Select Committee on Treasury Fourteenth Report


6  ECONOMIC POLICY CHALLENGES

Our approach

42. In this chapter we are concerned with identifying some of the specific economic policy challenges that relate to globalisation, particularly those that have a bearing on the work of the Treasury. We also identify some of the issues that we may wish to pursue ourselves as a Committee in this area. Many of these issues merit detailed consideration separate from their relevance to globalisation, and we do not seek to make detailed recommendations on individual issues in this Report.

Globalisation and overall Government economic policy

43. The Government, and the Treasury in particular, have sought to promote understanding of the importance of globalisation in the context of the Government's overall economic policy. The Treasury has produced three detailed analyses of globalisation, one from an international perspective,[134] one centred on the impact of globalisation on the United Kingdom economy,[135] and one relating to the relevance of globalisation to the Government's economic reform agenda.[136] Globalisation has also been one of the main themes of recent machinery of Government changes, with the creation of both the Department of Innovation, Universities and Skills and the Department for Business, Enterprise and Regulatory Reform linked to the Government's wish to "rise to the new global challenges".[137] We welcome the Government's endeavours to analyse globalisation and its implications for the United Kingdom's economy and Government economic policy. In order to promote understanding of the impact of globalisation on jobs and communities, we consider that there needs to be an annual analysis on a consistent basis of new developments affecting the Government's assessment of the impact of and prospects for globalisation, reflecting the dynamic nature of the changes arising from globalisation and its increasing importance in policy formation. We recommend accordingly that the Government publish an annual review at the time of the Pre-Budget Report covering prospects for the globalisation, evidence on the impact of globalisation on jobs and communities and the Government's economic policy response.

The international dimension

PROMOTING OPEN TRADE

44. There is an important international dimension to the United Kingdom's economic policy response to globalisation. While the United Kingdom's global economic influence should not be exaggerated, it also has to be recognised that, as Professor Sen put it, "Britain is a leader of the world community in a variety of ways".[138] We have already noted the risks to globalisation from a rise of protectionism.[139] The United Kingdom, as an open economy, is likely to feel the effects of such moves to a significant degree.[140] According to the Treasury, the United Kingdom "has been a major proponent of progressive trade liberalisation, and will continue to pursue more open global markets".[141] In particular, the Government has been "pressing for … a successful conclusion of the WTO negotiations".[142] In March 2007, the then Chancellor of the Exchequer told us about the United Kingdom's role in relation to those talks, bilaterally and as a member of G7 as well as through the European Union.[143] We referred earlier to signs of increasing protectionist sentiment and the risk that an increase in protectionist measures, and a retreat from multilateral trade agreements, would endanger the progress of globalisation, and pose a threat to both developed and developing economies.[144] A successful conclusion to the World Trade Organisation negotiations would be of crucial benefit to globalisation, to developing nations and to the United Kingdom, and promotion of such a conclusion should continue to form an important element in the Government's economic policy response to globalisation. Without such a conclusion, all nations, and developing nations in particular, face a more uncertain future.

REDUCING RISKS FROM GLOBAL IMBALANCES

45. We noted earlier that a disorderly unwinding of global imbalances represents a risk to the progress of globalisation.[145] We have previously referred in our Report on the IMF to the important role that that institution could play in reducing such risks, not least through authoritative and independence surveillance, both at multilateral level and in relation to the exchange rates and economic conditions of individual countries.[146] The Government has a long-standing commitment to securing reform of the IMF's surveillance arrangements and considers that "there is a compelling case for revising the IMF's 1977 Surveillance Decision".[147] The Government has identified what it sees as the priorities for a revised Decision—including "a more thorough conduct of exchange rate surveillance" and a reinforcement of "the links between multilateral and bilateral surveillance in the context of increased global spillovers"—and for the accompanying remit.[148] The success of the International Monetary Fund in coming years will undoubtedly be judged in relation to its performance of its core and critical function in ensuring that global imbalances are properly addressed. We welcome the Government's efforts to secure reforms to the International Monetary Fund's surveillance and we recommend that it provide an update on the progress of those efforts in its response to this Report.

