Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 180 - 199)

TUESDAY 17 OCTOBER 2006

SIR GEORGE COX AND MR STEPHEN RADLEY

  Q180  Mr Newmark: We could have it at the other end. For example, we have 200 years of coal. Should we be getting EU support for carbon capture, carbon sequestration, for the coal industry? Is that a role that the EU should be playing or is that a UK role?

  Mr Radley: I think it may be a case of both. One important priority there is we look at the Emissions Trading Scheme and we are moving towards greater levels of auctioning now, initially on the power generators. That is going to raise a lot of money. One thing governments should be looking at very closely is investing the money that is raised in that in R&D. They could play a very important role in making carbon capture and sequestration a commercial reality. We are still some way from it being commercially viable, but there are obviously enormous opportunities there.

  Q181  Mr Newmark: I am curious, which do you see as preferable: the Government encouraging R&D by providing incentives to companies through R&D tax credits—and I know you touched on this a bit earlier—or the Government increasing public expenditure on R&D itself? Would you flesh that out a bit more?

  Sir George Cox: There are two elements to this and one is the generosity of the scheme. It is a tax credit scheme; in other words, it is not a tax allowance. You do not make losses to get this. It is a straightforward: "We will fund R&D" provided it is not just product-specific. I spoke to a number of large companies about it—because, although my report focused on the smaller business, large companies have design units which are actually small units around the world—and they explained to me, "This is quite competitive. Other people are competing for us to be based there." I said, "What makes the difference? Is it the percentage you get?" and they said, "No, what makes the difference is the consistency of the scheme—if we are going to make a 20-year decision on where we base research, we want to know the regime is going to be stable for the next 20-odd years—and, secondly, the ease of dealing with the scheme—we do not want to spend all the money on bloody accountants." Saying we should tweak it by another per cent does not matter. I think a lot of it comes back to the point we have hammered already: the public sector demanding innovation. It is very important, because I do not think there is a single issue that we face in society that is going to be served by throwing resource at it. Whether you talk of health care, security, congestion, energy, it is down to innovation. It really is down to innovation and how one demands that innovation that is going to have a big impact.

  Q182  Mr Newmark: That is answering a different question from the one I have asked.

  Sir George Cox: It is a good question to have answered though!

  Q183  Mr Newmark: Just focusing a little bit here, you recommended a move to partly an incremental scheme of R&D tax credits.

  Sir George Cox: Yes.

  Q184  Mr Newmark: What do you see the advantages or disadvantages of that particular scheme?

  Sir George Cox: That is a good and specific question.

  Q185  Mr Newmark: Your last answer was very good but it was not question specific!

  Sir George Cox: I argued for a scheme which was incremental. In other words, too much of the money spent on R&D tax credits at the present, I believe, is just being spent on R&D which would be done anyway—which is great, but you are just giving a large amount of money to people who would do it anyway, perhaps just helping to keep it here. I would like to see a scheme where you were rewarded for upping the level. For example, for the R&D you did above the level you have done—say, the best of the last five years—it should be at a much higher rate. You are trying to get people to increase their game, not just to maintain it. In other words, if a company, this year, for the first time spends money on R&D and they are quite satisfied, get them to do more. The argument against it was: It complicates the scheme. As a person who in the past has argued against the complexity of the tax scheme, I have a fair amount of sympathy with that, but when I argued this with HMRC and the Treasury, the view, not unreasonably, was: "All right, we are not rejecting that, but it would be better to do the other things you are saying and get the present scheme working well and people using it before we further complicate it." I have not abandoned that as something I would like to see or would like to see considered very seriously, but if they can get a regime at present where people find the scheme easy to deal with, where they do not have to deal with the tax inspector who has never encountered research before but deal with a special unit, good enough for a start.

  Q186  Mr Newmark: What difficulties confront businesses attempting to establish stronger links with universities?

  Mr Radley: The starting pint is that it is becoming more positive. Certainly our survey evidence suggested that around about half of companies were working with the universities. In many cases, these are not necessarily high level projects—I think in many cases it may be about getting access to a specialist bit of equipment or specialist skills for a period of time—but we have a strong starting point. In many cases, we faced a problem of a lack of understanding of the different cultures, the different timescales, the different objectives that the two organisations are working towards.

