MEMORANDUM BY CONFEDERATION OF BRITISH
1. The CBI, through its direct and indirect
membership, represents a broad-based constituency of firms with
members across all sectors of UK business. The management of the
economy is of considerable importance to all our members, and
the CBI's own recommendations for the Budget each year are the
fruit of extensive consultation and discussion.
2. This note gives our first impressions
of the March 2001 Budget. In several areas it is only possible
to express a provisional view as there has been no opportunity
to discuss the detail with CBI membersit would clearly
be wrong for example to pre-judge here the CBI's final, detailed
response to the consultation on "Increasing Innovation".
3. The note comments first on the Treasury's
economic forecast and the question of whether the fiscal stance
resulting from the Budget is appropriate. It moves on to review
the specific measures introduced (or omitted) under the broad
headings of: corporation tax; R&D; environmental tax; employment
related measures; property issues; SME issues; other topics.
4. The Treasury's forecast for overall growth
is broadly in line with the CBI and with a wider consensus of
forecasters. It is noticeable that the Treasury expects the imbalance
in the UK economy between domestic and foreign demand to continue
in 2001 (though the forecast moves into balance by 2003). In fact
the Treasury projections for household spending are a little stronger
than the consensus in 2001 and to a lesser extent in 2002. This
means a rise in the current account deficit to 2.5 per cent of
GDP in 2002 is projected, and the outlook for manufacturing output
5. Business investment is forecast to grow
very slightly faster than GDPthough the risk to investment
from any further decline in equity prices is rightly pointed out.
Government investment is projected to grow by a massive 43.5 per
cent in 2001. The growth of government investment has recently
improvedalthough public investment has recently improved,
it is not certain that this will be achieved. So although the
overall picture for the economy looks favourable, there are some
more worrying trends beneath the surfacein particular whether
the financing of the current account deficit will become an issue,
and how difficult it would be to bring trade closer to balance
after a prolonged period of weak manufacturing growth.
6. The question usually asked after each
Budget is whether or not there has been any loosening in fiscal
policy. Further issues are whether the Treasury's fiscal projections
are reasonable, whether they point to a sustainable fiscal stance,
and what impact the Budget changes will have on prospects for
growth and inflation.
Has fiscal policy been loosened?
7. The key problem here is agreeing on a
definition of what constitutes loosening. It is all too easy to
get caught up in a lengthy debate on this issue and miss the more
important questions which should be asked of fiscal policy. Taking
the different approaches in turn:
Compared with what would have happened
if the Chancellor had made no announcements on 7 March, except
to confirm implementation of the measures put out for consultation
in the Pre-Budget Report (PBR), the Budget loosened fiscal policy
in 2001-02 by around £3.35 billion. (This also assumes that
the decision to reduce the AME margin and spend this on specific
projects constitutes a policy loosening. But it could be argued
that this was clearly money which the Government could have been
expected to spend anyway, in which case the "loosening"
would have been only £1.6 billion.)
However, the projections for both
the current balance and for public sector borrowing are virtually
unchanged in all forward years from those published in Budget
2000 (and in the November 2000 PBR). This is true both in £
billion, and as a share of GDP (cyclically-adjusted). In that
sense fiscal policy is unchanged.
The final way to look at this is
the change from the fiscal year just finishing to the next one.
On this basis policy is clearly looser, with the cyclically-adjusted
surplus falling from 1.4 per cent of GDP to just 0.3 per cent.
If these projections turn out to be accurate, the Budget will
clearly have the effect of adding more to demand over the next
It seems reasonable to suggest that the Budget
loosened policy, though not very dramatically.
Are the fiscal projections reasonable?
8. The continued assumptions of 2.25 per
cent trend GDP growth for the UK is certainly a bit conservativebut
it is not unreasonable. Following the misjudging of trend growth
in the late 1980s, it is certainly prudent to stick to a cautious
figure. On public spending, as indicated above, there may be doubts
in the short-term about whether the ambitious rise in public investment
could be achieved.
9. With regard to tax receipts, it is more
difficult to make a judgement. In 2000-01, income tax receipts
were £3 billion stronger than expected, and it is suggested
in the "Red Book" that much of this improvement is structural,
and will be sustained in future years. However, the Treasury seems
to be unclear among a number of competing explanations (p195,
para C39) about what has caused the rise in the income tax take.
While there is conservatism, going forward, in assuming the unexpected
growth of tax receipts does not continue, there is also some optimism
in believing the strong growth will not actually be unwound. But
as we have suggested before, it would not be good forecasting
to be conservative about everything, and any relative optimism
on tax receipts is clearly offset by the relative pessimism for
Is the medium-term fiscal stance sustainable?
