Nadhim Zahawi: Regulation, Reward and Re-Skilling are the 3 Rs of growth for Ministers

Nadhim Zahawi is MP for Stratford on Avon and a member of the Business Innovation and Skills Select Committee. This is an edited version of remarks he gave at Monday's 'Going for Growth' conference, hosted by ConservativeIntelligence.

The government needs to do something to create growth appears to be the overwhelmingly clear message coming from all quarters. But exactly what that “something” needs to be and how that fits with what the government is already doing, doesn’t appear to be quite so obvious.

“We need a growth strategy” says one group, “the Chancellor needs to lay out what the economy will look like in the future” says another, “the BIS department is failing to deliver a growth agenda” claims Her Majesty’s opposition, but again no one seems able to say what this should be and exactly where the government is failing.

Why? Because growth isn’t something that happens because you implement a policy, it’s as much about creating confidence for businesses as anything else. If business has no confidence then it’s not likely to invest to grow or to take on new employees. Therefore creating growth has to fundamentally be about how we create an environment in which businesses are confident enough to grow. In reality it’s as much about where we leave businesses alone as where we as government intervene.

So here are my suggestions to Ministers for growth - you could call them my 3Rs:

Regulation
Speak to any businessman or woman and they will tell you that over regulation stifles growth. This is why one of the first policies implemented by the Coalition was one-in, one-out on business regulation and a review of all business regulations across all departments.

Then we have employment regulation: the recently announced changes to the tribunals process is a very positive step. If fully implemented it will create an environment where businesses feel able to take on employees without fear of spurious claims and increasing costs. 

Or what about the Office for Tax simplification? Currently it takes over 11,000 pages to explain our unnecessarily complex tax code. Is it right that smaller businesses should be prevented from using it to fund R&D or other growth investment because of that complexity, whilst those businesses with experts devoted to working the system get ahead? The OTS is working to resolve this.

Then there are the regulatory hoops required to supply to government, rules that have meant that despite small business making up 50% of economic turnover they  supply only 10% of the billions of pounds of government contracts available every year. The recently announced changes for SMEs supplying to government are again a positive move to improve this and help growth.

But we need to do more on regulation, primarily starting with protecting our reformed markets from further over regulation by the EU. Our Civil servants have a history of Gold-Plating EU regulation, rather than looking for how to use it to deliver what we need. A classic example of this is the Enterprise Finance Guarantee for exporters, which in Spain is offered in a much more robust manner, but in the UK can’t be because of EU State Aid rules. Last time I checked Spain was also part of the EU, but yet they seem able to work with the system to achieve the right outcomes for their businesses, whereas we can’t.

Export Credit Guarantees are another case in point, where the department itself appears to work against businesses. The evidence we took at Select Committee showed that the ECGD department is simply not fit for purpose, and whilst great for aerospace (which accounts for 90% of all support) has actually reduced the value of the remaining 10% of support in the last 5 years, whilst other countries have been increasing it. This department and its issues have to be tackled if we’re to generate growth from exports.

Reward
Make no mistake for most businesses going for growth is a risk, a calculated risk, but a risk nonetheless and where there are risks there must be rewards, something we forget at our peril. If the risk reward balance isn’t right then businesses won’t take it, or they’ll look to take the risk elsewhere in the world.

The first and most obvious reward to date is our National Insurance holiday for new businesses. How does this reward businesses that grow if it’s only for new companies? Well it rewards sole traders and one man band businesses that choose to take on staff and incorporate themselves. For any business taking on a first employee is a big step, and any help or reward for doing so is likely to make that decision a little easier.

Then there was the announcement that corporation tax rates will be reduced to the lowest in the G7, and the 5th lowest in the G20. Corporation tax rates are important. Not just for encouraging existing businesses to grow, but for attracting inward investment and corporations to site their operations and head offices here. It’s a global world and we have to think about what rewards a business has for basing itself here rather than in our competitor countries.

Having lobbied for it, I was delighted that the government listened to the concerns of entrepreneurs and changed the Capital Gains Tax regime in a way that didn’t disincentivise entrepreneurs. Increasing the Entrepreneur Capital Gains Tax threshold from £2m to £5m is significant and means that entrepreneurs can grow their business and eventually sell it on without fear that they won’t fully realise the proceeds of their hard work.

But there’s still more we can do in this area. I really think we need to look again at Capital Allowances, their removal may be funding reduced corporation tax rates, but manufacturing businesses, which are an area we want to see grow, are big users of them. At present capital expenditure is 15% below the pre-recession peak and we need to reward and incentivise those businesses to invest.

We also need to be stronger on 50p tax, the Chancellor has stated that it isn’t permanent but we need to get this message out there more, and make the argument that it harms the job creators. Businesses, particularly in the city, are saying they are having trouble attracting and retaining high earners in the UK, and it’s important to remember that it is these highest rate tax payers that create jobs. Remember if we love jobs we need to love the people who create them, not drive them away.

Re-Skilling
The skills agenda is vitally important to creating growth, businesses will only be able to grow if our workforce has the skills they need.

Again though the Coalition has already announced a raft of policy to help in this area starting with apprenticeships where we’re creating an extra 75,000 new apprenticeships and have increased funding for apprenticeships by an extra £250m. There’s also a renewed focus on advanced apprenticeships, something which helps individuals to earn more (£105,000 more over their lifetime) and provides a significantly higher skilled workforce.

It’s also important to remember that the tuition fees settlement has secured the future funding of our universities. By putting university funding on a sustainable level we’re ensuring that the quality of our Higher Education system is maintained at the highest levels in the world.

The future of growth and skills also requires the highest levels of research which is why it’s important to remember that we’ve ring-fenced £1.5bn of science research funding, allowing the development of future technologies to remain in the UK.

However like with my two other Rs there’s still more to do. Businesses I talk to are particularly concerned with the immigration cap and its impact on high-tech jobs. I recently visited Jaguar Land Rover who have been searching Europe for over a year for a battery research specialist. But they are unsure if they will be allowed to recruit someone from the rest of the world to fill a vital gap in their hybrid research team.

We need to ensure that we’re not limiting business growth by restricting who they can recruit when there’s simply no option for them to use a UK or EU citizen. Flexibility is undoubtedly the key here.

And when it’s becoming clear that businesses can’t find the skills they need here then it’s also clear that we need to improve our focus on targeting the skills we need. It isn’t government’s jobs to pick the winning technologies and growth areas for the future, but it is that of business. To do this we need to work more closely together, not just  to ensure that our skills agenda is focused on what we need but also that careers like engineering are again seen as aspirational.

Becoming a Hub
There is also a final point which unfortunately doesn’t begin with R, and that’s about how we can become a hub in the new global economy. I strongly believe that the UK, has what we need to become an international hub for business.  We have not only the benefit of speaking the language of business, but also the creativity and innovation that businesses need. However in terms of becoming a hub we’re competing with countries like Dubai and Singapore, countries that have invested significant money into airport infrastructure and international transport links. Heathrow is simply not fit for purpose.

I believe that to secure our place as an international hub we need to look at how we can improve our airport infrastructure fast. Again the solution, given the economic climate, won’t come from government. We need to look to business to see how we can improve this vital area but what the Government can do is set the vision and deliver the planning and legislation to allow it to go ahead.