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CBI chief warns UK could fall into low growth trap

Tony Danker
Tony Danker: decisions needed now

CBI boss Tony Danker today says the UK could remain stuck in a “low growth trap” unless the government takes the hard decisions on tax incentives and green initiatives that will encourage investment.

In a wide-ranging speech, Mr Danker also calls for measures to tackle chronic skills shortages and high childcare costs together with a push for smarter regulation.

He applauds measures taken by the Prime Minister Rishi Sunak and Chancellor Jeremy Hunt to stabilise the economy after last autumn’s fall-out, describing their moves as “a vital first step, executed well”. He believes the Government is likely to comfortably meet its economic targets this year.

But sustaining growth thereafter depends on taking some “very big decisions right now, not waiting until 2024,” says the CBO’s director-general, referring to potential general election giveaways.

“As Chancellor, Rishi Sunak accepted that the UK’s tax incentive regime for investment is lower than the OECD average,” he says in his speech at University College London.

“But, as of right now, the super deduction – which expires in a few weeks – is not set to be replaced. With it, the UK had the fifth most competitive tax system in the OECD for capital investment. Without it, we’re back to 30th out of 38. Just like our business investment, which ranks alongside Turkey and Greece.  

Mr Danker says that “our international competitors in Europe, Asia and the US are going hell for leather on green growth and getting firms investing.

“We are behind them now and seem to be hoping for the best.”

He reckons the UK could stay stuck in a low growth trap as the major drivers of productivity grind to a halt.

“This makes the Chancellor’s Spring Budget a key point in the Government’s turnaround strategy. But there is grave concern that the Government could shy away from the hard decisions that can reverse the UK’s trajectory’ with a General Election on the horizon.”  

Aside from replacing the super-deduction, which allows firms to offset certain capital spending against their corporation tax bill, he warns that corporation tax will rise six points overnight.

Jeremy Hunt’s Spring Budget is a key point in the turnaround strategy

“This double whammy makes the UK less competitive and less likely to see firms investing,” he says.

He adds that the UK needs to “up its game on green growth” in response to fierce global competition for market share.

The UK, he says, cannot compete with US and EU subsidies so it must be smart and strategic, bringing forward market-making mechanisms like the Contract for Difference that have proven success in renewables and could be applied to other promising technologies like hydrogen, carbon capture and sustainable aviation fuels.  

Hydrogen fuel is a promising technology

He calls for the government to use regulation to stimulate domestic demand for green technologies as is being done for electric vehicles.  

“Green growth is one of the big opportunities in the coming years for the UK economy. Automotive firms are increasingly moving towards electric vehicle production – currently the UK is estimated to lose out on around £3bn in EV assembly and battery production by 2030.  

“Hydrogen electrolysers offer carbon-free routes to fuel, power industry and production of chemical gases. The UK has slipped 1% in the global production market since 2020 which will account for £1.3bn worth by 2030 lost.”

Mr Danker wants the government to outline a bigger and bolder approach to tackle chronic labour and skills shortages. 

“If the Government wants to reject using economic migration to fill immediate vacancies – something business disagrees with – then their labour market interventions must be the boldest in the world. 

“The Government needs to develop credible pathways back into work for those who’ve had to leave, fixing tapers, cliff-edges and disincentives that exist in the benefits system and childcare support.

Immigration is needed to help fill vacancies

He says there are real opportunities for the UK to regulate markets more smartly than the EU but the Government’s current plans for the expiration of EU-generated law risks throwing industry into some chaos just at the time we’re trying to exit recession at the end of the year. 

The Sir Patrick Vallance Review will work with industry to advise on pro-innovation regulation in key growth sectors, including: digital technology; life sciences; green; creative industries and advanced manufacturing. 

On green growth, Mr Danker says: “The Skidmore Review is devastating. And echoes CBI analysis of the UK’s performance against our competitors in future green industries. The UK is falling behind rapidly – to the Americans and the Europeans, who are outspending and outsmarting us.  

“We’re behind the Germans on heat-pumps, insulation and building retrofits, the French on EV charging infrastructure, and the US on operational carbon capture and storage projects – despite the UK’s North Sea advantage. We’re lagging all three on hydrogen funding.  

“We are leaving huge amounts of money on the table. In the last two years alone, the UK has lost market share in green tech, equivalent to the potential value of £4.3bn by 2030.  

“That’s approximately £3bn in EV assembly and battery production, and £1.3bn on hydrogen electrolysers. Even before we get into the growth possibilities of emerging tech, like carbon capture and storage.  

“On the UK’s regulatory divergence from Europe, the Government is convinced this is a major opportunity for growth. I agree it can be too. But it’s a bit more complicated than scrapping overnight many of the terms of trade we’ve used for decades.   

“I’ve never felt Brexit was about the economy. It was about sovereignty.  But now we’ve done it we must explore the potential prizes.  

But he says the abolition of EU laws is creating huge uncertainty for UK firms.  

“Companies are asking will we really erode maternity and paternity regulation or health and safety standards like the General Product Safety Directive? Or rapidly change regulations on REACH, which governs the use of chemicals? With billions of pounds of industry costs? Or create the potential for firms being underinsured because it’s harder for analysts – who don’t know what laws will be retained – to effectively price risk into products?  

On the labour market, he says: “Childcare is expensive in the UK – amongst the highest in the OECD. And it’s keeping parents who want to work at home or limiting their hours.  

“While automation is increasing in some sectors, it’s harder to do in others. And the post-Brexit immigration system is very expensive for higher-skilled roles and doesn’t offer a solution at all for where some of the most acute shortages exist today.”

As for skills, he says just 24% of the UK’s public education spending goes to post-secondary education and vocational training and skills compared to the OECD average of 66%. That’s the smallest percentage of all 38 OECD countries. 

“I share the politicians’ ambition for a high-wage, high-skill economy. But it’s currently an empty promise. Because we aren’t paying anywhere close to what it takes for higher skills. And we’re not letting immigrants help do the lower-skilled, lower-wage jobs every economy has.

“There are high-wage, high-skill economies who’ve all made different choices to UK political parties. Serious and honest choices. I worry our politicians are just trying to change the conversation.”

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