spending for political reasons, and programmes that do little to boost UK output are being protected at the expense of capital investment. Infrastructure spending and radical action on direct house building and road maintenance would provide a significant boost to the construction sector and local growth. Furthermore, the UK’s overall export performance is still not where it could or should be. If we are to win the ‘global race’ described by the Prime Minister, we need a huge increase in the resources dedicated to supporting international trade. But these measures must be focused on frontline support to businesses, not the extension of agencies or bureaucracy in Whitehall.

“Businesses across the UK are crying out for more support to help them drive growth, boost trade overseas and create jobs and wealth. The Chancellor must be brave and listen to the business community, and seize this opportunity to go all out in the name of growth.”