Thursday, June 24, 2010


Much of the focus from Tuesday’s budget has been on those measures, such as the increase in VAT, that George Osborne has put into place to deal with the economic mess left by the last Labour Government and to cut a government deficit that is currently running at 12.7 per cent of GDP, the largest of any major economy.

What many commentators on the left of the political spectrum seem to have conveniently ignored is the simple fact that if you spend more than you can earn, then those lending you the money will charge you interest on those borrowings and this will accumulate over time, much in the same way that an unpaid credit card will accumulate interest payments on any outstanding capital.

Therefore, running high deficits every year since 2001 - when Gordon Brown abandoned the previous Conservative government’s fiscal plans - has left us with an overall debt of a trillion pounds, on which we currently pay over £44 billion in interest every year.

The Labour Party and its supporters seem to conveniently ignore the fact that if George Osborne had kept to the previous government’s spending plans, the interest paid to service the government debt would have increased to over £70 billion by 2015. To put this into context, that is equivalent to twice the amount raised by corporation tax every year, more than twice what the UK Government spends on social services and nearly five times the annual budget of the Welsh Assembly Government.

In addition, any failure to deal with the ballooning public sector would have inevitably have led to those who are lending the money to the UK, as has happened to other European countries who had failed to deal sufficiently with their deficits, to downgrade the UK’s credit rating.

As a result, the interest rates at which the government pays the debt would then have risen, much in the same way that a bank charges those businesses that it considers to be at risk certain percentage points above the base rate. This would cost the economy tens of billions of pounds in extra interest charges, thus compounding the problem and sending this country into a serious depression.

Under such circumstances, did the Chancellor have any alternative? Clearly those in the Labour Party who have encouraged a growth in the public sector paid for by increasing government debt over the last decade think not. Certainly it has become politically expedient for the Labour Party to complain about the potential loss of jobs in the public sector but compare that with their silence during the recession when over 45,000 jobs were lost in the private sector in Wales.

Like those who keep spending on a lifestyle that they cannot afford, they keep pretending that everything is fine, that they can continue to increase their outgoings without any consequences for their actions, forgetting that not only is the debt on that interest owed increasing but there comes a time when that money will have to be paid back.

That is the reality of the situation. Whilst the Welsh branch of the Guardinistas may not agree with Osborne’s decisions, a YouGov poll taken after the budget showed that 53 per cent of the general public believe that the way the government is cutting spending to reduce the deficit will be good for the economy as opposed to 28 per cent who think it would be bad for the UK.

Perhaps the boldest move in Osborne’s budget, and one that has been conveniently ignored by left-leaning commentators in Wales and elsewhere, has been those changes to ensure that the private sector is given every support to replace government as the driver of the economy and create jobs and prosperity over the next five years.

For example, these include a corporation tax reduction to 27 per cent next year and which will be cut by one percentage point a year for next three years to 24 per cent. This compares to a corporation tax rate of 33 per cent for France, 30 per cent for Germany and 37 per cent for Italy. This will give the UK, with the exception of Ireland, the most competitive tax regime in the whole of Western Europe and yet again ensuring that this country becomes a magnet for inward investment as the world economy recovers.

Secondly, there is the reduction in small companies’ corporation tax rate cut to 20 per cent, reversing the increase to 22 per cent intended under Alistair Darling’s last budget. With over 4.7 million small businesses in the UK, it is clear that government needs to ensure that firms can invest more of their income in their own development rather than taking that money away from them. In previous recessions, small firms have been the engine of employment growth and this new fiscal policy will boost this potential at a time when it is needed the most.

Those who are ready to take the risk and start their own business have also been given a major incentive with the 10 per cent Capital Gains Tax rate for entrepreneurs extended to first £5 million of qualifying gains. The Chancellor will also offer new firms based outside the three most prosperous regions in the UK a £900 million tax break. This means that any new venture set up outside London, the South East of England and East England will not have to pay employer National Insurance contributions (NICs) for the first ten employees taken on during its first year in business.

