Watershed Budget as Brown focuses on productivity gap

Perhaps there is more to Gordon Brown’s recent Budget than first meets the
eye. Far from being mediocre or dull, the detail suggests the chancellor has
laid down a real productivity challenge to employers

‘Brown’s Boring Budget.’ ‘Brown’s
gamble.’ ‘Brown’s Budget bombshell.’ ‘Growth forecasts too optimistic – he’ll
have to raise taxes.’ ‘The Budget was so dull that the FTSE 100 hardly moved.’
Such have been the responses to Gordon Brown’s seventh Budget, that the
Treasury and the chancellor must be wondering what on earth they can do to
raise the level of economic debate in this country.

Yet for the first time, Gordon Brown has shown real economic leadership and
has laid down a real productivity challenge to UK business and the UK
workforce. At last, the Treasury has taken on board the idea that supply-side
measures alone do not adequately address some of the deep-seated issues of the
economy. Finally, some understanding – if we are to raise our competitive game,
we need to change our behaviour.

As individuals we need to take chances, our banks and financiers need to be
encouraged into riskier segments of the investment market, excluded groups need
to be encouraged into the workforce and, above all, responsibility for ensuring
that jobs and innovation are responsive to local and regional labour markets
should be devolved to policy makers at this level and not be determined by
central government. And where the risks are too high for individuals or
businesses to bear them by themselves, government resources should be made
available to bridge the gap between risk and return.

Every measure the chancellor proposed in the Budget took a risk-sharing,
demand-side approach.

For example, a long overdue and much-needed consultation on the concept of
Small Business Investment Companies (SBICs) was announced. Under such a system,
state funds are managed by local fund managers and are used to provide parallel
investments and guarantees to private sector investors to back early-stage
entrepreneurial businesses with little track record.

Our favoured American cousins have been using this type of risk guarantee
mechanism for 50 years, and the Nordic countries, Germany, France, Singapore,
Israel, the Republic of Ireland and The Netherlands have all taken similar
approaches in the past five years. SBICs have an undisputed positive impact on
encouraging investment into the high risk, uncertain return end of the market.

The expanded remit of the small firms loan guarantee scheme is also to be
welcomed. Banks have been able to provide riskier loans to entrepreneurs
supported by guarantees from the Government for years now, but there has been a
very low take-up of the scheme, despite the fact that it has been used as a
role model for structures in the EU and individual member states such as
Denmark. The low take-up of these schemes or their European equivalents, has
effectively starved some of our small businesses of cash when they most need
it.

The changes to housing benefits and an ethnic minority jobs fund, along with
the abolition of late payment fines, the release from audit requirements and
the increase of the VAT threshold for small businesses, will go a long way
towards encouraging productivity through entrepreneurship and innovation.
Alongside this, the scope now for local authorities to share the receipts from
new business creation with the Treasury from 2005, greater focus on regional
science centres, Enterprise Areas, community investment tax relief and the
devolution of power to allow job centres to fill local vacancies lays down a
gauntlet to policy makers to face the challenge of local and regional autonomy.

And one final challenge. The endemic carping by the business lobby about the
regulatory burden facing small businesses has become part of the mood music
accompanying every post-Budget party. Yet the Organisation for Economic
Co-operation and Development says the UK is the least regulated market for
setting up a business in Europe and the changes announced by the chancellor
will only serve to make it even more favourable. More importantly, he has also
started a process of removing the 24-month regulatory hurdle that small
businesses face by announcing a review of all red tape to be led by those who
shout the loudest Рthe CBI and the Institute of Directors. Touché.

This was a Budget about productivity and micro-economic performance. The
chancellor proclaimed an improvement in productivity relative to our G7
competitors that was impressive to hear – the productivity gap with Japan no
longer exists, with Germany the gap has been reduced to 4 per cent and with
France to 16 per cent. This is clever national income accounting and can be
explained entirely in terms of the past year’s higher GDP growth rate.

As we are finding through our Work and Enterprise Panel of Inquiry at The
Work Foundation, the driver of productivity improvements over the long-term
comes from the innovation base of the economy – the men and women from all
walks of life and all backgrounds who take chances, find new ways of doing
things or new products and services with a viable market, and, critically, who
are prepared to take risks to follow through their ideas. It is about the large
businesses that allow their employees to be creative and innovative and, hence,
stay ahead of the game. Raising productivity is about raising all of our
aspirations so that we can adapt flexibly, dynamically and inclusively to the
processes of change.

The chancellor has started the process of raising our aspirations and,
hence, productivity. The challenge now is to work together towards meeting that
challenge.

By Rebecca Harding, Chief economist, The Work
Foundation

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