PROMOTING GLOBAL ACTION AGAINST CLIMATE CHANGE

46. Globalisation and the rapid growth of emerging economies such as those of China and India place added pressure on natural resources and influence global action in relation to climate change. The economic aspirations of emerging economies provide an added ethical dimension to the global debate on climate change, insofar as developing countries may feel that developed nations secured their current economic status with limited regard to environmental implications.[149] The United Kingdom's influence in relation to international action against climate change, and the relationship between such action and the progress of globalisation, is likely to be affected by the appropriateness of the domestic policy response to climate change. That policy response, and its linkage to international developments, are matters we will explore further in our Report on Climate change and the Stern review.

Promoting innovation

47. According to the Government,

Sir George Cox was of a similar view, telling us that, in a highly competitive global market, innovation was vital if businesses were to remain competitive:

    You can only flourish in such a world—that is when you talk as an individual, a company in industry or a nation—by innovation, by progressively looking at new ways of applying new developments, new ways of doing things, whether it is new products, new technologies or new routes to market, whatever.[151]

The EEF echoed this comment, arguing that "we need to put more effort into developing innovation … to compete in world markets in the future".[152]

48. There is likely to be some linkage between spending on Research & Development (R&D) and innovation. Currently the United Kingdom spends a lower proportion of GDP on R&D than many of its competitors, as Table 1 illustrates.

Table 1: Gross Domestic Expenditure on Research and Development as a % of GDP

  
2001
2002
2003
2004
2005
Finland
3.30
3.36
3.43
3.46
3.48
France
2.20
2.23
2.17
2.14
2.13
Germany
2.46
2.49
2.52
2.50
2.51
Japan
3.14
3.18
3.20
3.18
  
Sweden
4.25
  
3.95
  
3.86
United Kingdom
1.83
1.83
1.79
1.73
  
United States
2.76
2.65
2.68
2.68
  

Source: OECD Main Science and Technology Indicators 2006/02

Because R&D spending has the potential to lead to innovation in business, low levels of R&D spending could, over time, lead to an erosion in the United Kingdom's competitiveness in several industries. The Treasury has set a target for the United Kingdom economy to attain a ratio of 2.5% investment on research and development to GDP by 2010.[153] The Federation of Small Business viewed this target as insufficiently ambitious, pointing out that the Governments of Sweden and Finland aim to reach investment levels of 4% of GDP by 2010.[154]

49. Despite the evidence of the United Kingdom's low levels of R&D spending relative to other countries, many witnesses expressed caution about placing too much importance on increasing levels of R&D expenditure as an end in itself. According to Mr Stephen Radley, Chief Economist of the EEF, "In the private sector, obviously driving up levels of R&D is important, but in many cases that is not the whole story about delivering innovation".[155] Bridget Rosewell, Chief Economist from the Greater London Authority, also argued that "for most businesses it is what you can do with the research once you have done it that matters".[156] Sir George Cox was concerned about the limited ability to convert British inventiveness into successful business applications. He asked rhetorically "where are our Googles? Where are our Microsofts? Where are our Dells?"[157] As Sir George acknowledged, the onus partly lies with businesses themselves, for whom innovation should be in their self-interest,[158] but two areas for Government action were identified in evidence—relating to support for R&D through the tax system and to support for innovation through public procurement.

50. Since the Government introduced R&D tax credits in 2000, it has made a number of changes to the rates of such credits and the rules governing eligibility, most recently in the 2007 Budget.[159] The Government has also implemented changes to the way in which it administers R&D tax credits in order to make it easier for businesses to claim the credits.[160] We received mixed evidence about the effectiveness of the R&D tax credit scheme in increasing levels of R&D, with some sceptical about the value of the current structure and whether it subsidised investment which would have taken place anyway and others more supportive.[161] Some evidence concentrated on awareness of the credit and the effectiveness of its administration.[162] We have examined R&D tax credit briefly as part of our regular scrutiny of Budgets and Pre-Budget Reports.[163] We may explore the role and effectiveness of Research and Development tax credits in a separate inquiry in due course, examining the linkages to levels of innovation in the economy and to the wider system of business taxation, as well the levels of R&D tax credit and its administration.

