Memorandum submitted by the CBI
THE AUTUMN 2001 PRE-BUDGET REPORT: PRELIMINARY
1. This note gives our first impressions
of the Autumn 2001 Pre-Budget Report. In several areas it is only
possible to express a provisional view as there has been only
a limited opportunity to discuss the detail with CBI members.
2. We comment first on the broad economic
picture, including the Treasury's economic forecast, the appropriateness
of the Government's borrowing plans, and issues surrounding the
Government's approach to overall public spending, the total tax
burden, and overall business taxation. We then look at specific
measures under the broad headings of: corporation tax; research
and development; environmental and transport taxes; employment-related
measures; property and regional development issues; small and
medium-sized enterprise issues; and NHS spending.
3. UK economic growth has remained relatively
robust despite the world economic slowdown. The Treasury forecast
of 2.25 per cent for growth in 2001 is in line with the 2.3 per
cent predicted by the CBI. However, the forecasts of 2-2.5 per
cent for 2002 and 2.75-3.25 per cent for 2003 are more optimistic
than the respective CBI forecasts of 1.7 per cent and 2.6 per
cent and, indeed, the general consensus.
4. Household consumption has played an important
role in supporting growth in the face of weak external demand.
The Treasury projections for the annual change in consumption
are broadly similar to the CBI forecast for this year but show
less of a marked decline for next year, with a range of 2.75-3
per cent as compared to the CBI's forecast of 1.9 per cent. This
variation is the key to understanding the more optimistic Treasury
forecast for GDP growth beyond 2002.
5. The corporate sector has borne the brunt
of the economic slowdown with externally exposed sectors being
disproportionately affected, principally through adverse developments
in the global economy and the relative strength of sterling against
the euro. The Treasury has revised down its forecast for the growth
of business investment this year from 5.5 per cent to 0 per cent,
reflecting the decline in business confidence. Treasury projections
for 2002 (0.25-0.5 per cent) remain more subdued than the CBI's
estimate of 1.2 per cent but show rapid recovery by reaching 4.5
per cent by 2003 as postponed investment plans come back on stream.
6. Inflation looks set to remain a little
below the Government's target of 2.5 per cent, with the Treasury
forecasting 2.25 per cent for both this year and the next. These
estimates are similar to the respective CBI projections of 2.2
per cent and 2.3 per cent and underscore the relatively benign
environment in which counter-cyclical monetary and fiscal policy
can currently operate.
7. Rapid growth in public spending, combined
with lower-than-expected receipts, has led to a steeper rise in
borrowing than previously projected. Public sector net borrowing
(PSNB) is expected to be £2.5 billion this fiscal year, or
0.3 per cent of GDP, compared with a predicted surplus of £5bn
in March. Next year's projected PSNB has risen from £2 billion
to £12 billion, followed by a £3 billion upward revision
to £15 billion in 2003-04. Compared with the March projections,
these revisions represent an increase in borrowing of £24
billion over the next three years.
8. The key factor behind the Treasury's
higher borrowing forecast is the reduction in expected receipts,
which fall short of previous projections by £7 billion this
year, £10 billion next year and a more modest £3 billion
in 2003-04. A large impact comes from lower corporation tax receipts
which are estimated to be £3 billion lower this year and
£2 billion lower in 2002-03 than in the Budget projections.
9. Nevertheless, it would seem that on present
plans, the Government's finances are on a sustainable footing
and should not give any cause for alarm. On the basis of the existing
expenditure plans (including the policy announcements made in
the PBR), the deficit is expected by the Treasury to peak at 1.4
per cent of GDP in 2003-04, settling down to around 1 per cent
from 2005. The debt-to-GDP ratio is projected to remain around
31 per cent which is well below the 40 per cent sustainable investment
rule. Of course if, as we expect, economic growth falls a little
short of the Chancellor's predictions, then public borrowing may
turn out a little higher than this. But even then there would
be little to worry about on the basis of the present spending
10. Taking the CBI's forecasts, which suggest
that GDP will fall short of the Treasury's projection by 0.4 per
cent by 2002, and using the "rule of thumb" that a 1
per cent shortfall in growth eventually pushes up public borrowing
by ¾ per cent of GDP, we might have expected the Chancellor
to have forecast borrowing at 1.7 per cent of GDP instead of 1.4
per cent. In other words, the peak in the deficit would be worse
than currently projectedbut not by anywhere near enough
to warrant remedial action. And looking further out, we accept
that the long-term growth assumption of 2.25 per cent per year
is rather conservative, making it more likely that the public
finances would eventually begin to surprise on the upside.