10. The fiscal projections out to 2005-06
show the current balance remaining in modest surplus, a small
borrowing requirement emerging, and net debt falling to around
30 per cent of GDP and then remaining at broadly that level. This
is certainly sustainable, and indeed seems to provide a sufficient
cushion to weather the impact of a cyclical downturn on the public
finances without causing the Chancellor's two fiscal rules to
11. The recent criticism from the European
Commission and from the IMF of this medium-term perspective seem
misplaced. While debt remains under control, borrowing to invest,
especially when in so many areas public finance is so badly needed,
seems fully justifiable, provided that good practice is maintained
in terms of careful evaluation of public investment decisions.
The delays in getting public investment to increase suggest that
there is indeed a lot of evaluation taking place.
What impact will the Budget have on UK growth
12. At the time of the Pre-Budget Report
we expressed some concern about whether fiscal relaxation would
add to demand in the short-term and increase inflation pressure.
As argued above, the March Budget adds to the fiscal relaxation,
partly by carrying forward an underspend of £1 billion for
the present fiscal year. However, concerns about inflation pressure
are less important than they seemed in November following the
deterioration in global economic prospects. This Budget will add
to domestic demand over the next year and support growthbut
we do not believe it will do so sufficiently to prevent further
cuts in interest rates. We still consider interest rates could
be reduced by a further 0.5 points by September 2001.
13. However, there is one general concern
about the balance of measures actually announced for 2001-02.
Although as far as business is concerned there are some useful
proposals for future tax changes (the R&D tax credit for example)
there was very little to reduce the tax burden on firms in the
short-term. Given the concerns raised above about imbalances in
the economy this can only add to worries that the imbalance between
consumption and investment could worsen further. In this context
it is particularly disappointing that our recommendations with
regard to stamp duty on commercial property, and SME capital allowances,
were not taken forward.
14. In terms of the total tax burden on
business, the Budget made very little difference (apart from the
implementation of the PBR proposals on road user costs). As the
impact of earlier corporation tax payments comes to an end, the
additional tax burden on business due to measures introduced since
1997 is set to fall from an average of about £5 billion per
annum up to 2001-02, to £4.5 billion in 2002-03 and £1.5
billion in subsequent years.
15. Following the cumulative changes made
since the Budget 2000 the new regime on Double Taxation Relief
is much improved. However as a result of implementing change by
amending amendments the emerging rules are unnecessarily complex
and very difficult to understand. Even though there is less than
a month to the date of implementation there is no published official
statement explaining the precise working of the new regime in
the light of the Budget changes. Additionally a number of technical
issues remain to be tackled.
16. As regards the other two connected elements
of the March 2000 Budget "package", there is disappointment
that, despite intensive discussion, action to implement change
to capital gains on substantial shareholdings has been deferred
but on Intellectual Property the publication of the latest technical
note does take the consultation forward though a number of important
issues are yet to be resolved.
17. Welcome news did come in the form of
the announcment of the relief for cleaning up contaminated land.
The CBI has long urged that where Government imposes obligations
on business the costs of meeting those obligations should be fully
recognised for tax purposes.
18. More broadly the Chancellor's firm commitment
to international competitiveness and the encouragement of innovation,
investment and entrepreneurship as part of his vision for the
future of the corporate tax system is welcome news. It reflects
the CBI's message that our tax regime has a vital role to play
in the UK's success not only within Europe but also in the wider
19. We welcomed the publication of the consultation
document "Increasing Innovation" which gives a useful
overview of the UK's performance on R&D and outlines the main
alternatives and issues to be considered in introducing an R&D
tax credit for larger firms in the UK. We agree with the basic
proposition that this should be done on an incremental basis and
will be consulting our members on which of the options should
be pursued. Two key factors to consider are ease of implementation
(too much red tape can reduce the impact of tax incentives) and
a measure that will really serve to emphasise the benefit of doing
R&D and lead to a significant change in companies' attitude.
It is also important to have the right definition of R&Dthe
definition currently being used for the SME tax credit leaves
out some development activity which we believe should be included.
20. We were particularly disappointed that
this Budget saw no progress on the remaining issues around the
introduction of the Climate Change Levy. This remains a
key concern for many CBI members, and we continue to urge that
some way is found to extend eligibility criteria for negotiated
discounts beyond the current IPPC basis. We hope that discussions
with the Government can continue on this issue, to avoid putting
UK business at a competitive disadvantage against countries such
as Germany and the Netherlands, where less restrictive eligibility
for discounts prevails. There are also anomalies such as the plastics
industry (who face the full CCL), who compete with glass and paper
in packaging (who do not).
