Select Committee on Treasury Appendices to the Minutes of Evidence


Memorandum submitted by the CBI


  1.  This note gives our first impressions of the Autumn 2001 Pre-Budget Report. In several areas it is only possible to express a provisional view as there has been only a limited opportunity to discuss the detail with CBI members.

  2.  We comment first on the broad economic picture, including the Treasury's economic forecast, the appropriateness of the Government's borrowing plans, and issues surrounding the Government's approach to overall public spending, the total tax burden, and overall business taxation. We then look at specific measures under the broad headings of: corporation tax; research and development; environmental and transport taxes; employment-related measures; property and regional development issues; small and medium-sized enterprise issues; and NHS spending.


  3.  UK economic growth has remained relatively robust despite the world economic slowdown. The Treasury forecast of 2.25 per cent for growth in 2001 is in line with the 2.3 per cent predicted by the CBI. However, the forecasts of 2-2.5 per cent for 2002 and 2.75-3.25 per cent for 2003 are more optimistic than the respective CBI forecasts of 1.7 per cent and 2.6 per cent and, indeed, the general consensus.

  4.  Household consumption has played an important role in supporting growth in the face of weak external demand. The Treasury projections for the annual change in consumption are broadly similar to the CBI forecast for this year but show less of a marked decline for next year, with a range of 2.75-3 per cent as compared to the CBI's forecast of 1.9 per cent. This variation is the key to understanding the more optimistic Treasury forecast for GDP growth beyond 2002.

  5.  The corporate sector has borne the brunt of the economic slowdown with externally exposed sectors being disproportionately affected, principally through adverse developments in the global economy and the relative strength of sterling against the euro. The Treasury has revised down its forecast for the growth of business investment this year from 5.5 per cent to 0 per cent, reflecting the decline in business confidence. Treasury projections for 2002 (0.25-0.5 per cent) remain more subdued than the CBI's estimate of 1.2 per cent but show rapid recovery by reaching 4.5 per cent by 2003 as postponed investment plans come back on stream.

  6.  Inflation looks set to remain a little below the Government's target of 2.5 per cent, with the Treasury forecasting 2.25 per cent for both this year and the next. These estimates are similar to the respective CBI projections of 2.2 per cent and 2.3 per cent and underscore the relatively benign environment in which counter-cyclical monetary and fiscal policy can currently operate.


  7.  Rapid growth in public spending, combined with lower-than-expected receipts, has led to a steeper rise in borrowing than previously projected. Public sector net borrowing (PSNB) is expected to be £2.5 billion this fiscal year, or 0.3 per cent of GDP, compared with a predicted surplus of £5bn in March. Next year's projected PSNB has risen from £2 billion to £12 billion, followed by a £3 billion upward revision to £15 billion in 2003-04. Compared with the March projections, these revisions represent an increase in borrowing of £24 billion over the next three years.

  8.  The key factor behind the Treasury's higher borrowing forecast is the reduction in expected receipts, which fall short of previous projections by £7 billion this year, £10 billion next year and a more modest £3 billion in 2003-04. A large impact comes from lower corporation tax receipts which are estimated to be £3 billion lower this year and £2 billion lower in 2002-03 than in the Budget projections.

  9.  Nevertheless, it would seem that on present plans, the Government's finances are on a sustainable footing and should not give any cause for alarm. On the basis of the existing expenditure plans (including the policy announcements made in the PBR), the deficit is expected by the Treasury to peak at 1.4 per cent of GDP in 2003-04, settling down to around 1 per cent from 2005. The debt-to-GDP ratio is projected to remain around 31 per cent which is well below the 40 per cent sustainable investment rule. Of course if, as we expect, economic growth falls a little short of the Chancellor's predictions, then public borrowing may turn out a little higher than this. But even then there would be little to worry about on the basis of the present spending plans.

  10.  Taking the CBI's forecasts, which suggest that GDP will fall short of the Treasury's projection by 0.4 per cent by 2002, and using the "rule of thumb" that a 1 per cent shortfall in growth eventually pushes up public borrowing by ¾ per cent of GDP, we might have expected the Chancellor to have forecast borrowing at 1.7 per cent of GDP instead of 1.4 per cent. In other words, the peak in the deficit would be worse than currently projected—but not by anywhere near enough to warrant remedial action. And looking further out, we accept that the long-term growth assumption of 2.25 per cent per year is rather conservative, making it more likely that the public finances would eventually begin to surprise on the upside.