51. Witnesses also argued that the Government could encourage innovation through its own procurement practices. Sir George Cox argued that "public sector procurement generally could be a big force for innovation", but thought that its effectiveness as a tool for innovation was undermined by over-specified requirements.[164] Similarly, Mr Radley described public sector procurement as "very bureaucratic, risk averse and slow", and said that, in many cases, businesses could produce products or deliver services which were more advanced than those which the Government was currently demanding through procurement.[165] Sir George Cox argued for a less risk averse approach to procurement, with more willingness to encourage joint projects, albeit subject to robust risk-management.[166] In January 2007, the Government published plans intended to transform government procurement, including through "an outcome-based and whole-life value approach … to encourage more innovative solutions to problems".[167] We expect to explore the Government's ambitions to make public procurement more supportive of innovation as part of our Sub-Committee's regular scrutiny of the work of the Office of Government Commerce.

Improving the business environment

52. One of the consequences of globalisation is that businesses are increasingly international in nature. The concept of a "British company" is less precise and meaningful than in the past.[168] However, the location of businesses for the purpose of taxation and employment is still enormously important, and the Government, through its policies, can do much to shape decisions on location and to assist the competitiveness of United Kingdom-based firms. In particular, we received evidence on the importance of tax policy and administration in that context, as well as regulation and planning, and policies relating to the environment.

53. In setting tax policy and tax rates, including corporate tax rates, the Government considers the desirability of "tax policies that promote innovation and enterprise … while ensuring that all taxpayers contribute their fair share to the provision of public goods and services".[169] The CBI argued that there had been a deterioration in the United Kingdom's tax competitiveness in recent years, and this view was echoed by the EEF.[170] Concerns expressed in evidence related to the complexity of the tax system as much as tax rates, with some suggestions that efforts to counter tax avoidance had added to that complexity.[171] In November 2006 the Treasury published a Review of Links with Large Businesses, which set out recommendations on how to make the administration of the tax system work better for businesses. The recommendations included a proposal to give businesses more forewarning of the tax implications of their business decisions.[172]

54. Some evidence suggested that there was only limited direct linkage between corporate tax rates and international competitiveness.[173] The then Chancellor of the Exchequer also told us in March 2007 that he thought that the corporation tax rate was only one factor amongst many affecting businesses' relocation decisions.[174] A recent study by the National Audit Office concluded that "the administration of corporate taxes in a globalised environment presents significant challenges" and demonstrated that the rates of corporate taxation may not matter as much for many large businesses which are able to plan their affairs so as to minimise their tax liabilities.[175] Analysis of the global competitiveness of United Kingdom businesses and of the United Kingdom as a business location has an important role to play in decisions about corporate tax rates and about the administration of the business tax system. Globalisation has enhanced incentives to develop a competitive corporate tax system, while at the same time enhancing the challenge associated with ensuring that all businesses pay a fair share of overall taxation. Simplicity is likely to be crucial to the effectiveness of a corporate tax system in an increasingly globalised economy. We consider that the Government should provide a more thorough and systematic analysis of these matters and of the effectiveness of its measures to create a simpler and better administered tax system—not least through the annual review on globalisation that we recommended earlier—and we expect to bear these factors in mind in our continuing scrutiny of tax policies and tax administration.