Apart from the fact that this will help those starting a business through the critical first twelve months of development where cash is key to survival, this groundbreaking measure will be the first time in living memory where a UK Government has applied its fiscal policy on a regional basis, a measure that may begin to address the widening regional disparities in wealth that have grown under thirteen years of a Labour Government.

Whilst those are the headlines for the business side of the budget, there are other important measures hidden away in the Treasury’s published document.

These include increasing the Enterprise Finance Guarantee (EFG) facility (which supports lending to viable small businesses that lack sufficient collateral or the financial track record to access a normal commercial loan) by £200 million, which will support additional lending of up to £700 million for small businesses until 31 March 2011. The Government will also continue with the proposed £237 million Enterprise Capital Fund to support small businesses with high growth potential and provide an extra £37.5 million in equity finance.

A Green Paper on business finance will be published before the summer recess that will consider the broad range of finance options for businesses of different sizes including bank lending, equity and corporate debt. There will also be detailed proposals put forward, after the Autumn spending review, to create of a Green Investment Bank to help the UK meet the low-carbon investment challenge, and the government will consult with business to review the taxation of intellectual property, the support R&D tax credits provide for innovation and the proposals of the Dyson Review.

These are all measures that can make a real difference to the engine room of the UK economy over the next five years, namely the business sector.

In Wales, those in power have a simple choice. They can either complain from the margins whilst the rest of the country gets on with dealing with this budget or they can create a clear and constructive strategy that will take advantage of the opportunities to grow the Welsh economy.

Let’s examine the reductions in corporation tax and the potential benefit to the Welsh economy. During the last few weeks, there have been rumours that International Business Wales will be a sacrificial lamb when WAG’s Economic Renewal Programme is launched at the beginning of next month. If this is true, this is exactly the last thing the Welsh economy needs when the UK Government is using corporation tax reductions as a magnet to attract inward investment, especially given the demise of the regional development agencies in England.

We should also be taking advantage of other schemes for the benefit of Wales. Why, for example, can’t WAG agree a target for Welsh banks to engage with the Enterprise Guarantee Fund and bring in its own public development bank, Finance Wales, to support this programme? Why can’t WAG ensure that we take full advantage of the £270 million available for high growth companies through the Enterprise Capital Fund. Through my involvement with the Fast Growth 50 for the last 12 years, I know that there are plenty of high potential Welsh companies that need funding for further growth and development. If fifty firms can generate an additional £300 million of sales in two years and be responsible for 15 per cent of all private sector jobs in Wales, imagine what they could do with the right financial support.

Wales also has a real opportunity to become the primary “green region” for the UK. As the Centre for Alternative Technology stated earlier this week, thousands of jobs for young people can be created in the cleantech sector and again, we must ensure, through representations from Cardiff Bay and Westminster, that Wales is perfectly placed to take advantage of the Green Investment Fund.

Finally, George Osborne has promised a review in the autumn of measures to help rebalance the Northern Irish economy, which would "examine mechanisms for changing the corporation tax rate". Given that this comes on the back of a report prepared by a group of Northern Irish economists, isn’t it time a similar case was made for Wales from across the political spectrum. The IWA itself could co-ordinate such a critical review during the next few months. After all, a precedent has already been established by this government for regional fiscal policy with the reduction in NICs for new firms so why not extend this to other instruments such as corporation tax.

Therefore, for Wales, the choice is simple.

We can either continue to complain from the sidelines and become increasingly marginalised within the UK economy or we can grasp the opportunities presented to us firmly in both hands and use these to develop an entrepreneurial innovative economy fit for the 21st Century. Given the fact that successive Labour Governments at both Cardiff Bay and Westminster have ensured that the gap in economic prosperity between Wales and the rest of the UK has widened during the last thirteen years, that choice is a no-brainer.

(This article appears on the IWA website, Click for Wales)