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Mr. Love: The right hon. and learned Gentleman is discussing business investment, which is one way to rebalance the economy. The conditions for business investment could not be better, because the stock exchange is going up and interest rates are low, yet business investment is not happening. In the Budget judgment, the Chancellor suggests that business investment will increase in the next couple of years, but although all the conditions are right, how can we be sure that that will happen?
Mr. Clarke: The Chancellor says that every year, but the record, as the hon. Gentleman has conceded, is dreadful. Business investment in the fourth quarter of last year was 9.1 per cent. of GDPthe lowest figure recorded in this country since records began in 1965. Our business investment record is very poor, and, as hon. Members have said, people are being deterred from investing in this country by high levels of complicated corporate taxation, by rising levels of regulation and by falling or dull demand in this country. We must address why this country is not producing the necessary level of business investment.
Ever since he was shadow Chancellor, this Chancellor has stressed the need to improve our productivity level, but he has a dreadful record on it. The Red Book includes an extraordinary set of international comparisons, which the hon. Member for Doncaster, North (Edward Miliband), who tried to intervene a moment ago, has unwisely used. I refer him to a very good article in last week's Financial Times. The presentation in the Red Book of our productivity record compared with that of the Americans, the Germans and the French is completely bogus, because our record is dreadful. The Red Book uses output per employee, but output per hour is the best measure. Our performance is extremely poor, and it remains miles behind that of the French, the Americans and the Germans, so it is not true that we are closing the gap. Output per hour in this country increased by zero in the year to the third quarter of 2005.
Productivity in the public sector has been dropping like a stone as huge sums of money have gone into increased payrolls, huge pay rises, reduced work loads and reduced performance in service after service.
We must consider innovation, because our research and development record is extremely poor. As a proportion of GDP, research and development spending in this country is now down by 3 per cent. compared with 1997, when this Government took over, and the burden of taxation and regulation is constantly referred to.
In policy terms, the Chancellor is contributing nothing to that long-term challenge. He is burned out in his current job, and I just wish his successor luck in trying to do something to put some life into his lacklustre legacy.
Kerry McCarthy (Bristol, East) (Lab): It is slightly daunting to follow a former Chancellor of the Exchequer in a Budget debate. I spent the morning at the Treasury Committee taking evidence from the Governor of the Bank of England. I must say that the Governor's analysis of the current economic outlook bears very little relationship to the scenario just presented by the right hon. and learned Member for Rushcliffe (Mr. Clarke).
I welcome the Budget's focus on the economic performance of cities as a driver of regional economic growth, especially the importance placed by my right
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hon. Friends the Chancellor and the Secretary of State for Trade and Industry on science and the creative industries, which are certainly key to the economic prosperity of Bristol and the surrounding city region. Bristol has been designated one of the first six science cities in the UK and the universities are leading the field in several areas of scientific research. The city is also host to many creative entrepreneurs, especially Aardman Productions, which has just brought back its fourth Oscar from Hollywood.
I wish to talk today about the need to raise levels of enterprise and investment in our most deprived areas if we are to raise overall levels of enterprise and productivity. We know that significant amounts of regeneration funding have gone into those areas, but that alonewelcome though it iswill not deliver fundamental and lasting change: creating thriving and successful business sectors in those communities will.
The Government have introduced a range of initiatives over the years, including enterprise areas, business improvement districts, new entrepreneur scholarships, the Phoenix fund and the business incubation fund. I could go on. I was pleased to see continued support in the Budget for measures such as the local enterprise growth initiative. So far, £126 million has gone into deprived areas and a second bidding round will start soon. I hope that one day my constituency will benefit from that.
Government support is not, in itself, enough. We need a long-term transformation in the business environment in poorer communities, and to achieve that the private sector has to play a part. The Budget included a very useful paper entitled "Financial services in London", which I read with great interest. It rightly focused on the City's internationalismit was sub-titled "Global opportunities and challenges"which is, after all, the reason for its past pre-eminence and its continued success and prosperity. However, we also need to look at whether UK financial institutions could do more to help regeneration in our poorest areas.
When the Treasury Committee went to the USA recentlya country with higher productivity than the UK and a much stronger enterprise culturewe visited City First bank in Washington DC, which is a community development financial institution, or CDFI, that serves a community that is 87 per cent. black and 9 per cent. Hispanic. The bank is playing a key role at the heart of its community in cultivating a crop of new entrepreneurs and business that are rooted in their communities, bringing new wealth into them.
The bank's clients also include many customers in the not-for-profit sector, who were not well served by major banks, including day-care centres, homeless shelters, sheltered housing operators, churches and charter schools. Those depositors know that by putting their reserves into City First, at a competitive rate, they are also having a positive impact on the local community. The team at City First act not just as bankers, but as business advisers, working with clients on, for example, drawing up cash-flow projections. They nurture their clients, through good times and bad, and they can do so because they are part-funded by mainstream banks. The mainstream banks benefit from the new markets tax
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credit, and also meet their obligations under the Community Reinvestment ActI shall return to that later.