  Q187  Mr Newmark: It seems to work very well in the US and does not seem to work particularly well over here.

  Mr Radley: I do not think that is necessarily the case. We have interviewed quite a lot of companies which have experience in both countries and they have said that in some cases the UK universities tend to be as good, if not better, in understanding how to work with business.

  Sir George Cox: I think the issue with working with universities is that, for the larger companies, it is working pretty well: if you ring up a university and speak to the vice-chancellor and say, "I'm from Rolls Royce" you are in, but if it is Cox & Newmark: Who do I ring up? Who do I get to?

  Q188  Mr Newmark: You get to lots of people!

  Sir George Cox: It is difficult for the smaller company to plug into universities, and in many cases they could benefit. They could benefit enormously from the research facilities available in the university, from prototyping facilities and the like, or if you get a placement. Too many university graduates are looking for a placement with a blue-chip company. If you get a placement with a small company, you can transform them. This is an issue I have debated a lot with universities and the question for them is: Where do we go for the smaller company? I have advised them to use the local Chamber of Commerce. Why are you not a member of the local Chamber of Commerce? Why are you not a member of the IOD? I once had a meeting with a dozen university chancellors who wanted to talk, when I was heading up the IOD, about better relations with business. They entertained me to dinner. In the Athenaeum. My view was: "Why are we not eating across at the IOD or somewhere like that?" If you want to understand the fishes better, jump in their water. A lot of this has to come down to the universities to reckon on what you do to access companies. That is a huge potential. I think it works very well with the large companies but I think the smaller companies do not take advantage of what the universities could offer them.

  Q189  Jim Cousins: Sir George, you were talking earlier about cultural models, which I think is a very powerful point. Is it not right that a very powerful cultural model of success that we offer in this country is working in the professional services that surround the activities of the City of London and working in financial services and having a huge bonus and having a tax account in the Cayman Islands, or similar? Do you think that is the right kind of cultural model to offer people in this country?

  Sir George Cox: I see a fair amount of truth in what you say. I suppose, to some extent, we have come through. I think we went through a period of a lot of people, particularly people who studied maths, thinking that was the glamour profession, to become traders. I think we are moving through that. People are recognising, for example, that if you study engineering it widens up an awful lot of opportunities to you. When you are talking about the model, you are talking about people who are studying and what they are going to do. I spoke to the Royal Academy of Engineering about this, to say that we should encourage people not to become engineers (because that is a career choice at 17 which a lot of people are not prepared to make) but to study engineering. Just study it. If you look at the head of the New York Stock Exchange, who came from Goldman Sachs—the head of Goldman Sachs globally, and that is pretty well paid—he came from MIT. That is what he studied. To get more people like that is not a loss to engineering. More people understanding innovation is an asset. Getting more people to study technology like that, I think, would be a great thing. If some of those people want to become traders, that is a very small element of the world. Even though it is highly paid, many think, "I wouldn't want to do that." The view that that was the kind of career opening, I think is changing. I hope so.

  Q190  Jim Cousins: Mr Radley, you were referring earlier to the training and education system. Is it not far more economically rational for a British company to acquire trained workers from Poland or Slovakia than it is to train British workers from the start?

  Mr Radley: I do not think it is the case of either/or. You may have a temporary increase in demand for particular skills, you may need to get access to particular specialist skills, and in many cases it will make sense to import those skills from abroad, sometimes permanently and sometimes on a temporary basis. But if you are looking at driving long-term change in a company and really improving its performance, you have to invest in your own skills as well, and you have to invest in skills in order to achieve a change in the culture of an organisation. In many cases, as well, you will see workers coming over from Central and Eastern Europe but they may be gone in a couple of years: Where does that leave you then? I think it makes sense in a global labour market to tap into those skills where they are available but you also need to develop your own. We are concerned. If you look at the evidence the Sector Skills Development Agency recently issued, some research suggests that business as a whole is spending £33 billion a year on investing in skills, which is enormous money, but we need to do it more effectively. Certainly the evidence we have produced suggests that too few companies link what they do on training to where their overall business is going, their business plan, and we need to do more to ensure that we spend the money better. One of our suggestions is that you revitalise the Investors in People initiative.