21. There are other outstanding concerns
about the treatment of electricity exported from combined heat
and power (CHP), the regime in Northern Ireland and the allocation
of the £50 million energy efficiency fund.
22. On transport issues we are broadly
pleased by the implementation of the package of measures announced
for consultation in the PBR. We also welcome the fact the fuel
duty rebate for buses will not be cut in line with the diesel
tax cut, effectively reducing bus fuel costs by 3p per litre.
However, we are disappointed that the Government is still not
taking up our recommendation of a full review of transport taxation.
23. On maternity leave and pay, the
CBI accepts the increases in Statutory Maternity Pay (which from
2003 will be increased to £100 per week, and paid for 26
weeks rather than 18 weeks) and welcomes the extension of Small
Employer Relief (SER). But the increase in SMP may result in a
significant increase in costs for some employers not qualifying
for SER. And firms just above the increased threshold for SER
will face significantly higher costs (only 92 per cent reimbursement
of SMP) than otherwise similar firms below it (105 per cent reimbursement,
including 5 per cent compensation for administrative costs).
24. The extension of paid maternity leave
will be problematic for some companies, such as SMEs and companies
with multiple small sites which use internal cover during such
absences. It could also increase the costs of the many companies
which "top up" SMP if employers cannot resist pressure
to pay occupational maternity pay for the extra eight weeks.
25. The CBI has accepted the introduction
of paid paternity leave but business will find it easier
to accommodate this if the right applies only to employees with
over 12 months' service and if it is subject to adequate notice
periods. Pressure to top up paternity pay, combined with the cost
of replacing men on paternity leave, could lead to significant
additional costsparticularly in companies employing large
numbers of younger men. Some of the firms which already "top
up" SMP to full pay will face claims for a similar increase
to be applied to paternity pay, and many employers have expressed
concern that they, rather than the state, will be expected to
pay for paternity leave in the future. Some SMEs have said that
they will struggle to cover the absences.
26. The CBI supports the introduction of
paid adoption leave from 2003.
27. We welcome the particular focus of the
Budget proposals on training for the low skilled. The CBI
has highlighted for some time the need to raise the skills level
of the 32 per cent of the workforce who lack a level two qualification
(equivalent to GCSE). Our Budget submission specifically recommended
that all those who do not hold a qualification at level two should
have an entitlement to achieve one through publicly funded education
and training system. The National Skills Task Force also called
for this, which should be a priority.
28. The open, consultative approach of the
Budget proposals is welcome. We note that the Government intends
to consider a range of possibilities, including one based on the
R&D tax credits model. More research is needed on what can
work most effectively in tackling the problem of the low skilled,
particularly SMEs, and the CBI already has work underway on this
area. We will gladly participate in the Treasury's consultation.
29. There is disappointment that nothing
was said about employer NIC on unapproved share options where
we had hoped, at least, to have consultation on a better solution.
30. The broader red tape burdens created
by the transfer of the administration of citizen-state social
welfare dealings onto employers seem set to increase as a result
of those Budget changes which will fall to be delivered via payrolls.
31. The CBI welcomes the Government's announcement
that it will abolish the minimum funding requirement (MFR), which
is the main distortionary influence on pension scheme investment.
We urge the Government to take immediate measures prior to the
abilition of the MFR in order to provide relief to companies on
whom it is currently having an adverse impact. The CBI has suggested
the following measures for this purpose:
extending the MFR transitionary period
abolishing the requirement for annual
certification of employer contribution rates.
32. We also support the Government's proposals
for replacing the MFR, which closely mirror those put forward
by the CBI. The CBI believes that the adoption of a long-term
scheme-specific funding standard supported by a strong regime
of transparency and disclosure is the right approach to ensuring
the adequate funding of defined benefit schemes. We look forward
to working with the Government as it develops its proposals in
33. We will consult fully with members regarding
Paul Myners' recommendations for improving the quality of trustee
A legal requirement for trustees
to be familiar with the issues on which they make decisions merits
consideration, but could have drawbacks. In particular, members
would be unlikely to welcome such a requirement were it to limit
pension fund trusteeship to those with professional investment
The more widespread payment of trustees
may be acceptable. However, employees are already allowed paid
time off for performing trustee duties, and consideration would
need to be given to the level of payment that should be received.
We support the recommendation that
funds and their sponsors should increase their investment in training
We support the recommendation that
decision-makers should consider a full range of investment opportunities
across all major asset classes, including private equity.