11. If, however, the spending totals were
ratcheted up further in next year's new Spending Review, then
new funding streams would almost certainly be required to prevent
the deficit from widening to levels inconsistent with the Treasury's
favoured "golden rule".
12. The Pre-Budget Report measures, in conjunction
with the pre-existing spending plans, will act counter-cyclically
to support domestic demand at a time of global economic slowdown.
But they should not add unduly to inflationary pressures. Indeed,
our major short-term concern remains the possibility (albeit an
outside one) of an unacceptably steep downturn in the situation
facing the business sector. We still see scope for a further modest
interest rate reduction, without jeopardising the inflation target.
And we are concerned that the Chancellor has not responded to
our call for the preparation of an "emergency" tax package,
to be targeted on the most vulnerable sectors of business in the
event of a more severe downturn. This omission does, however,
appear consistent with his more optimistic view on economic growth
in the immediate future.
13. Public expenditure is currently projected
to reach 40½ per cent of GDP. However, the Chancellor's comments
about NHS funding indicate a willingness to allow a further ratcheting-up
of the ratio in next year's new Spending Review. We further note
the Chancellor's preference for taxpayer-funding in this case.
14. If spending is to be pushed higher in
the Review, it would probably be better to fund the extra through
new revenue streams rather than extra borrowing. But we hope that
the Government will remain open to a range of alternative funding
methods, and that, if taxes are to be pushed higher, this is done
in a way which avoids imposing new burdens on business. At present,
if excise duties are included, the tax burden borne by business
is higher in the UK than in key OECD competitors, including the
US, Germany, Ireland and the Netherlands. Further, the majority
of tax increases during the last Parliament fell on the business
sector (widely defined to include shareholders). And internationally
exposed sectors are already under considerable competitive pressure
due to the over-valuation of sterling against the euro.
15. To improve competitiveness, the CBI
has called for fundamental reviews of several areas of the tax
system (such as transport taxes, "green" taxes, stamp
duty on property, excise duties in the context of the Single Market,
stamp duty on sharedealing, and commercial buildings allowances
within the corporation tax system). Beneficial reform in all these
areas would be relatively expensive and only achievable as the
finances allow. We are concerned that further increases in the
share of total taxation in GDP would reduce still further the
scope for the necessary action in areas such as these, as well
as the scope to reduce business taxation more generally as part
of the drive to facilitate investment in all its forms.
16. Stability and consistency in the tax
system are also crucial to long term business planning and investment.
And tax rules should be simple to understand and facilitate easy
compliance. It is imperative that new mechanisms do not increase
red tape, potentially negating their intended beneficial effect.
Tax changes should only be implemented when it is clear that benefits
outweigh costs. In this light, we continue to urge an "audit"
of recent tax changes, assessing the true cost to business (including
the cost of compliance) against any wider benefits actually achieved.
But we do welcome the decisions to introduce the new R&D tax
credit on a "volume" rather than "incremental"
basis, and to push ahead with simplification for small businesses
in the areas of VAT and corporation tax.
17. We welcome the Government's confirmation
that, subject to consultation, the new tax relief for intellectual
property and the exemption for companies' capital gains on substantial
shareholdings will be introduced in April 2002. We are also pleased
to see that the Government has responded to business requests
for more time to prepare for implementation of the new tax regime
for corporate debt, financial instruments and foreign exchange
gains and losses. The CBI will be commenting in detail on the
draft legislation in each of these areas.
18. We welcome the Chancellor's confirmation
that he will legislate next year for a new R&D tax credit
for large companies. With the Pre-Budget Report referring to the
new scheme as "volume-based" rather than "incremental",
this is a significant step towards a scheme design that business
could welcomeie one which is simple enough for business
to use and generous enough to make a difference. It will be particularly
important to recession-hit manufacturers. We will of course be
responding to the consultation on the detailed design of the scheme,
and would very much hope that a properly-funded credit will be
introduced in the Budget in March.
19. The CBI is very interested in the major
consultation that is to take place on proposals to charge lorries
according to the distance or time they drive. This should be fairer
than vehicle excise duty (VED) as it would apply to both UK and
foreign registered vehicles. We are reassured by Government comments
that there will be no overall increase in the amount of tax paid
by the UK haulage industry (so VED or fuel duty for hauliers would
be cut), although there would obviously be winners and losers
20. This is a fairly significant proposal
- effectively a first step towards national road tolling - but
initial reactions from the hauliers seem to be quite positive.
