Sir Richard Lambert gives final major speech as CBI Director-General
Coalition Government “by no means firing on all cylinders” – CBI DG
In his last major speech as CBI Director-General, Sir Richard Lambert today (Monday) set out the critical short-term changes necessary to secure economic growth, and gave his assessment of the performance of the coalition Government.
Addressing an audience of business leaders and key stakeholders, Sir Richard said: "This coalition Government has been single minded - some might even say ruthless - in its approach to spending cuts. Very unpopular decisions are being driven through on the argument that they are essential to the long-term stability of the economy."
"That policy is strongly supported by business, on the grounds that sound public finances are an essential foundation for a sound economy. Spending cuts do less damage to employment and growth over the long-term than do tax increases. And the squeeze on fiscal policy will allow monetary policy to remain looser for longer than would otherwise be the case, and help to rebalance the economy in the process."
"But my argument this morning is that the Government has not been nearly so consistent and focussed when it comes to policies that support growth. It's failed so far to articulate in big picture terms its vision of what the UK economy might become under its stewardship. And it's taken a series of policy initiatives for political reasons, apparently careless of the damage that they might do to business and to job creation."
"This matters a great deal, because public spending cuts and private sector growth are two sides of the same coin. The starting point is that public finances in the UK are in a mess, to a degree that threatens our long-term economic stability."
"There are two reasons for this. One is that the tax and spending policies of the last Government created a substantial structural deficit - a hole in the budget that had to be tackled irrespective of what happened to the economic cycle. That's what made substantial spending cuts inevitable, irrespective of who won the last election."
"The second is that the worst recession since the 1930s has had a devastating impact on government revenues. Government spending last year was a little over 3 percent higher than the then Chancellor had expected in his budget two years earlier. But the steep fall in output meant that tax revenues came in around 13 percent below earlier expectations. Add in the policy stimulus, notably the temporary cut in VAT, and the result was the biggest fiscal deficit in the UK's peacetime history."
"Spending cuts and this month's VAT increase will fix the structural deficit over time. But to bring the public finances back to full health, they will have to be accompanied by increased output and employment - which bring with them higher tax revenues. The sooner we can get output back up to the levels that were expected before the recession, the quicker government revenues will rise to narrow the fiscal gap."
"It's not enough just to slam on the spending brakes. Measures that cut spending but killed demand would actually make matters worse. It's easy enough to see how the squeeze could take 400,000 jobs out of the public sector by 2015-16. What's needed above all is the kind of growth in the private sector that will more than offset this impact."
"So the question is: where's the growth going to come from? And the answer to that one is quite simple. Government consumption is going to be under pressure for years to come. Household consumption will recover in time. But family balance sheets are still stretched by high levels of personal debt. The housing market is weak. Family budgets are being squeezed between high consumer price inflation and low growth in wages."
"So domestic consumption is not going to be a powerful source of growth for quite a while. That leaves us with only two engines to drive job creation and economic recovery - and they are private sector investment and trade. And that in turn means the success or failure of the business sector will be what determines the wellbeing of our economy - and indeed the health of our society - in the years to come."
"The good news is that business has the capacity to fuel these engines of growth. For one thing, there is a very large pent-up need for new private sector investment. Companies reacted to the credit shock by cutting costs and putting whatever spending programmes they could on to the back burner. The result was that business investment collapsed by an astonishing 28 percent over the period of the recession."
"One consequence is that companies in aggregate now have an above average level of cash in their balance sheets. What they need now are the right signals from the market and from government to give them the confidence they need to get out and start investing this money. An obvious example is the energy market."
The necessary rebuild of the UK's power generating capacity will require very large sums of private sector capital - and create many thousands of new jobs - in the next few years. If the policy framework is right, this investment will be forthcoming. There is also clear scope for growth in trade. We are now beginning to see the impact of the relative decline in sterling, which has made our exports much more competitive - and our imports more costly - over the past three years."
"Year-on-year manufacturing exports are 12 percent higher, and forward orders are looking strong. Some manufacturers are beginning to relocate parts of their supply chain to the UK, and import substitution is happening. Service sector exports have been slower to take off, but here too the trends are pointing in the right direction."
"The impact of net trade - the difference between export and import growth - has been a drag on our economy in past years. But our CBI economists now reckon that it will add 0.7 percentage points to output this year and next."
"Growth in private sector investment and trade is the surest way of creating the new jobs our economy is going to need during this period of public spending cuts. In normal times, the private sector generates very large numbers of jobs each year. In the ten years up to the crash, for example, the annual total worked out at around 220,000 new jobs. And there is always a huge churn in our labour market. Just in the past 12 months, there have been over 600,000 lay-offs - and yet aggregate employment has risen by around 250,000."