34. The CBI welcomes Paul Myners' recommendation
that the tax rate on the withdrawal of surpluses should be reduced.
As the Myners review recognises, current restrictions on the repayment
of surpluses may encourage employers to take a more risk-adverse
attitude to pension scheme investment than they might otherwise,
since these restrictions make employers less likely to benefit
from any investment gains. The CBI has said that scheme surpluses
recovered by the employer should be subject to corporation tax
in the normal way and that the current 40 per cent tax on the
recovery of scheme surpluses should be abolished.
35. The confirmation of the changes to property
tax in the PBR was welcome, but the CBI continues to argue this
does not go far enough. We would have preferred to see VAT reduced
to 5 per cent on all conversion and renovations, to come closer
into line with zero rated new building.
SME TAXATION ISSUES
36. Small and medium-sized enterprises (SMEs)
will have a keen interest in many of the general business issues
discussed elsewhere in this submission. These include:
scrapping of the minimum funding
requirement for employer pension funds
new parental employment rights
further corporation tax reform, especially
the treatment of intellectual property and goodwill
consultation on a new tax credit
eligibility for climate change levy
37. We welcome the Review of Small Business
Taxation as a means of reducing tax compliance burdens for
small businesses, and will be seeking the CBI SME members' views
on the most appropriate definition to use and on how to achieve
the greatest simplification of the system.
38. However, we would note that the cash
flow pressures which all SMEs face make it essential that all
existing investment allowances, reliefs and credits are maintained.
Indeed, as noted in the CBI's SME Council Budget recommendations,
Removing Barriers to Growth, there is a strong case for
further enhancing the existing first year allowance for fixed
capital, and for widening the definition of expenditure qualifying
for the SME R&D tax credit. We are disappointed that no action
was taken in this Budget.
39. SMEs can also suffer disproportionately
from the failure of the corporate tax system to recognise certain
genuine business costs ("nothings") for tax purposes.
The incidential cost of raising equity finance is particularly
40. Our Budget submission urged the Government
to amend the rules on allocation between associated companies
of the profit thresholds for both the small companies' rate
of corporation tax and the quarterly instalment regime. At present,
these rules can cause some individual associated SMEs to be taxed
as large companies, even though collectively the whole group's
profits fall below the threshold at which a single company would
start to pay tax at the higher rate, or become liable to quarterly
41. The improvements proposed to the detailed
rules of the Enterprise Investment Scheme (EIS) and Venture
Capital Trusts (VCTs) will help to make them more practical to
use and will remove a number of the traps which can cause bona
fide users inadvertently to lose their status and the tax relief
which goes with it. The CBI is involved in continuing discussions
with Revenue officials on these schemes and will be looking to
achieve further improvements to facilitate increased take-up.
42. The CBI continues to believe that investors
in smaller quoted companies should have access to tax benefits
akin to those available to investors in non-quoted firms through
the EIS. We will be pursuing this matter in the course of 2001
as part of our more general investigation into this sector's needs.
43. The improvements to the scope and flexibility
of the Enterprise Management Incentives scheme are very
44. We are disappointed that the rates of
stamp duty on transfers of business assets, including commercial
property and goodwill have not been reduced. Stamp duty is a serious
obstacle to SMEs pursuing growth by asset acquisition, and the
fact that duty is charged on the gross value of individual assets
acquired means that the effective rate on the net assets acquired
can be absurdly high.
45. We welcome the increases in the VAT
turnover thresholds for the annual accounting and cash accounting
schemes, and the consultation on proposals to introduce a simplified
VAT system for small businesses.
46. The freezing of excise duties on
alcohol, and the lower increase in tobacco duty was good news
for industries suffering from big duty differentials. But we would
still prefer to see a full review of the issues around excise
duties to establish a long-term strategy, rather than have the
industries concerned subject to an annual period of uncertainty
47. We welcome the move towards a Single
Budget for RDAs and the increased flexibility this will afford
them. This will not be effective until 2002-03, but unused Single
Regeneration Budget can be used more flexibly from next year.
These moves should go some way towards enabling RDAs to spend
according to particular needs in their regions. It should also
increase their ability to meet the new Government-set targets
sooner. On the £5 million extra to boost the Regional Chambers'
scrutiny role, we hope that this will help the Chambers to focus
their activities more clearly and encourage greater business involvement.
48. A final, but no means unimportant disappointment
was the lack of any reference to the issue of stamp duty on
share transactionswhere we believe there should be
a full review to examine the case for reform. This is due to concern
about the competitiveness of the City of London, and to the question
of the cost of capital in the UK.
12 March 2001