Of course the acceptability of the final scheme will depend on
the detail - key issues will be the cost to hauliers, and the
degree of bureaucracy imposed. But we welcome the chance to contribute
to the consultation.
21. In the area of business energy efficiency,
we remain critical of the climate change levy and believe further
improvements are neededeg on companies' eligibility for
a discount on the levy. The willingness of the Government to consider
giving more favourable treatment to combined heat and power (CHP)
generation is welcome, but needs to be matched by action. The
review of possible further energy saving technologies to qualify
for enhanced capital allowances is also in line with what the
CBI had been calling for, although it remains to be seen how far
this will go.
22. The Green Technology Challenge initiative,
which embraces enhanced allowances for both energy saving and
the promotion of cleaner fuels and vehicles, also appears positive.
But again the impact of the measures under consideration remains
to be seen.
23. The Government says it is minded to
phase in the introduction of the aggregates levy in Northern
Ireland, for aggregates used in processed products (eg pre-cast
concrete). This is a welcome recognition of the problems faced
in Northern Ireland, but does not address the more general fundamental
flaws of the levy, wherever it is applied.
24. We note the Government's commitment
to increasing the rate of the landfill tax for active waste
by £1 each year until 2004, which is in line with the landfill
tax escalator. We welcome the intended consultation on the future
of the landfill tax credit scheme, which must be considered within
the wider context of the Government's review of the Waste Strategy,
business taxation and public spending.
25. The Government is considering new policy
approaches to encourage training for lower skilled workers,
building on recent work by its Performance and Innovation Unit
(PIU). The Chancellor further announced that pilot initiatives,
to begin in September 2002, would be set up to test a range of
approaches. The CBI is encouraged by these proposals, given the
basic skills problem harming the UK economy. The PIU report recognises
the need for more public investment to help employers and employees
because "aspects of the performance of the education system
have led to a relatively poorly qualified workforce, and a disproportionate
number of employees lacking basic skills."
Seven million adults lack functional literacy and numeracy.
26. We are pleased by indications that the
Government is preparing to introduce the financial incentives
for training for which we have campaigned. More details are needed
on the pilots as to whether course and accreditation costs would
be met where the employer is providing the training directly.
It is not clear whether training must be linked to the employer's
needs in order for employees to be eligible for the proposed entitlement
to paid time off.
27. We are concerned by references to a
possible statutory right to time off within the report. The case
for such a right has not been made. It would have a significant
impact in terms of business cost and administrative burdensparticularly
for SMEs. It would reinforce views that training is a cost rather
than an investment. The CBI believes that demonstrating benefits
to company performance is the best way to get smaller firms involved
in training. An incentive approach should be explored thoroughly
before considering statutory intervention. We are therefore disappointed
that the TUC-CBI proposal for a tax credit to help small firms
work with the Investors in People Standard has not been taken
up. The Standard helps organisations to use training to meet business
objectives, reinforcing the link between skills utilisation and
productivity. Currently take-up is low among smaller firms. Since
both the PIU and Pre-Budget reports aim to increase demand for
training, especially in SMEs, it makes sense to build on this
28. We look forward to working with Government
and the PIU on the proposals for the pilots in order to ensure
that they meet employer demand, raise skills and increase productivity
29. The Chancellor restated his continued
support for the tax credit idea, announcing amongst other things
plans for a new Working Tax Credit. We support the extension
of the tax credits system, but remain concerned about the rising
burden of payroll administration on employers. A long-term solution
is clearly needed to avoid employers becoming paymasters of the
30. We are interested in the Government's
decisions on stamp duty on property, confirming details
of an announcement already made in the last Budget. The immediate
increase in the exemption threshold for property transfers in
the poorest 2,000 wards, from £60,000 to £150,000, is
of limited significance to businesses. But we look forward to
proposals in the March Budget to distinguish between business
and residential properties for the purposes of stamp dutywith
the possibility of duty being removed for all business property
in those deprived wards.
31. We have been concerned that businesses
are hit by rises in stamp duty originally intended to impact on
the housing market. So separating the two is potentially welcome,
though much depends on the details. But there is a strong case
for cutting the burden of stamp duty on transfers of business
propertyand other business assetsthroughout the
UK. We hope that separating the rates of duty charged on residential
and business property will pave the way for a more general reduction
in the charge on all business-related deals.
