House of Commons - Budget 2011

Budget 2011 - Treasury Contents

4 The Plan for Growth

The aims of the plan

54. Budget 2011 was described by the Chancellor of the Exchequer as a Budget for "reforming the nation's economy, so that we have enduring growth and jobs in the future".[90] The Budget was accompanied by the publication of The Plan for Growth, which set out the Government's growth agenda. The Plan for Growth sets out the rationale for action in this area. The Chancellor stated that the UK had gone from:

having the 3rd lowest corporate tax in the EU-15 to having the 7th highest. In the World Economic Forum's Global Competitiveness Index, we've fallen from 4th to 12th. In education, the foundation of economic success, we have slipped back. In international rankings of excellence in maths, we've fallen from 8th to 28th, in science from 4th to 16th. Manufacturing has halved as a share of our economy, and 50 per cent of all manufacturing jobs have been lost. Our share of world exports has fallen from 4.4 per cent in 2000 to 2.8 per cent in 2009. These trends are not inevitable for an advanced economy: look at Germany whose share of world exports was 9.0 per cent in 2009 compared with 8.5 per cent in 2000. Not only do we export just a third as much as Germany, we even lie behind the Netherlands, a country a third our size.[91]

55. The Government considered that the UK economy had "become more and more unbalanced" with a growing gap "between the prosperity of the South East and the rest of the UK" as well as "between the richest in our society and the poorest". This they said had occurred even as government spending had "grown to equal about half of the entire national economic output, paid for by our highest peacetime budget deficit". Instead, the Government argued that:

Private sector growth must take the place of government deficits, and prosperity must be shared across all parts of the UK. We want to remain the world's leading centre for financial services, yes; but we should determine to become a world-leader in, for example, advanced manufacturing, life sciences, creative industries, green energy and non-financial business services.[92]

56. The Government's growth plan set out four overriding ambitions for the UK economy:

to create the most competitive tax system in the G20;
to make the UK one of the best places in Europe to start, finance and grow a business;
to encourage investment and exports as a route to a more balanced economy; and
to create a more educated workforce that is the most flexible in Europe.[93]

57. Each of the ambitions in The Plan for Growth is supported by a number of 'measurable' benchmarks against which the Government expects to be judged.

The Plan for Growth: Ambitions and Measurable Benchmarks
To create the most competitive tax system in the G20
A. The lowest corporate tax rate in the G7 and among the lowest in the G20
B. The best location for corporate headquarters in Europe
C. A simpler, more certain tax system
To make the UK one of the best places in Europe to start, finance and grow a business
D. Improving the UK's ranking in major international indices of competitiveness
E. A lower domestic regulatory burden
F. More finance for start-ups and business expansion
G. An increase in the proportion of planning applications approved and dealt with on time
To encourage investment and exports as a route to a more balanced economy
H. Ensure the UK remains one of the top destinations for foreign direct investment (FDI)
I. An increase in exports to key target markets
J. An increase in private sector employment, especially in regions outside London and the South East
K. Increased investment in low carbon technologies
To create a more educated workforce that is the most flexible in Europe
L. Supporting more apprenticeships than any previous government
M. Home to more of the world's top universities than any other country except the USA
N. An increase in the participation of 16-24 year olds in employment or learning
O. Narrowing the educational attainment gap, allowing everyone to meet their potential
P. Lowest burdens from employment regulation in the EU

58. Dave Ramsden told us:

I think the whole Budget strategy is about providing the stability and the confidence for those businesses to invest, because the large majority—as I think you have talked about previously at this Committee—of business investment comes from larger businesses, so it is, "How do we give those large businesses the confidence?" It is a combination of the macrostability that I have touched on and then the more detailed micro measures, including Project Merlin.[94]

As we discuss later in the Report, we have already identified stability and certainty as key principles for tax policy—we share Mr Ramsden's view that stability is essential for business confidence.

59. Key policy measures announced in The Plan for Growth included:

a reduction in the main rate of corporation tax by a further 1% so that corporation tax would reach 23% by 2014, accompanied by simplification of the tax system;
the establishment of 21 new Enterprise Zones across the UK where firms would benefit from a 100% business rate discount as well as access to superfast broadband and potentially lower levels of regulation and planning controls;
reforming the planning system by "introducing a powerful new presumption in favour of sustainable development so that the default answer to development is 'yes'", as well as measures to streamline planning applications;
supporting small firms "through an unprecedented moratorium exempting micro and start-up businesses from new domestic regulation for three years; extending the current small business rate relief holiday for one year", as well as "increasing the SME rate of R&D tax credit, subject to state aid approval"; as well as
"scrapping plans for regulations" that the Government argued "would have cost business over £350 million a year".[95]

The Government also announced plans to "promote skills and employment, notably for the young, through funding for up to 100,000 additional work experience placements for young people and 50,000 additional apprenticeship places over the next four years".