55. The Government has acknowledged that an efficient regulatory system allows businesses to compete effectively.[176] It believes that a transparent and well-respected regulatory tradition in the United Kingdom gives British businesses a competitive advantage.[177] The CBI welcomed the Government's commitment to better regulation,[178] but the Federation of Small Businesses expressed concern about the continuing high volume of regulation for small businesses.[179]

56. Both Sir George Cox and Mr Radley of the EEF argued that costs, delays and uncertainties in planning procedures inhibited business development.[180] Mr Radley suggested that bureaucratic planning procedures could make it difficult for industry to implement changes which were better for the environment.[181] In May 2007, the Government set out its intentions for planning reform in a White Paper, which sought to build on earlier measures to speed up the process, as well as containing measures to simplify the provisions governing how planning applications are made and to streamline information requirements for applications to reduce the burden on all parties involved in the planning process.[182]

57. Business location and competitiveness might be affected by environmental regulation, although Professor Neumayer told us that there was very limited evidence that tightening environmental regulations led to business relocations.[183] Some witnesses emphasised that environmental efficiency and productive efficiency went hand in hand.[184] Friends of the Earth argued that there would be competitive benefits from the development of a low-carbon, resource-efficient economy.[185] Mr Wolf suggested that an environmental policy based specifically around carbon taxes that was not in step with competing nations would be counter-productive in the context of competitiveness.[186]

58. We recommend that the annual review of globalisation by the Government which we have already proposed include an assessment of the specific roles of regulation generally, and the level and operation of planning controls and environmental regulatory standards specifically, in relation to the United Kingdom's global competitiveness.

The labour market

IMPROVING SKILLS

59. In responding to globalisation, the Government has placed particular emphasis on skills. It has argued that "Globalisation has increased the importance of skills for developed economies", creating "an increased need for high-level skills and equally a strong base of intermediate and basic transferable skills that can respond quickly to changing business demand".[187] The Government has acknowledged the "particular need for further progress … to raise the UK skills profile".[188] The need to improve skills in the labour force was also a recurring theme in evidence.[189] Mr Tholstrop thought that "the one area Britain …. is somewhat lagging behind in terms of its stance on globalisation is in the area of education and training".[190]

60. In 2004, the Government commissioned Sandy Leitch, Chairman of the National Employment Panel, to undertake an independent review of the United Kingdom's long-term skills needs. The final report of the Leitch Review was published in December 2006 and recommended that the United Kingdom should aspire to being a world leader in skills by 2020. Its recommendations included:

  • increasing employer engagement in the investment in skills;
  • rationalising existing bodies related to the provision of skills through creating a new Commission for Employment and Skills; and
  • by 2010, directing all public funding for adult vocational skills in England, apart from community learning, through Train to Gain schemes and Learner Accounts.[191] Train to Gain schemes involve the Government providing support to firms to train their employees up to Level 2 (five good GCSEs) and Level 3 (2 good A levels).[192] Learner Accounts are a mechanism to provide people with some government funding, which they can then spend at an accredited learning provider of their choice.[193]

61. In July 2007, the Government published its proposals to implement the Leitch Review. The Government committed itself to the ambition of becoming a world leader in skills by 2020, benchmarked against the top quartile of OECD countries. It also established a series of intermediate targets to be achieved by 2011 and 2014. The Government proposed to make Train to Gain a much broader service to help employers to improve the skills of their employees.[194] In evidence which we received prior to the Government's announcement, some possible weaknesses in Government's skills policy were identified, relating in particular to the danger that Government financial support might subsidise training that was already taking place rather than create additional training,[195] the apparent gap between inputs in terms of public and private investment and the outputs in terms of gains in skill levels,[196] and the appropriate balance between basic skills and specialist skills.[197] A recent Report by the Education and Skills Committee has also expressed concerns about the direction of current policy, relating to the uncertain relationship between qualifications and skills, the complexity of the delivery infrastructure and the risks associated with the Train to Gain model.[198]

