Memorandum submitted by the Confederation
of British Industry
1. On balance, the CBI was disappointed with
the Chancellor's Autumn Statement. Instead of taking a tighter
grip on the growth of government spending in the near term, the
Chancellor has allowed borrowing once again to drift. And he has
introduced further discretionary tax increases for the business
sector. Together with the borrowing overshoots and business tax
rises already seen in the recent years, the Government's fiscal
policies risk deterring the very investment that is required for
long-term improvements in the prosperity of the nation and its
residents.
2. Some of the themes announced or reiterated
in this year's Report were welcome and—if the aims come
to fruition—could benefit the UK economy in the longer term.
These include:
— Measures to enhance skills.
— Measures to support science, research
and development.
— The public sector efficiency savings
programme.
— Housing and planning system reforms.
— The proposed introduction of Real
Estate Investment Trusts (REITs).
3. However, businesses have some major reservations:
— The £2¼ billion per annum
hike in taxes on oil company profits, coming on top of the rise
in 2002 and the change in the timing of payments in the 2005 Budget.
— The fact that measures introduced
under the headings of "building a fairer society" and
"protecting revenues" aim to raise a further £11¼
billion per annum from the corporate sector by 2008-09,
with the proposed planning gain supplement likely to add still
further to costs.
— Extra borrowing amounting to a cumulative
£17 billion over the five year period 2005-06 to 2009-10,
compared with the Treasury's March forecast, despite a policy
tightening bringing in a net £7 billion or so over that timespan.
— The fact that even these projections
once again depend on an optimistic-looking forecast, for a strong
bounceback in GDP growth in two years' time.
4. The CBI also notes that government expenditure
is pencilled in to grow a little more slowly than GDP beyond 2007-08.
This might just be sufficient to head off the need for still further
discretionary tax rises, if wider economic developments unfold
favourably, and so is a welcome move insofar as it goes. But the
CBI would have preferred this tighter grip at an earlier stage,
to eliminate the prospect of further tax rises altogether and
instead pave the way for the total and business tax burdens to
be rolled back in due course. And the fact that these numbers
have been pencilled in does not mean that the Government is bound
by them.
5. The remainder of this analysis is set
out as follows:
— The revenue flow impact of confirmed
new measures.
— Comments on specific areas of policy.
— An overview of the projections for
the economy and public finances.
(A) THE REVENUE
FLOW IMPACT
OF CONFIRMED
NEW MEASURES
6. Table 1 sets out the impact of the new
policy announcements, in terms of revenue transfers between the
state and other parts of the economy. The tax increase for oil
companies, and abolition for small companies of the zero rate
corporation tax band, build to £2.8 billion in 2008-09. This
far outweighs the financial "benefit" to business shown
in the table—of £0.4 billion in that year—which
is, in any case, largely accounted for by the freeze in the main
road fuel duties and will not improve businesses' cashflow compared
with the position before the PBR.
7. Including these measures only, the net
cost to business of the PBR measures in the final year would therefore
be £2.4 billion. But it would be £3.2 billion if the
other assorted tax changes affecting business were included. In
the event, the business tax burden could be pushed higher still
as a result of the proposed planning gain supplement. Other business
costs could be influenced positively by success on the deregulation
front, but perhaps negatively by decisions concerning paternity
and maternity rights.