60. In The Plan for Growth the Government also identified a number of sectors where it aimed to encourage growth. These sectors included healthcare and life sciences, advanced manufacturing, construction, digital and creative industries, retail, professional and business services, the space industry and tourism.[96] We note that this list of sectors is similar to those in the previous administration's strategies. New Industry, New Jobs, which identified a Low Carbon Industrial Strategy, digital Britain, life science and pharmaceuticals and advanced manufacturing and professional and financial services as areas where there was "significant constrained potential and that Government can make a difference to the prospect of growth or high-value employment by removing barriers to market."[97] Page 3 of the subsequent document, Partnerships for Growth, notes "Current key sectors include the digital economy, the creative economy, low carbon technologies, advanced manufacturing, and life sciences."[98] Page 3 of The Plan for Growth identifies the United Kingdom as aspiring to be "world-leader in, for example, advanced manufacturing, life sciences, creative industries, green energy and non-financial business services."

61. 'Rebalancing' means different things at different times. This can create confusion. The Plan for Growth has been presented as part of the Government's strategy to "rebalance" the UK economy. We note that this rebalancing is described in various ways, and appears to take a number of forms:

away from the public sector and towards the private sector;
away from the south east and London and towards the rest of the country;
away from financial services and towards other sectors of the economy, including manufacturing; and
away from consumption and towards exports and investment.

Raising trend growth

62. The OBR has estimated that the trend growth rate is around 2.35% a year to the end of 2013 and 2.10% thereafter. The measures contained in The Plan for Growth have not led the OBR to raise its estimate of trend growth in the UK economy in response. It argued that "whilst policy measures announced in the Budget could increase the economy's productive potential, in time", they did "not believe there is strong enough evidence to raise our trend growth assumption now".[99] Robert Chote expanded on this in oral evidence, explaining that the OBR did not know what impact the policy measures would have on trend growth and that "the evidence is not strong enough for us to say, 'We are now confident that past trends are no longer the best guide to the potential growth of the economy in the longer term'".[100] Dave Ramsden did not give a figure for how much trend growth might increase, but suggested the best way to think of the policies contained in The Plan for Growth was that they provided "an upside risk to the growth forecast of the OBR".[101] He explained that any changes to forecasts of trend growth would have immediately changed the fiscal outlook, but would not have been "based on any actual evidence of the impact of the policies".[102]

63. We asked our expert witnesses the extent to which it was possible for Government action to influence trend growth, what impact, if any, they believed the measures outlined in The Plan for Growth would have on trend growth in the UK economy as well as the time frame over which trend growth might rise.

64. Roger Bootle differentiated between the short-term, where growth was determined by aggregate demand, and the medium-term where growth was determined by "supply potential". Focussing on medium-term growth, Mr Bootle told us it was:

quite instructive that the OBR did not choose to alter its projection for the sustainable growth rate of the economy on the back of these measures. I thought many of them looked to be very sensible, good things to do, but if it were possible for Chancellors to raise the sustainable growth rate of the British economy by a series of measures like this presumably it would have happened a long time ago.[103]

Mr Bootle ended by stressing that the balance of "historical evidence" did not "support the idea that Government's can very easily alter the potential growth rate".[104] Stuart Green was also unsurprised that the OBR had chosen not to raise its estimate of trend growth explaining that the impact of these "measures are uncertain".[105]

65. Others were less sceptical about the ability of Government to raise trend output. Paul Johnson believed there were "clearly a range of things you can do on the supply side that might have a positive impact on the long-term growth path of the economy", but argued "it's very difficult to change the path of growth in the short run". Mr Johnson defined the short-run as around "four years", stressing again that it was "difficult to change the path of growth over a three or four-year period".[106] He said it was:

pretty hard to say, sitting where we are today, that it will definitely have some impact on growth over that period. It may have some impact on particular areas and particular elements of the economy, but, on a measurable increase on the size of the economy three years out, I certainly couldn't sit here and tell you yes, I think it will do that.[107]

66. Jonathon Portes also believed "Governments can make a difference, both positive and negative".[108] His colleague Professor Ray Barrell concurred, explaining that there were a number of ways to raise medium-term growth, some of which were easier for Government to influence than others:

we can raise technical progress, that's quite hard; we can raise efficiency, that's quite hard; or we can increase the supply of labour, and increasing the supply of labour is not quite as hard as we think. For instance, in the manifesto before the last election there was a commitment to raise the retirement age in 2016; that increases the supply of labour; that increases the trend rate of growth. That commitment has been delayed somewhat but could be changed. There are other ways to increase the supply of labour, and in the medium term it's the supply side that matters. Changing migration laws would help that. So you can increase trend growth by increasing the labour supply.[109]

67. Mr Portes argued that, what he described as the UK's "good" growth performance over the 1997-2010 period, was due to:

improvements in skills, labour market flexibility, which of course was very much the product of the last 20 or 25 years, not just the past ten years, the strength of UK higher education institutions and competition policy, all of those are the results of government policy over the last 20 or 30 years.[110]

before going on to explain that:

the things that economists agree on that have restrained growth in the UK, the long tail of low-skilled workers, planning restrictions and poor management are also, to a large extent, the product of policy for the last 20 or 30 years.[111]

Professor Nickell believed that it might be possible to:

increase growth rates in productivity over some period—not necessarily forever—by changing policies, and there has been some evidence that some of the structural changes that have occurred in Britain in the last 40 years have indeed impacted on the rate of growth for a period of time, i.e. five to ten years. Changing the rate of growth forever is a pretty tall order.[112]