"So as we recover from recession, forecasts that the private sector could generate around 1.5 million new jobs over the next five years don't look over-ambitious. If that's indeed how things work out, employment in the UK would be significantly higher at the end of the period than it is today, despite the job losses that are coming in the public sector."
"Confidence is the key - and that comes at least in part from political leadership. If growth is necessary to restore our public finances, and business investment and trade are what will make that growth possible, then this needs to become the guiding priority for domestic policymaking. And the coalition Government needs to test every policy initiative against a single question: will this help or hinder the process of investment and job creation in the private sector?"
"But it's by no means firing on all cylinders in this important respect. For a start, it has yet to set out its vision of what a successfully growing economy would look like. The Growth White Paper that was expected last autumn never materialised, and the impression was given that there simply weren't enough good ideas around to justify such a publication."
"Rather than a big picture of the kind of economic eco-system that the Government wants to champion, we are left with a few rather vague ideas about the scope for supporting a number of predictable sectors, and the promise that more ideas will be forthcoming at the time of the spring budget. And when it comes to micro policy initiatives, politics appear to have trumped economics on too many occasions over the past eight months."
"I'm thinking of the immigration cap, which is still a source of concern for companies and institutions, like universities, that need to bring international talent into the UK. There's the localism agenda, which has thrown an extra level of uncertainty into the planning system and led to the poorly-handled introduction of the new Local Enterprise Partnerships. There's the abolition of the default retirement age in a way that threatens extra administrative burdens for businesses, especially small and medium sized enterprises."
"The carbon reduction commitment has been converted into an additional tax running to more than £1bn on business, removing the incentives for change from many companies. Then there's aviation policy, or rather the lack of one in the cramped South East of England. And the bribery legislation - it's clear that business has a strong interest in the integrity of the UK's rule of law, but the drafting has left too much uncertainty about how the rules might apply. It's just not good enough to say that this can be resolved in the courts."
"The Mortgage Market Review is being driven by the Financial Services Authority rather than the Government, but this is not the right time in the house building cycle to be making mortgages harder to obtain. The politics that are behind many of these initiatives are clear enough. But it's odd that the Government should be willing to push aside short-term political considerations when it comes to making spending cuts, but not when it's addressing the growth agenda."
Tax is another matter for consideration. "The Government has made a good start with its approach to business taxes. Given the size of the fiscal deficit, it wasn't in a position to cut rates straight away. But it recognised that the UK had slipped out of line with other big developed economies in terms of tax competitiveness. And it acknowledged that certainty and consistency of policy were almost as important as the headline rate when businesses were planning their future investments."
"So it set out a pathway for the future direction of tax policy, providing a clear sense of the way in which corporate taxes would move lower over the next few years. Why doesn't it now set out a similar roadmap for personal taxes? After the tax increases of the past year, the take-home pay of a UK executive now ranks way below that of someone receiving similar compensation in just about all competitor jurisdictions."
"This is a problem, and not just for the City of London. Business investment in the UK will suffer if highly-paid individuals drift elsewhere for tax reasons. There are obvious political and fiscal reasons to prevent personal tax rates being brought down into line with the competition immediately. But just as a road map has been helpful for corporate taxes, so a broad sense of the intended direction for personal taxes would also help to build confidence for the future."
"I want to emphasise that the Government will need help if it is to shift national priorities towards a pro-growth agenda, and business itself has an important part to play here. Above all, this means recognising that supportive policies will require support from the public - and that will only be forthcoming if businesses themselves behave in a way that helps to rebuild the reputation and trust that have been damaged in the course of the past few years."
"Companies have a vital interest in the health of the communities in which they operate, and in a Government that is prepared to take political risks to support private sector investment. They need to act accordingly. This means a greater willingness to engage in constructive public debate. A renewed commitment to sustainable business practices. A greater emphasis on long-term performance as opposed to short-term shareholder value. A less gung-ho approach to executive compensation."
"The fact is that there is a link between public trust and the pace of growth in corporate compensation for big companies, and not just in the banking sector. Compensation committees need to understand that policies which might seem to be justified for an individual company can and do contribute to a collective problem, and that whether they like it or not, there is a trade off between the approach to executive pay and public support - especially during a period of public austerity."
"So how should the Government be shaping its policies for job creation and growth? What should its big picture actually look like? There are two sets of answers to this question. One is about the long-term, and the need to build productivity as the key contributor over time to the nation's prosperity and well-being. Among other things, this means a relentless focus on developing human capital and physical infrastructure - transport, power generation and the like.
As McKinsey has argued in a recent paper on growth priorities, it is also vital to consider how growth is shared across the regions of the country, and between individuals. There are big regional differences in the UK's productivity performance, and widening income differentials as well. A successful economy needs to be broad-based and resilient in a way that the UK is not today."