Table 1
PRE-BUDGET REPORT MEASURES WITH A SPECIFIC
REVENUE IMPACT
|
| Approximate £bn yield (+) or cost (-) to the Exchequer
| 2005-06 | 2006-07
| 2007-08 | 2008-09
|
|
| Half share of road fuel duty freeze | -0.19
| -0.31 | -0.31
| -0.31 |
| Measures benefiting SMEs1 | —
| — | -0.11
| +0.01 |
| Other measures benefiting business2 |
— | -0.03
| -0.06 | -0.07
|
| Measures benefiting business | -0.19
| -0.34 | -0.48
| -0.37 |
| North Sea oil profits taxation | —
| +2.00 | +2.20
| +2.30 |
| Abolition of zero rate corporation tax3 |
— | +0.01
| +0.39 | +0.53
|
| Business tax rises | —
| +2.01 | +2.59
| +2.83 |
| Rules for: Corporate capital losses | +0.02
| +0.21 | +0.30
| +0.30 |
| Life assurance companies | +0.15
| +0.11 | +0.08
| +0.08 |
| Corporate intangible assets | +0.01
| +0.09 | +0.12
| +0.12 |
| Sale of lessors | +0.01
| +0.04 | +0.09
| +0.16 |
| Oil valuation | —
| +0.04 | +0.08
| +0.08 |
| Other business tax rule changes4 | -0.01
| +0.09 | +0.05
| +0.09 |
| Other measures affecting business |
+0.18 | +0.58
| +0.72 | +0.83
|
| Other "revenue protection" measures5
| — | +0.08
| +0.20 | +0.22
|
| Measures benefiting households6 |
-0.21 | -1.23
| -0.92 | -0.97
|
| Spending: addition to special reserve
| -0.58 | —
| — | —
|
| OVERALL TOTAL | -0.80
| +1.10 | +2.11
| +2.54 |
|
1 Rise in VAT thresholds, small company capital allowances.
2 Biofuel capital allowance; duties for biofuels, road fuel gases
and electricity generation; minor measures affecting oil producers
and stamp duty on shares. 3 Described as "tackling tax motivated
incorporation" in the Treasury report. 4 Film tax incentives,
gambling machine tax rules, rules on stock lending, duty on rebated
oils. Film tax changes portrayed as an incentive but raise revenues
slightly. Rebated oil duties shown as small cost to government
in 2005-06, with no revenue impact thereafter, but only because
the steep rises implemented were already assumed and have been
slightly delayed. 5 Capital gains tax rules, tobacco smuggling,
income tax for assets transferred abroad. 6 Winter fuel payments,
half share of main road fuel duty freeze, pensioner fuel poverty
measures, tax credits rule change package, and minor measures
affecting housing benefit, self-employed NICs and bank accounts.
Note that the tax credit package costs the Government in 2006-07
but raises revenue in the following two years.
8. Against the background of a further rise in the overall
business tax burden, it is once again disappointing that the Government
did not signal any intention to adopt some minor business tax
changes put forward by the CBI, which would have benefited SMEs
and entrepreneurs in particular at virtually no cost to the exchequer.
Issues reiterated by the CBI ahead of this and earlier fiscal
policy announcements include: the tax treatment of associated
companies; the tax treatment of the incidental cost of raising
equity finance; and the tax treatment of investors in small quoted
companies.
(B) VIEWS ON
SPECIFIC AREAS
OF POLICY
ISSUES OF
CONCERN OR
POTENTIAL CONCERN
North Sea oil companies
9. The CBI is extremely concerned about the damage that could
be done by the doubling of the supplementary oil revenue charge
from 10% to 20%. At a time when there is so much business concern
about security of energy supplies, the UK should be seeking to
get as much out of the North Sea as possible. But to maximise
its potential, a stable, supportive fiscal regime is crucial.
By contrast, the Chancellor's move risks undermining North Sea
investment and exploitation of our indigenous energy reserves.
It is an approach which makes little sense as part of an integrated
energy policy.
10. The Chancellor should have noted how the precipitous
changes in the North Sea fiscal regime in 2001 resulted in a significant
drop-off in new entrants in 2002, and corresponding fall of exploration
and appraisal activity in 2002-03. Looking ahead, the CBI's recent
energy brief showed that if investment were to be hit as a result
of fiscal changes, the percentage of the UK's gas needs supplied
from the North Sea could fall to as low as 10% by 2020—compared
with 25% if current investment rates are maintained.