68. Stuart Green was also positive about the scope for Government to "improve the supply side performance of the economy and boost potential growth over the medium-term" through "increasing labour market participation rates". To this end he welcomed measures in the Budget "that were aimed at youth unemployment". He also discussed the possibility of introducing "more targeted tax cuts to get people back into employment", but cautioned that such "measures take time".[113] Mr Green stressed the fiscal and monetary benefits of this, telling us that "if we can get more people into the work force, our fiscal position improves", whilst "helping the Bank of England, for instance, keep interest rates at a lower level for a longer period".[114] Jonathan Portes agreed with Mr Green about the potential benefits of addressing youth unemployment and said "considerably more could have been done".[115]

Picking winners

69. The Plan for Growth identifies a number of sectors of the economy where the Government aims to encourage growth.[116] Matthew Sinclair described the policies in the plan as "extremely micro-managing". He pointed to the Government's decision to fund a programme of six new Manufacturing Fellowships to forge links between business and the research base as an example of this trend towards "setting out a series of very minor policies", with respect to the identified sectors.[117]

70. Mr Sinclair compared the Government's approach to sectoral policy with that of the previous administration:

Almost following the example of the last Government, they set out a policy position that will attempt to look at each sector and ask what fiddles to policy will help it best, as distinct from looking at the overall environment for business. Although it is more difficult to do if you are trying to operate without affecting the major direction of policy, it is more productive in that it distorts less between different regions, industries and even companies.[118]

Mr Sinclair struggled to identify the rationale behind the choice of sectors:

it is possible that they have not picked winners so much as picked all the sectors for which they could think of a programme. [...] there is no obvious way you could think of a set that encompasses tourism, construction and space. They are a disparate set of sectors..[119]

He objected to the Government "trying to single out sectors for lots of special attention", which he described as "a mistake": because "The problem is that by picking the most obvious opportunities, you pick the same ones everyone else is going for." [120]

Peter Schofield tried to explain the rationale behind the Government's choice of sectors:

Partly because of their scale. Professional business services is the largest sector in the UK. Retail comes, I think, second, and advanced manufacturing third. Partly because we thought they were sectors here where the UK had or could develop a comparative advantage, so for example life sciences, digital and creative industries. And partly, we focused on those growth sectors where we thought the UK, if we could unlock growth potential, they would have a particularly beneficial impact on employment, because they are non-traded sectors, so for example, construction and retail. It was a combination of those measures that led to us coming up with the eight that you see in the plan.[121]

71. While the measures set out in individual sectors may be helpful, we note that many of them are policies which have been announced previously, including those of the previous administration. For example, the Business, Innovation and Skills Committee report on Exporting out of recession, published in January 2010, drew attention to risk sharing between the ECGD and private enterprise. The Business, Innovation and Skills Committee is currently enquiring into Rebalancing the Economy: Trade and Investment; it will presumably scrutinise these proposals carefully.

72. The Tourism Review contains measures ranging from co-funding a £100 million campaign to attract visitors to the UK in the years following 2012, to "helping the industry prepare for changes in technology, so tourism information can be provided through smartphone apps".[122] There are also areas where there may be tension between different strands of government policy, such as between the presumption in favour of sustainable development and planning, and the desire to allow local communities to decide their own priorities. The Plan includes several initiatives to make access to the UK easier, and to improve the work of the UK Borders Agency. While these may be valuable in principle, the Home Affairs Committee, which has had a continuing interest in such matters, may well wish to examine the extent to which they will contribute to the Government's desire to increase border security, and reduce immigration. We also note Jonathan Portes's claim that rhetoric might not match reality on regulation.

The Budget claims to reduce the burden of regulation on employers by over £350 million a year, but we should note that the same analysis that produced those figures suggests that the benefits of the regulations outweigh those costs, so even that is not necessarily a gain. Even if that deregulation was beneficial, the extra employment regulation that Government has imposed on employers that wish to employ migrant workers, the cap on skilled migration, will, using the Government's own methodology and the Government's own impact assessment, reduce UK output by between £2 and £4 billion.[123]

73. When we asked for further clarification on this issue, Mr Portes drew our attention to official government publications. A Home Office Impact Assessment demonstrates that by the end of the five year period there will be about 50,000 fewer skilled migrants in the UK, and a Migration Advisory Committee report which noted Treasury analysis suggesting that a reduction of net migration of 50,000 would reduce GDP by about 0.2%.[124]

74. We examine some of the proposals in The Plan for Growth later in this report; we urge colleagues on other Committees to evaluate the benefits of those within their terms of reference.

Tax reform and corporation tax

75. One of the ambitions in The Plan for Growth is to create the most competitive tax system in the G20. The benchmarks against which the Government has said they should be judged in achieving this goal are:

The lowest corporate tax rate in the G7 and among the lowest in the G20;
The best location for corporate headquarters in Europe; and
A simpler more certain tax system.[125]

76. The flagship measure towards this end was the Government's decision to further reduce the rate of corporation tax. In the June 2010 Emergency Budget the Government first announced its decision to lower corporation tax from 28%, by one per cent per annum, to 24% by 2014. The 2011 Budget built on this and announced a further one per cent cut in corporation tax to 23% by 2014. The Government argued that the cumulative effect of these cuts would be to "further reduce capital costs for business and promote higher levels of business investment".