"But changes here take time - maybe even a generation or more - to deliver. What I want to focus on this morning is the short-term, and the need to do everything possible to support the creation of new jobs in the private sector over the next few years. For a number of reasons, this means developing policies that are specifically targeted at supporting small and medium-sized enterprises."
"SMEs are the main source of new jobs in the UK. The big multinationals - the companies that the Prime Minister usually gathers around the Cabinet Office table when he is discussing these matters - taken together and over time are reducing their headcount in this country."
"This is not the case with smaller companies, which add to their employment numbers over the economic cycle. The data show they have two other qualities that are especially relevant in today's context. They tend to take on relatively lower skilled workers than do the big companies, which will be helpful at a time of public sector job losses."
"And they are much more widely dispersed across the country. Indeed, an analysis by Experian, the business information company, suggests that in the years leading up to the crash, Scotland, the North East and Northern Ireland had higher concentrations of what it called job creating growth champions than East Anglia and the South of England."
"Surveys show that smaller companies are under more pressure today than big companies, which is another reason to pay them special attention. Whereas multinationals are benefitting from the recovery in world trade and see the emerging economies as offering great scope for growth, smaller companies are more dependent on a fragile home market and often see countries like China and India more as a threat than an opportunity."
"Credit conditions for big companies have substantially recovered, and they have access to the capital markets when required. Smaller companies are still finding credit difficult and costly to come by, and they have few sources of non-bank finance. So what can the Government do to help? "The answer is that it should focus on the supply side, and be much smarter in the way that its support is allocated."
"It should not attempt to pick winners, and it should understand that its apparent wish to identify winning sectors makes no kind of sense at all when it comes to encouraging the creation of new jobs."
An analysis by NESTA, the National Endowment for Science, Technology and the Arts, concludes that high-growth firms are almost equally present in the 'high-tech' and 'low-tech' sectors. For its part, Experian says that looking at sectors is one of the least powerful predictors of growth champion probability.
"Its data show that regardless of whether a sector is considered to be growing or declining, each has its share of potential champions, survivors and strugglers, and the level of jobs generated varies accordingly.
"NESTA argues convincingly that a small minority of high-growth businesses - located in all regions and in all sectors - hold the key to job creation and wider prosperity. Just 6 percent of UK businesses with the highest growth rates generated half the new jobs created by existing businesses between 2002 and 2008."
"The Experian numbers point in the same direction, showing that less than 10 percent of SMEs come into the high growth category, and play a vital role in underpinning the stability of the whole economy. "
How do you spot these success stories? "My experience at the CBI, which is backed up by the data, suggests that they have a number of features in common. They are not start ups - some of which succeed but many more of which flare into life and then disappear. They've probably been around a few years - long enough to find their feet and identify their real strengths, but not so long as to have reached comfortable middle age. Companies that are much more than about 20 years old are not likely to start taking on lots of new people."
"They won't be what you might call life-style businesses, employing just a small handful of people. But they may well have less than 50 employees today - and the ambition to employ three times that number tomorrow. Some kind of international exposure is another characteristic of growth companies. It shows ambition, and it brings with it knowledge and experience not available to people who don't look much further than their doorstep."
"Two key qualities matter more than anything else. One is the entrepreneurial zip and drive of the management team. These companies are not run by bureaucrats, and they are not a place for managers who want a quiet life. They are led by entrepreneurs, who have big ideas and big ambitions. And they are far more likely to be innovative than the average business. This innovation will be the source of their success."
"What politicians find it difficult to get their mind round is that it is just as possible - and important - to be an innovator in the brick making industry as it is in the biosciences. And innovation is not confined to the South East corner of England."
"In the past few years, I've visited a CBI member company whose success is built on a new kind of hook for hanging televisions on hotel walls. I've dropped in on a medical technology company in the lush farmlands West of Belfast that's built a machine the US giants would die for. I've seen new ways of monitoring insurance claims, and of delivering the most mundane of public services."
"Innovation is going on all over the place. It creates jobs. And it has just got to be encouraged. If you know the characteristics of the kind of company that has the capacity to create new jobs, you can start to devise policies to support them. Take the export market, for example. What limited support that is available today from the Export Credit Guarantee Department is focussed on larger companies, and the main story from politicians is about the opportunities that are waiting out there in India and China."
"Instead, the Government needs to be doing much more to ensure that SMEs get the trade finance support they need when they take their first steps into the international markets. And it should recognise that the emerging economies are very risky places for small firms. Why not concentrate instead on what you might call the home market of the eurozone?"
"UK Trade and Investment can't reach out to every small company in the land. But it could do more to filter the marketplace to identify potentially high-growth SMEs, irrespective of their business sector, and give them the push they need to get going internationally."