Planning gain supplement (PGS)
11. The CBI will be consulting members on the PGS and responding
to the government. We note the government has indicated that it
will not implement the PGS before 2008. The government's stated
desire to retain revenues locally and regionally, to scale back
and streamline section 106 payments, and to not charge business
until development has started, are all steps in the right direction.
12. However, the CBI still has a number of major concerns:
principally the PGS is not the right vehicle as it is likely to
deter development, it is a form of double taxation on development
(as capital gains tax can already apply) and similar taxes have
failed in the past. The government has also yet to indicate how
much revenue it hopes to raise and what the local-regional-national
breakdown will be.
13. Moreover, the decision to extend the Barker Report's
recommendation on PGS to non-residential as well as residential
development could add complexity when it comes to assessing the
value of uplift where development is for wider business objectives
such as business expansion. Whilst further investment in infrastructure
at local and regional level is welcome, business will need reassurance
that these investments will be delivered.
14. We are also concerned that a tax along these lines could
make development of more complex or more risky sites, such as
larger brownfield sites, less attractive to developers. And areas
of low prosperity most in need of renewal could be made less viable
for development.
Tax changes for SMEs
15. The government has announced that it will replace the
non-corporate rate and the zero per cent rate of corporation tax
with a single small companies' rate of 19%. While the CBI supports
simplification of the corporation tax structure, this measure
will mean that companies with profits of less than £50,000
per year could face a tax increase, depending on their current
distribution policy. To compensate for this the government will
increase first year capital allowances to 50% for small businesses,
whatever their legal form, from April 2006. However, this enhancement
will only last for one year.
Duty on heavy fuel oil (HFO)
16. The duty on HFO has increased significantly again. HFO
is particularly important in Northern Ireland, where it is used
by major industrial companies, including those in key sectors
such as food and engineering. Many of these firms have no choice
in their fuel usage due to lack of availability of natural gas,
and in fact Northern Ireland is eight times more dependent on
HFO than the rest of the UK. The oil is also used by the electricity
generating sector. The duty rise will significantly affect electricity
prices in the Province, due to contractual indexation on the price
of HFO.
"Anti-avoidance" measures
17. The package of measures ostensibly aimed at tackling
tax fraud and avoidance involves potentially significant revenues
(see table 1), even excluding the impact of the disclosure regime
which comes into effect in April 2006. The CBI will need to examine
the detail before commenting on the merits of each individual
proposal in the PBR. But we stand ready to lobby vigorously against
any aspects which go beyond straightforward countering of genuine
"abuse".
18. The UK is already slipping down the competitiveness league
as the Chancellor raises the tax burden on business. If he now
comes to be seen as "declaring war" on previously accepted
principles for tax calculation, the impact will be uncertainty
about the UK in the international business community. This may
well persuade some companies to move operations to other economies.
If the Chancellor is determined to push through this approach
it is vital that business and government work together to identify
any genuine problems, and to ensure that consequent changes in
law or practice do not penalise longstanding, legitimate business
arrangements.
AIMS SUPPORTED
BY THE
CBI
Science, technology and innovation
19. The Chancellor re-announced measures from the previous
week covering stem cell research, refining the R&D tax credit
and support for science and innovation. These measures are welcome.
20. However, the CBI would like to see further improvement
in this area. Innovation through research and development has
historically been one of the UK's strengths, but has been in danger
of being left behind in recent years. The existing tax credit
scheme remains far too narrow in its remit for many companies.
Improving the delivery of the credit is a step in the right direction,
but its coverage needs to be widened to allow more development
expenditure to qualify.
Skills and training
21. The CBI welcomes the rollout of the National Employer
Training Programme—Train to Gain. The pilot scheme was a
success and a voluntary national programme for low skilled employees
that provides free, flexible training is a positive step. However,
to help firms make the most of this training it must not require
staff to be absent from work for long periods on a one-size-fits-all
basis. The training has to be applied flexibly and must take into
account the day-to-day needs of business, particularly smaller
firms.