77. Stuart Green singled out the corporation tax reduction as a growth measure he particularly "welcomed".[126] Paul Johnson tried to quantify the impact of the cuts in corporation tax, telling us that "the OBR suggested last year that this might increase national income by something like 0.1% over the long term". However, he was unable to be more precise, explaining that "the short answer is that we don't know with any precision, and that's why neither the Treasury nor the OBR has said with any precision, "This is what we think the effect will be."[127]

78. We examined the impact of cuts in corporation tax on Government revenues. Mr Johnson said evidence showed "cuts in corporate tax rates have some effect on the level of investment and some effect on the level of profits in the economy". However, he cautioned that profits would not increase to the extent that "you have as much corporate tax revenue as you otherwise would have done".[128] Matthew Sinclair did not agree that corporation tax cuts would harm corporation tax revenues. He argued that the UK should be "heading towards the Irish rate of corporation tax", where it currently stands at 12.5 per cent" and that revenues would increase as a result over four to five years.[129]

79. Mr Johnson did not appear to share Mr Sinclair's belief that cutting corporation tax to Irish levels would increase revenues. He pointed out the differences between the UK and Irish economies and told us that:

the Irish regime, for example, has attracted a lot of company headquarters to Ireland, but that's at a tax level that we couldn't, certainly in the short run, think of being able to afford to introduce in the UK. The Irish started from a world where they didn't have very much in the way of corporate profits to tax, so in a sense it was all gain from having a low rate and bringing more people in.[130]

He also stressed that moving towards Irish corporation tax levels "would clearly be a very expensive thing to do except over a very long period", adding that the Government would need to be clear that it could raise the tax elsewhere.[131]

80. However although Mr Johnson did not support Irish levels of tax, he noted that although "headline corporate tax rates have fallen across most developed economies", this "has not been accompanied by a fall in the importance of corporate taxes in the share of income in most economies". He attributed this to the fact that "corporate profits have done quite well over that period", but also because "the tax base has become broader over that period". He cited the 2010 Budget as an example, where "we saw a reduction in the headline rate [of corporation tax] but a broadening of the base in terms of reducing some allowances".[132]

81. We also briefly explored whether the cuts in the headline rate of corporation tax would encourage companies to locate or relocate in the UK. Paul Johnson believed that the headline rate of corporation tax did "seem to play a particularly important role—perhaps a more than rationally important role—in decisions that some companies make about where to make their investments and where to locate".[133] However, he cautioned that whilst "an important issue" when deciding where to locate, it was only "one among many important issues that companies consider":

the academic literature does suggest that a differential in corporate tax rates has some impact on the decisions of firms about where they invest. That's one reason why corporate tax rates across the world have gone down.[134]

We welcome the reduction in the headline rate of corporation tax and note the evidence provided that this has boosted business growth and tax revenues elsewhere. We will monitor closely the impact of this policy on corporation tax revenues in the UK.

Enterprise zones

82. As part of The Plan for Growth, the Government has announced that it will establish 21 new Enterprise Zones in England, in areas where a Local Enterprise Partnership [LEP} is in place. These zones will be given:

a 100 per cent business rate discount worth up to £275,000 over a five year period for businesses that move into an EZ during the course of this Parliament;
all business rates growth within the zone for a period of at least 25 years will be retained and shared by the local authorities in the LEP area, to support LEP economic priorities and ensure that the returns from EZ growth are reinvested locally;
government and local authority help to develop radically simplified planning approaches in the EZ, for example using existing Local Development Order powers; and
government support to ensure that superfast broadband is rolled out throughout the EZ, achieved through guaranteeing the most supportive planning environment and public funding.[135]

In addition, the Government is considering further measures:

The Government anticipates that LEPs will want to make their EZ as competitive as possible, including by minimising local regulatory burdens. To support them in doing this the Government will work with individual LEPs to consider the scope to:

introduce enhanced capital allowances for plant and machinery to support EZs in assisted areas where there is a strong focus on manufacturing;
promote the use of Tax Increment Finance to support the long-term viability of the area; and
provide UKTI support to promote inward investment or trade opportunities in all new EZs.[136]

83. Our expert witnesses were sceptical about the likelihood that Enterprise Zones would be successful. The most positive of them, Simon Hayes, describes the zones as "a gamble", where "you may just end up financing activity that would have already happened; you may end up with some white elephants on your hands, but I think that regional rebalancing is really crucial for the economy over the next few years ..."[137] and which was worth taking "because the measures are not especially expensive."[138] Other witnesses were even less convinced. Jonathan Portes suspected that the zones "broadly have the result of spending Government money in order to shift economic activity around the country rather than to create anything new.[139] He subsequently drew our attention to a report by the Work Foundation which concluded:

Enterprise Zones have a number of weaknesses, including:

Most of the jobs created in Enterprise Zones are displaced from other areas. Evidence from previous Enterprise Zones suggest that up to 80% of the jobs they create are taken from other places;
Enterprise Zones do very little to promote lasting economic prosperity. Most Enterprise Zones create a short-term boom, followed by a long-term reversal back into depression; and
Enterprise Zones are hugely expensive. Evidence from the 1980s suggests that Enterprise Zones cost at least £23,000 per new job they create.[140]

The Report suggests that:

If government is to implement a new wave of Enterprise Zones, it must:

Consider making Enterprise Zones bigger, so that they do not take jobs from within the same towns;
Accompany Enterprise Zones with targeted investments in skills and infrastructure, to ensure that they lead to lasting improvements in competitiveness; and
Ensure that Enterprise Zones are supported by local communities, and are not governed in a way that is incompatible with localism.[141]

84. The Government's proposals attempt to deal with some of these problems. The Plan for Growth specifies that "the Government is seeking to support real growth opportunities, not remedy local dereliction". The CLG prospectus makes clear that involving LEPs is intended to ensure that the zones build on local strengths, and have local business support. The Chancellor told us that:

Looking at what did and did not work in the 1980s and early 1990s, one of the lessons we have drawn from it is that if you are from the beginning in lockstep with the local authority, or in this case a local enterprise partnership, so a collection of authorities, then you have a much greater chance of success. [...] I think the enthusiasm with which quite a lot of authorities, many of which are not of my party's political persuasion, have embraced the idea, and either gone ahead with it—if it is one of the 10 that I have already announced—or are now applying to be one of the next 10, shows that there certainly is a lot of local support for the idea.[142]

85. To "ensure that Enterprise Zones help to support genuinely additional growth and create new businesses and new jobs" the prospectus proposes "that Enterprise Zones will generally be based on 'clean' sites with little or no business occupants. Targeting such sites will reduce the risks of simply favouring incumbent businesses with little added value to the economy of the area."[143] However, the prospectus suggests that most Enterprise Zones will be between 50 and 150 hectares; given that the first 10 Enterprise Zones will be "in LEPs that include the U.K.'s major urban centres" there must be a danger that this will not be large enough to prevent relocation from elsewhere in the immediate area.

86. At present, the main attraction that Enterprise Zones will have is a simplified planning system, as the Chancellor made clear:

With enterprise zones, yes, we are looking at regulatory exemptions but the main regulatory relaxation that we are seeking from local authorities or local enterprise partnerships that want enterprise zones is, when it comes to planning regulation where the quid pro quo, Mr Tyrie, in return for the tax advantages that we are prepared to give and indeed the stream of income that we are prepared to give to a local authorities or the local authorise in an LEP, we would expect very light planning controls and that is the deal we are prepared to cut with local authorities.[144]

87. The Business Rate discounts depend on the passage of the Localism Bill and will not be available until April 2012. As the Prospectus says:

Local authorities with an enterprise zone will provide discounts of up to 100% for every business within that zone, with the Government reimbursing the local authority the cost of the discount.

Discounts are limited by EU state aid law, up to a de minimis threshold of €200,000 over a rolling three-year period, the equivalent of approximately £55,000 per year. The relevant local authority will be required to ensure that businesses do not receive greater levels of support. Each business will receive discounts for five years from the start of its occupancy in the Zone, providing it enters the Zone by April 2015.

Businesses will therefore see a major reduction in their rates, and there will be no direct cost for those authorities who introduce the discount within an Enterprise Zone.

The Red Book gives the cost of business rate discounts for Enterprise Zones as £20 million in 2012-13, £40m in 2013-14, £65m in 2014-15, and £80m in 2015-16.

88. Tax increment financing will require primary legislation to introduce, and on the Government's own plans is unlikely to be available until April 2013.[145]

89. The Government has announced the areas for the first 11 Enterprise Zones, and, within these, the precise location of four zones has already been announced: Boots campus in Nottingham, Liverpool Waters, Manchester Airport and the Royal Docks in London.[146] The remaining 10 zones will be established by a competition between other LEPs. The Government has invited expressions of interest, and once those are received, the Department intends to write out with the criteria against which worked up bids will be assessed.

90. Only established LEPs will be able to apply for an Enterprise Zone. The Prospectus says:

The Government hopes that those areas currently not in a local enterprise partnership are able to bring to a conclusion discussions that are currently underway so that they are able to take advantage of the opportunities set out in the Budget with respect to Enterprise Zones.

Given that expressions of interest are expected by the end of April, this seems an ambitious timetable.

91. Although the Government has clearly tried to avoid some of the mistakes of the past, it is far from clear that they will be successful. As Matthew Sinclair said:

The risk of trying to establish these clusters is that you are torn between these two objectives. You can see it in the tech city. It is the objective of enabling where you see an opportunity, and creating zones where you wish there was an opportunity. The tension between those two objectives is what could lead to a real challenge allocating enterprise zones effectively.[147]

Despite the claim in The Plan for Growth that the EZs should not remedy local dereliction, the Prospectus suggests that the Government already risks confusing its objectives between areas with potential, and areas which have "missed out" or have been dependent on the public sector:

The 11 Enterprise Zones named at budget focus on city regions and those areas that have missed out in the last ten years. Our major cities, and areas of significant untapped potential in places that have been dependent on the public sector, will be key to achieving sustainable growth.