"A White Paper on trade is due to be published in the coming weeks. Its relevance should be judged against whether it has something worthwhile to say about trade finance for smaller companies, and the encouragement of growth businesses right across the UK."
"The Government has much work to do, too, when it comes to regulation. Ahead of the election, the Conservatives came up with some interesting ideas about what they called 'Regulation in the Post Bureaucratic Age'. But up at the coal face today, it's hard to see that anything much has happened."
"One welcome sign of its determination would be for the Government to pick up and run with Lord Young's ideas about reforming health and safety legislation. Another would be to tackle the abuse of the employment tribunal system. Both would be especially welcome to SMEs, for which they are very burdensome."
"Perhaps it's time in this context for a hard look at the role of the Department of Business. Understandably enough, it's been preoccupied in recent months with the dramas of the higher education system, which makes up a very large share of its budget. But we need a department that is seriously knowledgeable about - and very closely engaged in - everyday business needs."
"Less of a talking shop, more of an action-oriented growth champion. That's what's required right now. The Government has shown imagination when it comes to supporting innovation. For example, its promised sizeable investment over the next four years in technology and innovation centres, and regional growth hubs are also being established."
"But there are two caveats. One is that this effort will do little to create jobs over the short-term. The other is that the Government may be running the risk of being so excited about announcing new policies that it ignores valuable schemes that already exist for the same purpose."
"A case in point is the future of Knowledge Transfer Partnerships, a scheme that puts postgraduates to work in companies for anything up to three years to help drive through innovation and change. It's funded part by government and part by the company concerned, it yields substantial economic returns both to the company and the country, and it's heavily focussed on small companies."
"In 2009, 75 percent of the near 1,000 companies involved were SMEs. By the standards of these things, it costs peanuts. Yet its funding is now in doubt. Far from cutting back the numbers, the Government should be straining every sinew to boost the numbers involved in KTPs."
"Then there's finance. As the Government appears to be discovering right now, it's not easy to agree meaningful lending targets for the banks. All the same, the effort is probably worthwhile, insofar as it gives institutions an added spur to get out there and actively pursue viable borrowers."
"Here again, there is a strong case for filtering out, and focusing on, the job-creating growth champions. The Experian analysis shows that the financial health of this relatively small group of firms is often above average, and that the risk of failure among them is very low. They should be identified, and given priority treatment."
"SMEs in the UK are overly-dependent on short-term finance from a relatively small group of lenders. Policy should be directed at widening the range of choice - by encouraging new lenders, by the development of non-bank finance such as the bond market, and by making long-term equity investment a more attractive option for savings institutions."
"And it's also going to be vital to ensure that changes in the structure of the banking system are done in a measured and predictable way over a sensible period of time. SMEs will pay the price if banks are forced to rebuild their balance sheets in too much of a hurry."
"Big companies have a part to play in supporting a dynamic SME sector. One important lesson many of the giants learned during the credit shock was about their dependence on a healthy supply chain. Large companies developed innovative ways of using their own balance sheets to support critically important small business suppliers, and they also found it helpful to transfer business skills - about cash-flow management, strategic planning, production controls and so on. It would make sense to build on this experience in more normal times."
"And of course payment terms remain an issue. Very large companies can take more than twice as long as small ones to pay their bill, which means that they are effectively using small companies as banks. Not a great idea, given the imbalances in today's credit markets."
"These are some of the measures that are needed to support fast growing SMEs, and give them the confidence to create new jobs. But what about the vision thing? We don't want a detailed five-year blue print, Soviet Union-style, or a series of platitudes about moving up the value chain."
"But we do need a sense of ambition and direction, and a shared understanding that economic success is a central mission of our society. A definition of success is an economy with high rates of productivity growth, and one where the benefits are enjoyed across all regions and income groups. An economy that is not over dependent on one or two business sectors, and one where investment is driven by savings more than by debt."
"Some bold initiatives would be in order. For example, rebuilding large parts of the nation's power generating industry will require more investment capital than the market left to itself is likely to supply. So I would favour the development of a green investment bank designed to channel long-term finance from the pensions institutions into energy infrastructure - not easy to do, but perfectly possible with a bit of imagination and courage."
"A focus on the development of human capital - the education, training and skills that a mature economy will need to succeed in a globalised world. Tax policies that will attract foreign capital, incentivise entrepreneurs and encourage long-term investment. The physical infrastructure - digital networks, roads, rail, air and sea ports - that's required to support a modern economy. A diverse supply of low-carbon energy at competitive prices. A healthy banking sector, which business can rely on through thick and thin."
"Weave these together, and you get the big picture that business is looking for. Given the right degree of encouragement and confidence, the private sector can certainly do the job. So let's get on with it."