The deregulation agenda
22. The CBI is very pleased with the government's commitment
to follow up the Hampton and Arculus reports, though we will be
monitoring progress closely as previous deregulatory drives have
not always borne fruit. We specifically support the decision not
to proceed with OFR amongst other things (although it is true
that a good deal of preparatory work could have been saved had
the decision not to proceed been made earlier).
Real Estate Investment Trusts (REITs)
23. The REITs concept is fully supported by the CBI. A successful
REIT market—making it easier and more attractive to invest
in property—should benefit not only the property industry
and investors, but should also provide wider benefits to UK business.
Delivering the right structure, however, will be crucial and the
government must continue to work with industry on setting the
right operational framework. The Government must also avoid setting
an onerous conversion charge that could discourage take-up of
the new vehicles.
Housing and the planning system
24. The principle of local authority incentives for housing
growth is another positive move, as is the merging to the Regional
Housing and Planning Boards, though we will need to see more details.
There is a series of consultations in this area, which the CBI
will be looking into. We are pleased the Chancellor has appointed
Kate Barker to lead an investigation into the ineffectiveness
of the planning system, which is currently a major inhibitor to
growth. It is to be hoped that the government acts quickly and
decisively on her findings.
Short-term energy supply
25. We welcome the inquiry into the behaviour of European
energy markets to find out why gas supplies have been diverting
away from the UK. This is an urgent matter, as this diversion
is damaging UK business by the day.
Main road fuel duties
26. We support the continued freeze in main road fuel duties,
which is fully justified given continued volatility in oil markets
and the rise in the oil price recorded during 2005.
Energy-saving measures
27. The increased £35 million for the Carbon Trust,
to provide interest-free loans for SMEs for the introduction of
energy saving measures, was called for by the CBI.
(C) PROJECTIONS FOR
THE ECONOMY
AND PUBLIC
FINANCES
28. The new Treasury forecasts show economic growth (relative
to the March 2005 Budget) cut for this year to 1¾% (from
3-3½%) and shaved to 2-2½% (from 2½-3%) for next
year. This places the Chancellor broadly in line with private
sector forecasters in the near term.
29. However, the CBI remains less sanguine than the Treasury
about the state of the public finances. There will be an extra
£17 billion of borrowing over the 2005-06 to 2009-10 five-year
period relative to the March Budget projections. This is despite
the net policy tightening worth some £7 billion over that
timespan. And even this projection relies on a significant bounceback
in economic growth in 2007 and 2008, which we regard as on the
optimistic side.
30. The CBI had recommended that the Chancellor take a firmer
grip on the growth of public expenditure, to head off any need
for further discretionary tax increases, and to pave the way for
the overall and business tax burdens to be gradually rolled back
in due course. We are pleased that slower growth of spending has
been pencilled in beyond 2007-08 (and also welcome the Chancellor's
stated commitment to contain public sector paybill growth in the
short term). But it is unclear whether these plans will be sufficient
to avert a further fiscal policy tightening, and of course the
government is not bound by these projections.
31. Table 2 sets out just how far the public finances
have been allowed to drift in recent years. Spending plans for
the present financial year (2005-06) have been subtly ratcheted
up since 2002 by a cumulative £9 billion. That is on top
of the extra £26 billion unveiled in that year's Budget.
At the same time, revenues are set to come in £11 billion
lower than projected in 2002, even though money GDP is on course
to come in almost exactly as envisaged at that time (on the basis
of the "cautious" growth assumption). As a result, the
government will borrow some £20 billion more this financial
year than planned three-and-a-half years ago.
Table 2
HOW THE PUBLIC FINANCE HAVE BEEN ALLOWED TO DRIFT
|
| Total managed expenditure in 2005-06, £1 billion
| Financed
by revenues
| Financed
by borrowing
| Total |
|
| 2001 Budget plan | 473
| 12 | 485
|
| 2002 Budget plan | 494
| 17 | 511
|
| 2005 Pre-Budget Report estimate | 483
| 37 | 520
|
|
| December 2005 | |
| |
| 