92. Earlier in this Report, we discussed the various ways in which the Government considers rebalancing the economy. Robert Chote told us:

You mentioned enterprise zones specifically. In terms of enterprise, I think there is a question about whether your objective with that is a fundamentally distributional one, i.e. you are trying to shift economic activity from one part of the country to another. Maybe you want to shift it to areas more likely to be affected by the public sector job reductions, for example. I think you would probably look at that as something that is more about changing the distribution of activity rather than an overall boost to growth. ... Given the amount of money that has been spent in that area, I would not cite that as a hugely important one.[148]

The Chancellor told us:

My view looking at whether we should go ahead with this policy was that I did not see how it could do any harm and I could see how it could do quite a lot of positive good in a number of areas.

93. Enterprise Zones may have some effect in reviving particular areas, but we note that almost all the evidence received is unsure about the extent to which they will contribute to UK growth. It is clear that there is still much to be done on the details of this policy. We expect that our colleagues on the Business, Innovation and Skills Committee and the Communities and Local Government Committee will want to scrutinise this policy carefully as it develops further. To aid them in this, we recommend that the Treasury provide an analysis of the overall economic impact, including measurement of any frictional and deadweight costs.

Housing and planning

94. In addition to proposing looser planning regimes for Enterprise Zones, The Plan for Growth signalled a new approach to planning, and contained several measures that will impact on the housing market. It noted that:

To support the housing market, the Government will:

provide equity loans, jointly funded with house builders, through a FirstBuy programme assisting over 10,000 first time buyers to purchase a new-build property;
take action to strengthen demand for residential property by reforming the Stamp Duty Land Tax rules applied to bulk purchases. This will reduce a barrier to investment in residential property, promoting private rented housing supply;
implement a range of measures to remove barriers to entry for new Real Estate Investment Trusts; and
accelerate the release of public sector land. The Homes and Communities Agency will announce shortly the first tranche of available sites. The Government will consider whether using a 'Build Now, Pay Later' model could be applied to the sale of particular parts of public sector land to encourage development.[149]

Alongside these measures, The Plan for Growth also announced major reforms to the planning regime within the UK. These were as follows:

To reform the planning system radically and fundamentally, the Government will:

introduce a powerful new presumption in favour of sustainable development, so that the default answer to development is 'yes';
localise choice about the use of previously developed land, removing nationally imposed targets while retaining existing controls on greenbelt land;
produce a shorter, more focused and inherently pro-growth National Planning Policy Framework (NPPF) to deliver more development in suitable and viable locations;
set clear expectations that with immediate effect local planning authorities and other bodies involved in granting development consents should prioritise growth and jobs, through a Written Ministerial Statement by the Secretary of State for Communities and Local Government on 23 March 2011;
introduce new powers so that businesses are able to bring forward neighbourhood plans and neighbourhood development orders;
bring forward proposals to extend Permitted Development rights, and will consult on proposals to make it easier to convert commercial premises to residential;
pilot a new land auction model, starting with public sector land; and
ensuring all planning applications and appeals will be processed in 12 months and that major infrastructure projects will be fast-tracked.[150]

95. Jonathan Portes was concerned about the implementation of the FirstBuy scheme:

House prices in the UK are too high. It has all sorts of damaging economic and social impacts, and the main impact of giving financial help into first-time buyers is to pump extra money into the demand side and hence to boost house prices. That is the last thing that future first-time buyers, or the economy as a whole, needs.

96. Mr Bootle also warned us that:

I certainly would not have done this scheme to boost the position of the first-time buyers, to help them, because I very much agree with the comments that Jonathan Portes made earlier on. That is, simply increasing demand and in the process doing nothing at all to ease the housing shortage in this country, there may well have been more aggressive moves that could have been made on the planning system, but I think the devil is in the detail. In essence, this is a supply problem. If we want to ease the shortage of houses, we have to make sure that more houses are built.[151]

Professor Nickell however thought that the impact of FirstBuy would be limited. He told us that:

[...] it's relatively modest so I don't imagine that will have an overall very big impact on the housing market. I mean, the fact is that the credit crunch is restricting mortgage availability to first time buyers in a very serious way, as you can see from the very large rise in deposits that are required, and there doesn't seem to be much sign of that changing soon. I would argue that the changes, so far, that have been announced in the Budget will only have a relatively modest impact on the prospects for the housing market.[152]

Mr Chote emphasised that the planning changes might affect the economy in the long term, but that they were not reflected in the OBR's forecast for house prices:

I think in the longer term the issue of the planning reform is the item that has the potential greatest impact in the longer term but it is not clear exactly how that will materialise and what the effects will be. There is certainly plenty of evidence, people have suggested, that you might expect benefits from planning reform, not just in housing but also in retail distribution et cetera. I think in terms of its—we haven't reflected that in the projections for the housing market performance, what we have basically done there is we take the independent forecasts for house prices over the next couple of years, and in this occasion we are using those forecasts for the CLG measure of house prices and then extrapolate forward thereafter in terms of the average earnings.[153]

97. Treasury officials were however keen to emphasise the package of measures together. Mr Ramsden told us that "I think we would hope that it will encourage transactions, and then together with the wider policies that we have announced in The Plan for Growth and elsewhere, it will help to free up the supply side. Together, when you look at the whole package, it can lead to a higher supply/higher demand equilibrium in the housing market".[154] When we pressed Treasury officials on whether FirstBuy would lead to higher levels of transactions, Mr Schofield replied:

This is potentially going to unlock a significant growth on the existing number of new build houses that are there. If we assumed that without this, we have another 100,000 new build homes in the current year, this is a 10% uplift on that. The Chief Executive of Barratt Developments said, "The Chancellor's initiative to help first home buyers get onto the property ladder is exactly the tonic the housing market needed". [155]

And the Chancellor noted that "the shared equity product is explicitly linked to a new property so you can't get it unless there is a new property".[156] He noted that "we identified 10,000 as a reasonable number was that was the number that the industry told us was the capacity that they were able to deal with. I could have provided more money if I had been able to make other choices in the budget but the industry themselves were clear about their capacity constraints".[157] When we pressed the Chancellor on whether the 10,000 properties bought under FirstBuy would be in addition to those that would have been built anyway, he replied "We are pretty confident that almost all of that 10,000 will be additional housing".[158]

98. The Plan for Growth contains measures to stimulate demand from first-time buyers through the FirstBuy scheme, whilst also undertaking reform of the planning system, which may, in time, increase the supply of housing. If successful, the combination of these measures should both increase the supply of houses, and assist first-time buyers. However, if the Chancellor's expected supply side response fails to materialise, additional demand from FirstBuy could merely stimulate house prices. This could take house purchase out of the reach of more people. We recommend that the Treasury assess the impact of both the FirstBuy scheme and the wider planning reforms, and report back at each Budget.

The moratorium on new UK regulation

99. Another flagship policy in the 2011 Budget and The Plan for Growth is supporting small firms "through an unprecedented moratorium exempting micro and start-up businesses from new domestic regulation for three years". The Government has defined micro businesses as those with fewer than 10 employees.[159] The intention of this measure and some of the other measures in the Growth Review, the Chancellor explained was "to either slow down or stop the flow of regulation, particularly as it damages small businesses and loads costs on small businesses".

100. We asked the Chancellor which specific regulations such firms would be exempt from. He explained that the "principal purpose" of the 'moratorium' was "to stop things that have not yet been conceived but Government of all colours have a habit of conceiving and therefore it acts as a brake on that". The Chancellor explained that there was, however, "a get-out clause for things like the asset freezing of Libyan money or essential food safety regulation or if one could imagine a situation where one would have to take financial regulatory steps to protect broader economic stability".[160] Such a 'get-out clause' would be difficult to invoke though because:

in order for those exemptions to take effect it has to be passed by two cabinet committees, the Regulatory Reform Committee and the Economic Affairs Committee. The Secretary of State for Business, Vince Cable, chairs one; I chair the other. Certainly speaking for myself, I would only ever sign an exemption to the moratorium if I absolutely felt that public health was at risk or there was some grave danger to financial stability or that our foreign policy goals in dealing with a regime like Libya were compromised or whatever. There is a get-out clause, but it is a very difficult clause to activate.[161]

When asked whether new corner shops would be exempt from new regulations on, for example, tobacco advertising, the Chancellor side-stepped the question. The Chancellor told us that this particular regulation had "been determined before the moratorium was announced" and that the Government was increasing the lead-in time which he described as "an example of a moratorium coming into effect".[162]

101. When quizzed on why the moratorium was for three years and not, say, five years, the Chancellor again side-stepped the question:

we had to take a decision on what was a sensible length of time in which to put in place this blanket moratorium. Of course, after three years we will consider whether it needs extending; whether it needs modifying in some form.[163]

When challenged on why the cut-off point for qualifying for the regulatory moratorium was ten employees, the Chancellor explained that:

for start-ups and for small businesses the burden of regulation—and often, of course, they are one in the same thing—but for start-ups and small businesses there is a particular burden that comes from additional regulation. The reason why we chose 10 employees as a cut-off point was because the evidence is that once you have 10 employees or more you start to have one person at least doing a part-time personnel function, which makes it a little bit easier to cope with.[164]

102. Witnesses questioned the Government's rationale in this area. Matthew Sinclair was concerned that "basing a policy purely on size" where "the benefit is lost once a firm exceeds a certain size" meant "you necessarily start to make it less of an attractive option to firms that are looking to grow".[165] The Government's proposal to limit the moratorium to three years should at least limit the disincentive to growth.

103. Mr Sinclair also questioned why the regulatory moratorium was being restricted to micro businesses and start-ups, stating that it would severely dilute the effect of the policies.[166] Conversely, CAB told us they found the moratorium "extremely worrying" and argued "that all workers should be covered by the same level of rights and protections". CAB said a "two tier approach to employee protection was:

likely to lead to disadvantage and discrimination and make it even easier for rogue employers to gain an unfair competitive advantage by exploiting their workforce. Many low paid and vulnerable people are employed in small, non-unionised workplaces, such as care homes, retail outlets and distribution warehouses, hairdressers, bars, restaurants, hotels, cleaning firms, food processing, security and transport companies.[167]

104. The Chancellor made clear that micro businesses and start-ups will still be required to implement European regulation:

there is unfortunately one area, I would argue as a Parliament as well as a Government we need to do a great deal more to tackle, which is the imposition of regulation from the European Union and there I think we are just beginning to make the argument as a country more effectively that Europe is pricing itself out of the world economy if it is not careful. So I am very clear, and I wish there were greater powers available to me to not apply some European regulation, but there I think we have to go and make our argument in the Councils of Europe.[168]