  Q191  Jim Cousins: Earlier in your comments to the Committee you said—and I have not got the exact phrase—that the British educational system was not delivering the results in terms of attainment and lifetime training and being value for money. I think that is more or less what you said. I wonder if you could explain that to the Committee, say why you think that, and perhaps give some examples.

  Mr Radley: I was not just talking about the education system, I was also talking about the system that encourages lifetime investment in workforce skills; so we are looking beyond the school system. If we look first at schools, I think there have been some major improvements in the output from education, but what concerns us particularly in manufacturing is that too few people are actually studying science, technology, engineering and mathematics, and in many cases they are not being taught sufficiently well because they are not being taught by a teacher with the specialist knowledge, so I think we need to do more to actually invest in the people who are teaching these subjects, and that may involve further financial incentives. I think they are starting to have an impact. Another thing we need to do is actually improve the quality of careers advice and guidance. In many cases people are actually receiving very limited advice and often it is coming too late. I think that what we really need to do is look from the age of 11, and possibly earlier than that, at actually enthusing people about taking science subjects by actually providing concrete examples to them of the relevance to the world of work, to actually show them that if you are taking a degree in science you can do lots of things: you could work in the City, but, for example, you could be working in developing the next generation of low-carbon technologies that will really address the problems of climate change that we face. There is a lot that can be done there. I think there are some areas where we have high hopes. I think the introduction of specialised diplomas from 2008, when that is being rolled out, offers a significant opportunity to raise the number of people that are taking science and engineering subjects and are attaining good standards in that, and that will certainly be one of the priorities that we will be looking for in the forthcoming spending review.

  Q192  Jim Cousins: Finally, to both of you, some people who look at issues of globalisation are increasingly concerned at the silting up of inequalities in society that create a kind of low-skilled, low-achieving low-aspiring section of society, not just in our own society but certainly in other European societies. We have seen some recent examples of how people actually vote, perhaps inspired by those kinds of experiences. Are either of you concerned about this, and, if you are concerned, what would you suggest we did about it?

  Mr Radley: I think the first thing to say is that, certainly at headline level, clearly what we are seeing in terms of the trends in globalisation are going to be increasing the premium on high-skilled, talented workers—the people who are the best are going to be able to command a significant wage—and, at the other end, if you have got low skills, your job opportunities are likely to be less secure, you are less likely to see improvements in your living standard, but I think that over simplifies it slightly and I think what we will be seeing looking forward is that some tasks that are considered high skill, in areas such as accountancy and law, I think in many cases will be under threat. Any job that can be standardised and located elsewhere, people who are in those industries will face significant threats as well. Ultimately, what we need to do, I think, to repeat an answer I said earlier, is to absolutely invest in basic levels of numeracy and literacy. If people do not have that, they have a very limited chance and I think their ability to acquire new skills is going to be extremely limited. I think what we are really looking at is what are the skills that are in demand now? Certainly there are technical skills, but what we find talking to companies is that it is about problem-solving, being adaptable, being a good communicator, being able to work in teams, and that does not just mean just putting your ego to one side but actually having the ability to work with people from a range of different disciplines effectively. I think those are some of the areas that we need to see action on.

  Sir George Cox: Perhaps I can give an answer to that. I think there is a great danger of this wealth which I see being generated being very unfairly split in terms of who benefits from it. Internationally the countries which worry me most are those which globalisation is by-passing. Through another interest, going to Sub-Saharan Africa, the issue there is not globalisation, it is that they just will not benefit at all. Customers will not invest there, they will not operate there. The Democratic Republic of the Congo, which I visited, the issue is that it is not taking an interest. It is a big world issue. If you come down on countries which are not being by-passed yet, you have a problem in some of a great disparity in wealth. I think it is a huge threat to Russia that you have got a country generating enormous wealth, in many ways a very wealthy country, creating, I think, a very unstable society. I spoke in Russia recently on corporate governance, which was quite a challenge, and, having spoken there previously and a month earlier in Lagos—

  Q193  Jim Cousins: No doubt military training comes in useful.