  11.  If, however, the spending totals were ratcheted up further in next year's new Spending Review, then new funding streams would almost certainly be required to prevent the deficit from widening to levels inconsistent with the Treasury's favoured "golden rule".

  12.  The Pre-Budget Report measures, in conjunction with the pre-existing spending plans, will act counter-cyclically to support domestic demand at a time of global economic slowdown. But they should not add unduly to inflationary pressures. Indeed, our major short-term concern remains the possibility (albeit an outside one) of an unacceptably steep downturn in the situation facing the business sector. We still see scope for a further modest interest rate reduction, without jeopardising the inflation target. And we are concerned that the Chancellor has not responded to our call for the preparation of an "emergency" tax package, to be targeted on the most vulnerable sectors of business in the event of a more severe downturn. This omission does, however, appear consistent with his more optimistic view on economic growth in the immediate future.


  13.  Public expenditure is currently projected to reach 40½ per cent of GDP. However, the Chancellor's comments about NHS funding indicate a willingness to allow a further ratcheting-up of the ratio in next year's new Spending Review. We further note the Chancellor's preference for taxpayer-funding in this case.

  14.  If spending is to be pushed higher in the Review, it would probably be better to fund the extra through new revenue streams rather than extra borrowing. But we hope that the Government will remain open to a range of alternative funding methods, and that, if taxes are to be pushed higher, this is done in a way which avoids imposing new burdens on business. At present, if excise duties are included, the tax burden borne by business is higher in the UK than in key OECD competitors, including the US, Germany, Ireland and the Netherlands. Further, the majority of tax increases during the last Parliament fell on the business sector (widely defined to include shareholders). And internationally exposed sectors are already under considerable competitive pressure due to the over-valuation of sterling against the euro.

  15.  To improve competitiveness, the CBI has called for fundamental reviews of several areas of the tax system (such as transport taxes, "green" taxes, stamp duty on property, excise duties in the context of the Single Market, stamp duty on sharedealing, and commercial buildings allowances within the corporation tax system). Beneficial reform in all these areas would be relatively expensive and only achievable as the finances allow. We are concerned that further increases in the share of total taxation in GDP would reduce still further the scope for the necessary action in areas such as these, as well as the scope to reduce business taxation more generally as part of the drive to facilitate investment in all its forms.

  16.  Stability and consistency in the tax system are also crucial to long term business planning and investment. And tax rules should be simple to understand and facilitate easy compliance. It is imperative that new mechanisms do not increase red tape, potentially negating their intended beneficial effect. Tax changes should only be implemented when it is clear that benefits outweigh costs. In this light, we continue to urge an "audit" of recent tax changes, assessing the true cost to business (including the cost of compliance) against any wider benefits actually achieved. But we do welcome the decisions to introduce the new R&D tax credit on a "volume" rather than "incremental" basis, and to push ahead with simplification for small businesses in the areas of VAT and corporation tax.


  17.  We welcome the Government's confirmation that, subject to consultation, the new tax relief for intellectual property and the exemption for companies' capital gains on substantial shareholdings will be introduced in April 2002. We are also pleased to see that the Government has responded to business requests for more time to prepare for implementation of the new tax regime for corporate debt, financial instruments and foreign exchange gains and losses. The CBI will be commenting in detail on the draft legislation in each of these areas.


  18.  We welcome the Chancellor's confirmation that he will legislate next year for a new R&D tax credit for large companies. With the Pre-Budget Report referring to the new scheme as "volume-based" rather than "incremental", this is a significant step towards a scheme design that business could welcome—ie one which is simple enough for business to use and generous enough to make a difference. It will be particularly important to recession-hit manufacturers. We will of course be responding to the consultation on the detailed design of the scheme, and would very much hope that a properly-funded credit will be introduced in the Budget in March.


  19.  The CBI is very interested in the major consultation that is to take place on proposals to charge lorries according to the distance or time they drive. This should be fairer than vehicle excise duty (VED) as it would apply to both UK and foreign registered vehicles. We are reassured by Government comments that there will be no overall increase in the amount of tax paid by the UK haulage industry (so VED or fuel duty for hauliers would be cut), although there would obviously be winners and losers within that.