105. It is clear that regulation will impose proportionately greater burdens on small businesses than larger ones. However, it is not clear how easy it will be find out which regulations apply to start-ups. When the Chairman asked how small businesses would find out whether new regulations applied to them the Chancellor assured us that:

I think we would make it very clear at the time if we were to introduce regulations on other businesses and I should say that I would like to keep that to a minimum as well, but if the Government were to introduce regulations on other businesses then we would alert small business as to whether they were or were not in within the scope of this. But as I say there is quite a lock on any exemption to this.[169]

106. The plan to boost micro businesses and start-ups by a moratorium on new domestic regulation is intended to reduce the burdens on business. The Committee has taken limited evidence on this. We have however received evidence that the proposal may create problems. Several lists of regulatory exceptions and some administrative complexity could however be created by this apparently attractive proposal. Furthermore, if the Government succeeds in reducing new regulation overall, there may be less scope for the exemption of micro businesses and start-ups from such measures. Nor is it clear—where such an exemption is merited on welfare grounds—that it should be time-limited, rather than related to the size of the company.

OTHER DEREGULATORY MEASURES

107. The Government has also said it "will scrap proposals for specific regulations that would have cost businesses over £350 million a year to implement". These include:

not extending the right to request time to train to businesses with fewer than 250 employees. The Government estimates that "this would have cost businesses up to £350 million a year, and will provide SMEs with the flexibility to manage the training requirements of their companies to meet their needs without spending time on administering the 'right to request' process, which is proportionately more costly for smaller businesses";
not bringing forward Equality Act dual discrimination rules that would have cost business £3 million per year;
repealing the right to request flexible working to parents of 17 year olds that was planned for April, which the Government says "would have had an administrative burden costing £0.5 million; and
?consulting "to remove the unworkable requirement in the Equality Act for businesses to take reasonable steps to prevent persistent harassment of their staff by third parties as they have no direct control over it, which would save £0.3 million".[170]

108. We examined the Government's assessment of the impact of repealing the right to flexible working to parents of 17 year olds which in The Plan for Growth they stated would have an administrative burden on business costing £0.5 million. Not directly mentioned in The Plan for Growth is the estimate that introduction of this right would lead to "additional procedural costs to employers of £1.3m (including £456,000 admin burden) plus £975,000 in costs of making adjustments to working patterns". Weighed against this was the fact the Government calculated that employers would make savings from "higher productivity (£1.1m), lower labour turnover (£1.2m) and reduced absenteeism (£63,000) in year 1 (total £2.4m). Furthermore, subsequent years would "include benefits accrued from the previous year's new working arrangements" which "leads to a total net present value of benefits over the 10 years of £41.2m".[171] When asked why these figures were not also included in The Plan for Growth, Mr Schofield responded that "you have those figures available to you in the impact assessment".[172] When challenged that the use of selected statistics from the Impact Assessment might present an 'incomplete picture', Mr Schofield said:

throughout this section of the document, we talk about the cost to business. I do not think what we say here is inconsistent with what we say elsewhere in the document.[173]

109. Jonathan Portes told us that the right to request flexible working to parents of 17 year olds had a "small cost to employers and small benefits to parents who use it", with the Government's own economic assessments showing "the benefits assessed as outweighing the costs".[174] Mr Portes said that:

my personal view, is that scrapping these two measures will do nothing for growth and may, as the assessments say, even harm it, but there are perfectly respectable economic arguments. If an economist said, "Employment regulation is damaging, these costs have been underestimated and the benefits are not as big; therefore, this would be marginally good for growth", that would not be a stupid argument to make, and I do not want to say that anyone who made it was necessarily wrong. Certainly, my assessment, and indeed the assessment of Government economists, is that this will be, on balance, marginally negative for growth.[175]

110. Simon Hayes, when asked whether this measure would "contribute to GDP in a big way", replied that the "only reason I can think of for thinking that this may not be a bad idea would be if you are trying to create a general impression of an environment that the UK is rolling back on costly legislation".[176] Mr Schofield explained that with respect to the right to request flexible working or training, conversations with business indicated that "particularly for smaller businesses, where there is not a sort of professional separate HR function, many of these processes, the burden of those processes falls on the proprietor".[177] He explained that the Government's goal was to see:

whether we can introduce flexible working without the bureaucracy that goes with the whole sort of existing right to request process. What we are looking at doing is whether we can find other ways of achieving the same benefits. The same is true, if I might say, referring to the right to request time off to train. Clearly, workforce-based training is a good thing for the economy, but the processes around right to request are imposing a burden that the Government would like to try to strip away. So we are finding other ways of trying to promote workforce-based training.[178]

90 HM Treasury/BIS, The Plan for Growth, Foreword Back

91 Ibid., p 3 Back

92 Ibid., p 3 Back

93 The Plan for Growth, p 5 Back

94 Q 361 Back

95 The Plan for Growth, p 6-7 Back

96 Ibid., p 8 Back

97 New Industry, New Jobs, April 2009, para 5.1 Back

98 Partnerships for Growth: a National Framework for Regional and Local Economic Development, BERR, December 2009 Back

99 Office for Budgetary Responsibility, Economic and Fiscal Outlook, p 6, para 1.7, March 2011 Back

100 Q 330 Back

101 Q 376 Back