  Sir George Cox: I am sure it does. And someone argued with me, I got a question from the audience: "Mr Cox, you talk of this corporate governance. This all sounds good stuff, we like that, but your country grows at 3%, ours grows at 8% and people who ignore this are booming and people like you in the West are obviously held back by this and there is a big premium to pay for all this corporate government stuff", he said. One had to reply, and I said, "Look, if you do not take any notice of what is said here today about corporate governance, it will not affect your growth in GDP in the next five, 10 years at all, but what you are building is a society where that money will not even attract any external investment and the priority of people who make the money will be to get it out of the country, and that is your issue." I think you have got that kind of disparity which you have to address. When you come down to countries like our own, there is a danger of disparity as wealth is generated, and I think the answer to it is exactly what Stephen has said. The issue there is getting in younger people the aspiration to want to take advantage of this, to want to work, to want to have a career, and the education. That really is it. There are a number of issues to address there. I think when you talk of younger children, we are very good now at making education much more creative. I have daughters of 10 and 12 and, if you go and see what they are doing in any subject, it is remarkably exciting and creative to compare with when I studied, but, by the time they get into their O and A Levels, much of that is squeezed out and they do not see the relevance. We spoke earlier about training. The issue of training is getting people who want to be trained, want to be educated, want to be developed. It is the demand. I was recently at a university degree ceremony and all those doing engineering and computer science, not all but the vast majority were from overseas and it sends out a sense of pride. That is not because the universities do not want to educate them, it is because that is where the applications come from. I think that is the way we tackle it. It is no good saying, "Let's make more courses available and more training", you have got to get people wanting to do it.

  Q194  Mr Gauke: Mr Radley, you talked earlier about the impact of the increased tax burden on Britain's competitiveness. Is your concern principally the one that in absolute terms the tax burden has increased in recent years, or is it that at the same time the tax burden in a number of competing countries, if you like, has reduced? Is it the absolute tax burden about which you are concerned or the relative tax burden?

  Mr Radley: I think it is both. Just to elaborate on that a bit more, I think for manufacturers, what we have seen is that quite a lot of the increase in taxation that has occurred has been on the cost of doing business; so it is things like higher national insurance contributions and a variety of environmental taxes, which are there for understandable reasons, but for a lot of manufacturers it is extremely difficult to pass these costs on to their customers. That means that you suffer a squeeze on profitability. If you look at the recently published official statistics on profitability in manufacturing, they are now down to their lowest level since 1992. I think there is also an issue about whether our tax system is losing some of the competitiveness that it used to have, and I think that is partly about the fact that taxation levels, as a share of the economy, have risen in the UK while they have fallen in many of our competitor countries, but I think it is not just about that. What we have also seen is that our tax code has become increasingly complicated. That ties up a lot of management time and also means there are some very good incentives out there, but many companies are not accessing them because the system is too complex. I think what we are also seeing (certainly this is coming from the larger companies particularly) is something of a deterioration in the relationship between business and Her Majesty's Revenue and Customs because of the increased emphasis on anti-avoidance. Clearly, it is absolutely right to clamp down on illegal tax evasion activities, but I think this obsession with tax avoidance is leading to a deteriorating relationship. What does this mean in practice? I think what you see is that across the world there are a huge variety of tax systems, a huge variety of tax rates, and companies do not make decisions in terms of where they are located overnight, they do not take these decisions lightly, and they are going to be taking a huge range of factors into account—the quality of our universities, our transport system, skills, science, a whole range of factors—but we are starting to see signs that companies are starting to raise questions: "Is it competitive to be here on the basis of our tax system?" and people are looking at this really seriously now.

  Q195  Mr Gauke: Sir George, would you agree with that analysis?

  Sir George Cox: Yes, I think you get to a balance, and you get to the point where tax levels are a disincentive and also the application of the system is too complex. I say that, not from the work I did here, but from my previous role at the IOD, of course. Can I, again, almost answer a question that has not been asked but it leads on to the regulatory environment as well?

  Q196  Mr Gauke: You are about to answer a question I was going to ask, so please carry on.