32. We applaud the Government's initiative
in analysing the challenges facing the Regional Productivity
Challenge and look forward to studying the 50 page report.
We welcome the recognition of RDAs as the key drivers of English
regional economic development and have made recommendations to
improve their performance. There is still significant scope for
these and other bodies in Scotland, Wales and Northern Ireland
to become more focused on business priorities. We believe the
intention of having a strong regional dimension to the 2002 Spending
Review makes sense but needs to be handled with care.
33. The Chancellor confirmed a number of
welcome but previously-announced measures in this area. This includes
the steepening of the taper applied to the taxation of capital
gains on holdings of business assets (chiefly shares in unquoted
companies) from next April, so that a top effective tax rate of
just 10 per cent will apply to assets held for just two years,
instead of the current four.
34. We would, however, like to have seen
some of the complexities surrounding this tax to be addressed.
While the current review of the scope for simplification of CGT
is welcome, we are concerned that this is unduly constrained by
the requirement to stay within the existing policy framework and
to avoid changes having any exchequer cost. The complexity arising
from the numerous recent changes can only be satisfactorily addressed
by permitting the re-basing of assets to 17 March 1998, and by
applying the new business assets taper to all business assets
sold after 5 April 2002, including shareholdings acquired before
6 April 2000 which only became business assets on that date. There
is a particular issue of unfairness under current rules. For example,
someone who held shares in 1998 and sold them in June 2004 could
be in a worse position than someone who acquired the same number
of shares in the same company in April 2000 and sold them in June
35. We also welcome the doubling in the
size of business qualifying for the Enterprise Management Incentives
scheme, and are pleased that the Government is pushing forward
with moves towards simplification of VAT and the taxation
of profits for small businesses. On the last, we recommend
that small businesses should be able to elect be taxed either
on a new, simpler accounting profits basis, or on the present
basis. Indeed, we believe that the principle of election could
usefully be widened to other areas.
36. We note that the Government plans to
widen the 10 per cent "starting rate" band for
corporation tax. While the goal underlying this low rate of corporation
tax is admirable, we have doubts about its usefulness in practice.
A "zero rate band" or "annual exempt amount"
could achieve the same benefits for businesses only just coming
into profit, while reducing the administrative complexity associated
with the 10 per cent rate.
37. Though the Pre-Budget Report package
will clearly be of net benefit to SMEs and entrepreneurs, it is
worth pointing briefly to areas where we believe further change
would build on the Government's own "enterprise and productivity"
We were disappointed that there was
no announcement of any change in the tax treatment of those businesses
which would otherwise qualify for the small company rate of corporation
tax (or exemption from having to pay quarterly instalments on
account), but which do not because they are deemed to have "associated
companies"even where the combined profits of all
of the "associates" falls short of the relevant threshold.
As set out above, we believe there
is a strong case for a nation-wide reduction in stamp duty
on business property and other assets. Many small businesses
looking to expand, relocate or restructure are hit by this charge.
Nor do we understand the reasons for using gross rather than net
asset value in the calculation of stamp dutyand indeed
for several other tax purposes, including qualification as an
"SME". The gross basis can discriminate against those
sectors of business with high capital requirements, and against
those businesses (such as exporters) requiring extra liquidity
to guard against slow or uneven payment streams.
We continue to believe that the tightness
of rules governing qualifying expenditure for the SME R&D
tax credit, and the application of those rules in practice,
means that the Government's goal of a significant increase in
innovation by these businesses is being undermined. Anecdotal
evidence suggests that a great deal of expenditure which companies
believe "ought" to qualify for the credit does not.
We aim to collect together some case studies. But it would also
be useful to know if the Treasury or Inland Revenue have any statistics
on take-up of the new credit.
38. Derek Wanless' interim report is a welcome
contribution to the debate on the future of healthcare and makes
a number of observations that support the CBI's own analysis,
particularly on the need to reduce waiting times and improve ICT
and human resources in the NHS. We particularly welcome the report's
recognition that business is a major stakeholder in the healthcare
sector. Another factor that needs to be better recognised is that
public and private sectors already play important roles
in both funding and delivering healthcare. The CBI report, Business
and healthcare in the 21st Century, published on 3 December,
outlines key areas where business and the healthcare sector interact
and debates priorities for action in these areas.
1 In demand: Adult skills in the 21st century-A report
by the Performance and Innovation Unit, 2001, p 36. Back