A bad day to release good news
stephen clarke, 19 September 2011
Today news emerged that Jaguar Land Rover plans to invest £335 million to build low-emission engines at a site near Wolverhampton. The proposed investment is expected to directly create approximately 750 jobs, with many more indirectly created in the supply chain and wider economy. Such news is welcome, but perhaps overshadowed by the economic gloom, which was propounded today when the Financial Times reported that there is likely to be a £12 billion hole in the UK’s public finances for 2011-12.
The Financial Times, using the Office for Budget Responsibilities methodology has estimated that the structural deficit for 2011-12 will be £12 billion, or 25 per cent, higher than previously expected. This is down to the fact that the level of spare capacity in the British economy, and propensity for growth, is lower than expected, at 2.6 rather than 3.9 per cent of national income for 2011-12. In short, cuts in spending are not being matched by growth; although the UK may soon be spending less, we are unfortunately not making enough, and as a result debt levels are not falling by as much as was previously projected.
What the British economy needs is more news similar to that concerning Jaguar Land Rover. The question (hopefully) filling the minds of civil servants and ministers is: how can the British Government act to encourage and help more companies replicate Jaguar Land Rover?
Interestingly Jaguar Land Rover’s chief executive Dr Ralf Speth cited ‘strong support’ from the Government as one of the reasons for the intended investment. This support came in two forms: the new site is located within a planned ‘enterprise zone’ and the project is reportedly benefitting from a government grant of £10 million through the Grant for Business Investment Scheme.
Ministers have trumpeted about the importance of Government support in this project, as one might expect them to. However, they may have a point. Clearly Jaguar Land Rover, a company with resilient profits and increasing revenue, despite the wider financial circumstances, can afford to invest. However for companies like Jaguar Land Rover it is more often a question of where, rather than whether, to invest? The answer to this question needs to be Britain, and often the way to get such an answer is to support investment using public resources. Spending money to make money.
The problem at the moment is that the Government is, quite rightly, concerned about levels of public spending. Nevertheless this should not result in a wholesale rejection of the idea of public investment. One thing the Government needs to do is to prioritise certain forms of spending. Tax rebates, allowances or loan guarantees to encourage firms to invest are perhaps better than grants. Forgoing government revenue is always more efficient that just recycling taxes. Grants should still be used, but perhaps only where the financial benefits are tangible, as in the Jaguar Land Rover case.
As well as spending wisely, the Government also needs to ensure that its powers to intervene in the British economy are not limited by the EU. It was mentioned that Jaguar Land Rover benefitted from the planned enterprise zones. Unfortunately the effectiveness of the new zones could be limited by EU state aid rules, if the Government does not make the effort to ensure otherwise. Under current plans the maximum amount of business rate relief a business can benefit from is capped at £275,000 over five years, furthermore only businesses setting up production in a zone covered by an EU regional aid area can benefit from increased capital allowances.
While EU rules can undoubtedly circumscribe the British Government’s actions, they do not pose an insurmountable barrier. Many other European states successfully navigate the rules. The British Government must work harder to do the same.
Samuel Johnson once remarked that ‘nothing focuses the mind like a hanging’, let’s hope that a similar crisis serves the Coalition. The performance of the British Government, in improving the effectiveness of public spending, and working effectively within the parameters of the EU rules, needs to improve.