MIGRATION AND THE LABOUR FORCE

62. As we noted earlier, increased inward migration associated with globalisation can also contribute to enhancing the skills available in the economy.[199] This is only one of the factors that needs to be borne in mind in the formation and operation of immigration policy. The United Kingdom nevertheless seeks to operate a policy in which non-European Union workers are allowed to come into the United Kingdom on the basis of their experience and skills, which is assessed through a points-based system in order to bring in "migrants who are highly skilled or to do key jobs that cannot be filled from the domestic labour force or from the EU".[200] The Home Affairs Committee reviewed immigration controls in a Report in July 2006 which noted mixed evidence on the economic and social effects of migration, while concluding that "facilitating travel for … workers who meet labour needs that cannot otherwise be met is essential to our national interests".[201] In August 2007 the City of London Corporation published a study on the impact of recent immigration on the London economy. That study concluded that new migrants shared characteristics of relative youth, above average qualifications and positive ratings by employers. It noted two distinct positive effects of migration—a qualitative impact on the London labour force and economy, through diversity, flexibility, international experience and skill sets, and a quantitative contribution through expanding labour supply and thus enabling employment growth and reducing upward wage pressure. It acknowledged that these benefits needed to be weighed against costs relating to accommodation and public services.[202] Mr Stephen King argued that:

    The economic reason for immigration controls is really a protectionist reason, that by trying to keep people out of a particular country effectively you are trying to protect the rights, wages and perceived benefits of the indigenous population. But in the same way that restrictions on trade are damaging economically, restrictions on migration, ultimately, will be damaging economically … If you close yourself off from immigration economically then you are likely simply to be protecting the interests of the current crop of workers, with the economy becoming more stagnant as a result.[203]

The National Institute of Adult Continuing Education has stated:

    Although there is a Ministerial committee on asylum and migration there appears to be little visible co-ordination across government policies about the labour market consequences of migration—including the differential distribution of migrants across the countries and regions of the UK.[204]

The evidence available on the economic effects of migration is limited, and we note that the House of Lords Economic Affairs Committee has recently announced its intention to conduct an inquiry into the economic impact of immigration.[205]

CONCLUSIONS

63. The Government is right to place its policy on skills at the centre of its economic policy response to globalisation. There remain a number of unresolved issues about the best way forward for such a policy. There is firm evidence of some of the beneficial effects of inward migration for the United Kingdom economy, but we remain to be convinced that sufficient analysis and debate has taken place on the economic effects of migration and on the role inward migration might play in enhancing the skills base of the United Kingdom which faces skills shortages and an ageing population. We expect to undertake further work relating to the economic effects of migration later in this Parliament.

The social policy response to globalisation

64. In this Report we have been concerned principally with the economic policy implications of globalisation. We also heard evidence about the links between globalisation and social policy, in particular about the way in which Government and others respond to the social consequences for the "losers" from globalisation.[206] As Professor Sen emphasised, it is important to recognise that globalisation also has an impact on the way in which society functions.[207] In a meeting with the Committee Chairman, Professor Stiglitz cautioned against the view that the rising tide of globalisation would "lift all boats", suggesting that the "losers" of globalisation in the United Kingdom would be those at the very bottom of society, most notably those who were unskilled and/or on low wages. The need to respond to globalisation and to its adverse effects may be a factor in welfare policy and other social policies, although it is not immediately evident how far that need can be separated from other policy considerations. We recommend that the Government, in its response to this Report and in the annual reviews on globalisation that we earlier recommend, set out its views on the links between globalisation and the formulation of welfare and other social policies.