  20.  This is a fairly significant proposal - effectively a first step towards national road tolling - but initial reactions from the hauliers seem to be quite positive. Of course the acceptability of the final scheme will depend on the detail - key issues will be the cost to hauliers, and the degree of bureaucracy imposed. But we welcome the chance to contribute to the consultation.

  21.  In the area of business energy efficiency, we remain critical of the climate change levy and believe further improvements are needed—eg on companies' eligibility for a discount on the levy. The willingness of the Government to consider giving more favourable treatment to combined heat and power (CHP) generation is welcome, but needs to be matched by action. The review of possible further energy saving technologies to qualify for enhanced capital allowances is also in line with what the CBI had been calling for, although it remains to be seen how far this will go.

  22.  The Green Technology Challenge initiative, which embraces enhanced allowances for both energy saving and the promotion of cleaner fuels and vehicles, also appears positive. But again the impact of the measures under consideration remains to be seen.

  23.  The Government says it is minded to phase in the introduction of the aggregates levy in Northern Ireland, for aggregates used in processed products (eg pre-cast concrete). This is a welcome recognition of the problems faced in Northern Ireland, but does not address the more general fundamental flaws of the levy, wherever it is applied.

  24.  We note the Government's commitment to increasing the rate of the landfill tax for active waste by £1 each year until 2004, which is in line with the landfill tax escalator. We welcome the intended consultation on the future of the landfill tax credit scheme, which must be considered within the wider context of the Government's review of the Waste Strategy, business taxation and public spending.


  25.  The Government is considering new policy approaches to encourage training for lower skilled workers, building on recent work by its Performance and Innovation Unit (PIU). The Chancellor further announced that pilot initiatives, to begin in September 2002, would be set up to test a range of approaches. The CBI is encouraged by these proposals, given the basic skills problem harming the UK economy. The PIU report recognises the need for more public investment to help employers and employees because "aspects of the performance of the education system have led to a relatively poorly qualified workforce, and a disproportionate number of employees lacking basic skills[1]." Seven million adults lack functional literacy and numeracy.

  26.  We are pleased by indications that the Government is preparing to introduce the financial incentives for training for which we have campaigned. More details are needed on the pilots as to whether course and accreditation costs would be met where the employer is providing the training directly. It is not clear whether training must be linked to the employer's needs in order for employees to be eligible for the proposed entitlement to paid time off.

  27.  We are concerned by references to a possible statutory right to time off within the report. The case for such a right has not been made. It would have a significant impact in terms of business cost and administrative burdens—particularly for SMEs. It would reinforce views that training is a cost rather than an investment. The CBI believes that demonstrating benefits to company performance is the best way to get smaller firms involved in training. An incentive approach should be explored thoroughly before considering statutory intervention. We are therefore disappointed that the TUC-CBI proposal for a tax credit to help small firms work with the Investors in People Standard has not been taken up. The Standard helps organisations to use training to meet business objectives, reinforcing the link between skills utilisation and productivity. Currently take-up is low among smaller firms. Since both the PIU and Pre-Budget reports aim to increase demand for training, especially in SMEs, it makes sense to build on this existing initiative.

  28.  We look forward to working with Government and the PIU on the proposals for the pilots in order to ensure that they meet employer demand, raise skills and increase productivity overall.

  29.  The Chancellor restated his continued support for the tax credit idea, announcing amongst other things plans for a new Working Tax Credit. We support the extension of the tax credits system, but remain concerned about the rising burden of payroll administration on employers. A long-term solution is clearly needed to avoid employers becoming paymasters of the benefits system.


  30.  We are interested in the Government's decisions on stamp duty on property, confirming details of an announcement already made in the last Budget. The immediate increase in the exemption threshold for property transfers in the poorest 2,000 wards, from £60,000 to £150,000, is of limited significance to businesses. But we look forward to proposals in the March Budget to distinguish between business and residential properties for the purposes of stamp duty—with the possibility of duty being removed for all business property in those deprived wards.

  31.  We have been concerned that businesses are hit by rises in stamp duty originally intended to impact on the housing market. So separating the two is potentially welcome, though much depends on the details. But there is a strong case for cutting the burden of stamp duty on transfers of business property—and other business assets—throughout the UK. We hope that separating the rates of duty charged on residential and business property will pave the way for a more general reduction in the charge on all business-related deals.