There are, of course, significant differences between the UK and the US banking systems, but we can learn lessons from the US. A vibrant CDFI sector in the UK could help to fill the funding gap that is left by a lack of access to mainstream finance and could act as a bridge between deprived communities and the more successful mainstream economies. It could also improve the sustainability of regeneration funding through increased loan financing, as compared to grant funding.
There has already been some analysis of the need for such organisations in the UK. Bristol city council commissioned some research in 2002 that looked at the support available for local business start-ups. In particular, it looked at Barton Hill, an estate in my constituency that is in a ward ranked 133rd on the national index of deprivation. The estate benefits already from £50 million regeneration funding under the new deal for communities scheme, but that alone is not enough to turn round its fortunes.
The study found that there was no lack of agencies providing enterprise support in Bristol. In fact, there was an over-provision of agencies and an under-utilisation of funds. In some cases, the resources were overlapping, or poorly targeted, or the agencies did not fully understand or meet the needs of micro-entrepreneurs. I very much welcome the decision, highlighted by my right hon. Friend the Secretary of State for Trade and Industry today, to cut the number of business support services from 3,000 to 100 by 2010. Streamlining the support will make accessing it much easier for small businesses.
The Bristol study noted that there was a raft of community finance initiatives, such as a loan guarantee scheme provided in partnership with a mainstream financial institution. But application processes were complex, and they had not been drawn together or developed in the context of an integrated strategy. The study also found that barriers to personal finance, such as the lack of a bank account or the absence of any savings or assets, were also significant barriers to entrepreneurship. We know, however, that mainstream financial institutions are increasingly deserting such communities, to the extent that they no longer even provide cashpoint machines, let alone set up branches.
The Bristol study recommended the creation of a broad-based CDFI, which would bring together existing loan funds; encourage closer partnerships with, and between, credit unions; link in advice services, such as the excellent Bristol debt advice centre in my constituency; and bridge the gap between access to personal banking facilities and enterprise finance. A CDFI in Bristol could also, as in the United States, have a role to play in supporting voluntary sector and not-for-profit groups, of which there are many in my constituency, doing immensely valuable work. They all too often struggle to access funding, can secure only short-term funds, or are hit by cash flow problems as they get caught out by the complexities of endless bidding rounds. A community bank could help them negotiate their way through the maze, by providing loan finance, cash-flowing shortfalls and offering business advice and support.
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The Government have already taken some important steps to promote the development of CDFIs in the UK. They have established a trade association for CDFIsthe Community Development Finance Associationand the Bridges community development venture fund has invested £20 million in our most deprived areas. Most importantly, the Government have introduced the community investment tax credit, which gives a tax incentive to investors in accredited CDFIs, and requires them to make onward investments. So far, that has enabled CDFIs to raise some £35 million of new capital for onward lending to small businesses and social enterprises in disadvantaged communities. CDFIs have financed more than 9,500 businesses and individuals, sustained more than 85,000 jobs, created more than 10,000 jobs and leveraged another £160 million in additional funds, on top of the £400 million they already have available to lend and invest.
That represents real progress, but there is still a long way to go before the sector is as vibrant and as much a part of the local economy as it is in the USA. There are three possible ways to encourage our financial institutions to do more to lend and invest in disadvantaged areas, and to support the development of CDFIs. The first is to offer a reward or incentive for investment, through measures like the community investment tax credit, which the Government have already done. The second, which was recommended by the social investment task force in 2000 but has not yet been implemented, is to force disclosure by the banks of the extent of their investment in, and provision of services to, disadvantaged communities. Only one bank, Barclays, does that voluntarily, and I suggest that the time has come to encourageor perhaps do more than encourageother banks to follow suit. The third and more radical approach would be to adopt the US approach and legislate to require banks to invest in deprived communities. In the USA, under the Community Reinvestment Act of 1977, deposit-taking financial institutions can choose whether to provide banking services directly to under-served communities, or to invest in CDFIs that do, but they have to do one or the other. That activity is monitored by federal regulators, and taken into account when banks are applying for charters, or for approval of bank mergers, acquisitions and branch openings. At the last audit, only 5 per cent. of banks were judged to have failed to comply with their obligations under the CRA, which has led to a huge growth in the CDFI industry and greatly increased access to capital for low-income communities. The bank that we visited in Washington said that without that legislation they would not exist, and neither would the businesses set up for their customers.
I spoke earlier of the company based in the Barton Hill area of my constituency that has just returned from the Oscars. Who knows what other talent is out there that, if cultivated, nurtured and supported, and if given half a chance and helped by financial institutions, would go on to similar success?
In conclusion, I very much welcome the measures proposed by the Chancellor in his Budget, particularly the focus on support for enterprise investment, and I hope that we can build on those measures for years to come.
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