134   Long-term global economic challenges Back

135   Globalisation and the UK Back

136   Long-term opportunities and challenges Back

137   HC Deb, 28 June 2007, cols 36-38WS Back

138   Q 304 Back

139   See paragraph 15. Back

140   HC (2006-07) 389-II, Qq 242-243 Back

141   Long-term opportunities and challenges, para 4.44, p 61 Back

142   Ibid., para 4.56, p 64 Back

143   HC (2006-07) 389-II, Q 240 Back

144   See paragraph 15. Back

145   See paragraphs 16 and 28. Back

146   HC (2005-06) 875, paras 9, 41, 44-45 Back

147   HC (2006-07) 52, p 6 Back

148   HM Treasury, The UK and the IMF 2006: Reform to deliver prosperity for all, March 2007, paras 2.8-2.9, pp 12-13 Back

149   See paragraph 18. Back

150   HC Deb, 28 June 2007, col 38WS Back

151   Q 141 Back

152   Q 160 Back

153   HM Treasury, Press Notice, £1 billion boost for UK Science and Innovation, 2004 Spending Review, PN C4, 12 July 2004 Back

154   Ev 112 Back

155   Q 174 Back

156   Q 13 Back

157   Q 163 Back

158   Q 175 Back

159   HM Treasury, Lisbon Strategy for Jobs and Growth, UK National Reform Programme, Update on Progress, October 2006, para 3.59; Cox Review, p 24; Budget 2007, Box 3.3, p 51 Back

160   Lisbon Strategy for Jobs and Growth, UK National Reform Programme, Update on Progress, October 2006, para 3.59 Back

161   Q 75; Ev 94 Back

162   Ev 112; Qq 173, 181 Back

163   HC (2006-07) 389-I, paras 55-57 Back

164   Q 171 Back

165   Ibid. Back

166   Qq 176, 177, 212 Back

167   HM Treasury, Transforming government procurement, January 2007, Box 2.1, p 13 Back

168   Qq 24, 322 Back

169   Long-term global economic challenges, para 4.26, p 42 Back

170   Ev 94; Q 146 Back

171   Ev 113; Q 194 Back

172   HM Revenue and Customs, 2006 Review of Links with Large Business, November 2006, para 1.9 Back

173   Q 72 Back

174   HC (2006-07) 389-II, Q 299 Back

175   National Audit Office, HM Revenue & Customs: Management of large business Corporation Tax, July 2007, HC (2006-07) 614, p 7; The Financial Times, 29 August 2007, pp 1, 3 Back

176   Long-term global economic challenges, para 4.30, p 43 Back

177   Globalisation and the UK, Box 2.4, p 22 Back

178   Ev 95 Back

179   Ev 113 Back

180   Qq 196-197, 207 Back

181   Q 207 Back

182   Department for Communities and Local Government, Planning for a Sustainable Future White Paper, May 2007, Cm 7120, Summary, para 1.40, p 18 Back

183   Q 278 Back

184   Q 212; Ev 116 Back

185   Ev 116 Back

186   Q 90 Back

187   Long-term opportunities and challenges, para 4.29, p 57 Back

188   Globalisation and the UK, para 4.7, p 52 Back

189   Qq 111, 159 Back

190   Q 213 Back

191   HM Treasury, Prosperity for all in the global economy-world class skills: Final Report of the Leitch Review of skills, December 2006, pp 3-4 Back

192   Ibid., p 75 Back

193   Ibid., p 111 Back

194   HC Deb, 18 July 2007, cols 297-299; Department for Innovation, Universities & Skills, World Class Skills: Implementing the Leitch Review of Skills in England, July 2007, Cm 7181 Back

195   HC (2006-07) 115, Q 82 Back

196   Q 158 Back

197   Ibid. Back

198   Education and Skills Committee, Ninth Report of Session 2006-07, Post-16 Skills, HC 333-I Back

199   See paragraph 31. Back

200   Home Office, A Points-Based System: Making Migration Work for Britain, March 2006, p 1 Back

201   Home Affairs Committee, Fifth Report of Session 2005-06, Immigration Control, HC 775-I, paras 22-32, 55 Back

202   City of London Corporation, The Impact of Recent Immigration on the London Economy, August 2007, pp 3-5 Back

203   Q 30 Back

204   HC (2006-07) 333-II, Ev 363 Back

205   www.parliament.uk/parliamentary_committees/lords_economic_affairs Back

206   Ev 156 Back

207   Q 318 Back


 
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