  32.  We applaud the Government's initiative in analysing the challenges facing the Regional Productivity Challenge and look forward to studying the 50 page report. We welcome the recognition of RDAs as the key drivers of English regional economic development and have made recommendations to improve their performance. There is still significant scope for these and other bodies in Scotland, Wales and Northern Ireland to become more focused on business priorities. We believe the intention of having a strong regional dimension to the 2002 Spending Review makes sense but needs to be handled with care.


  33.  The Chancellor confirmed a number of welcome but previously-announced measures in this area. This includes the steepening of the taper applied to the taxation of capital gains on holdings of business assets (chiefly shares in unquoted companies) from next April, so that a top effective tax rate of just 10 per cent will apply to assets held for just two years, instead of the current four.

  34.  We would, however, like to have seen some of the complexities surrounding this tax to be addressed. While the current review of the scope for simplification of CGT is welcome, we are concerned that this is unduly constrained by the requirement to stay within the existing policy framework and to avoid changes having any exchequer cost. The complexity arising from the numerous recent changes can only be satisfactorily addressed by permitting the re-basing of assets to 17 March 1998, and by applying the new business assets taper to all business assets sold after 5 April 2002, including shareholdings acquired before 6 April 2000 which only became business assets on that date. There is a particular issue of unfairness under current rules. For example, someone who held shares in 1998 and sold them in June 2004 could be in a worse position than someone who acquired the same number of shares in the same company in April 2000 and sold them in June 2004.

  35.  We also welcome the doubling in the size of business qualifying for the Enterprise Management Incentives scheme, and are pleased that the Government is pushing forward with moves towards simplification of VAT and the taxation of profits for small businesses. On the last, we recommend that small businesses should be able to elect be taxed either on a new, simpler accounting profits basis, or on the present basis. Indeed, we believe that the principle of election could usefully be widened to other areas.

  36.  We note that the Government plans to widen the 10 per cent "starting rate" band for corporation tax. While the goal underlying this low rate of corporation tax is admirable, we have doubts about its usefulness in practice. A "zero rate band" or "annual exempt amount" could achieve the same benefits for businesses only just coming into profit, while reducing the administrative complexity associated with the 10 per cent rate.

  37.  Though the Pre-Budget Report package will clearly be of net benefit to SMEs and entrepreneurs, it is worth pointing briefly to areas where we believe further change would build on the Government's own "enterprise and productivity" agenda:

    —  We were disappointed that there was no announcement of any change in the tax treatment of those businesses which would otherwise qualify for the small company rate of corporation tax (or exemption from having to pay quarterly instalments on account), but which do not because they are deemed to have "associated companies"—even where the combined profits of all of the "associates" falls short of the relevant threshold.

    —  As set out above, we believe there is a strong case for a nation-wide reduction in stamp duty on business property and other assets. Many small businesses looking to expand, relocate or restructure are hit by this charge. Nor do we understand the reasons for using gross rather than net asset value in the calculation of stamp duty—and indeed for several other tax purposes, including qualification as an "SME". The gross basis can discriminate against those sectors of business with high capital requirements, and against those businesses (such as exporters) requiring extra liquidity to guard against slow or uneven payment streams.

    —  We continue to believe that the tightness of rules governing qualifying expenditure for the SME R&D tax credit, and the application of those rules in practice, means that the Government's goal of a significant increase in innovation by these businesses is being undermined. Anecdotal evidence suggests that a great deal of expenditure which companies believe "ought" to qualify for the credit does not. We aim to collect together some case studies. But it would also be useful to know if the Treasury or Inland Revenue have any statistics on take-up of the new credit.


  38.  Derek Wanless' interim report is a welcome contribution to the debate on the future of healthcare and makes a number of observations that support the CBI's own analysis, particularly on the need to reduce waiting times and improve ICT and human resources in the NHS. We particularly welcome the report's recognition that business is a major stakeholder in the healthcare sector. Another factor that needs to be better recognised is that public and private sectors already play important roles in both funding and delivering healthcare. The CBI report, Business and healthcare in the 21st Century, published on 3 December, outlines key areas where business and the healthcare sector interact and debates priorities for action in these areas.

December 2001

1   In demand: Adult skills in the 21st century-A report by the Performance and Innovation Unit, 2001, p 36. Back

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