  Sir George Cox: You talk about what government can do. It cannot make people want to become entrepreneurs or heads of companies, but government does play a big role in setting the environment in which companies operate and I think with the regulatory environment you can see areas of advantage. If you look at what has happened to the United States since Sarbanes Oxley, if you want to see how effective regulation can be and how negative it can be, look at the impact it has had there, look at the reaction of American business: a huge impact from clumsy knee-jerk regulation. Equally, if you talk about regulation here, one of the big issues that I have always felt is not the need for regulation, it is how it is applied. When we talk about regulation, how it is applied is almost as effective as the regulation itself. Can I give you an example? There was a company, a very good company, a food processing company, in the Midlands, doing very well, and they had expanded their factory, which was on an old farm site, three times over and it was understood that they would not get any more permission because of vehicles down the lane. Fine. So they looked for a brownfield side, and they get a brownfield site six miles away, they can develop it. Everyone is pleased. So, they are going to move, they are going to employ more people, all the local produce companies are happy. You know the company, A&B Foods. Anyway, they buy the site, get planning permission for it no problem at all. Of course, they have to dispose of the old site. No-one is going to turn it back into a farm and no-one is going to put in a factory there. So they put in a planning application for half a dozen nice residential buildings. Everyone is happy. They are told there is to be a planning inquiry. As soon as you say that, that is money, that is a lot of expense, that is about 40 grand just going in a planning inquiry. Everybody at the inquiry speaks up for it—the parish council, the local MP—everybody is in favour. Fine; no problem. You do not get an answer. The inspector has to give you an answer within six months. After five months the MD rings up and says, "Have you got an answer yet?" He gets a snotty reply, "No, Mr So and So is very busy." I am pretty busy trying to run a company here, but, just like that, turned down on the grounds that it is against policy to turn agricultural property into residential property, and they appeal, and I make this a bit of a cause céle"bre and eventually they got it.

  Q197  Mr Todd: I was going to say, it is in my constituency, I know they got it. You are talking about A & B?

  Sir George Cox: A & B Foods. I am not getting against planning permission. Living in Gerrards Cross, God knows why they allowed Tescos to be built over my railway, but I am not against planning. Who is against planning? Why on earth do you not get a quick answer? It is that. It is the cost, it is the delay, it is the uncertainty. So, when we talk about regulation, it is not just whether we should have it or not, it is how easy it is to comply with. Make it easy to comply with.

  Q198  Mr Gauke: That is an answer to a much better question than the one I had. Can I return for a moment back to the tax point, if I may. The flip side of the increased taxes we have is increased public expenditure. Can I ask to what extent, compared to the disadvantages of the higher taxes, there have been advantages for the competitive position of UK businesses by the increase in public expenditure we have seen over the last seven years?

  Mr Radley: That is obviously a very big issue and, clearly, some of the big increases in expenditure have been in areas such as the National Health Service, in relation to which, ultimately, there are benefits to business in terms of a fitter, healthier workforce, but I do not think are necessarily areas that EEF would hold a detailed view on. In terms of those that are more directly related to business, we have seen benefits for increased investment in science, and I think there can be more that can be done to make that more effective, and we have talked about some of those issues already, and also greater investment in skills. If we look at the skills issue in particular, there have been benefits in terms of improving the standards of educational attainment from schools, but we are concerned that there has been quite a lot of money wasted in this area. If we look a bit wider at the overall skills system, we have actually invented a very bloated bureaucracy, we have got the Learning and Skills Council, Sector Skills Councils, the Sector Skills Development Agency, and at the local level we have got Regional Skills Partnerships, we are soon going to have Skills Academies, and so you do need to ask questions. Yes, we have seen an improved increased investment in skills but in many cases is it actually delivering the outcomes we are seeking or has a significant chunk of this money gone to sustaining bureaucracy?

  Q199  Mr Gauke: If you were to do this—this is a very big question—if you were to try to balance out the disadvantages of the higher taxes with the advantages of the higher public expenditure, if you were to do an audit of the Government on that, what would your conclusion be?

  Mr Radley: I think I would answer on two fronts. Firstly, if you look at a country like Britain, I think there are natural limits to the share that public spending should take as a share of the economy, and I think once we get much beyond 40% it is starting to cause problems in terms of the competitiveness of our taxation system. I think probably the other concern is not necessarily that spending has been in the wrong areas or that overall it has been wasted spending, but the direction of the travel. We have gone extremely fast from being a low taxation country, compared to many of our competitors in the OECD, to having a tax burden significantly above the OECD average, and I think that is what most concerns us, the speed at which this change has occurred.


 
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