Reflections

December 7, 2018

Carolyn Fairbairn, director general of the Confederation of British Industry (CBI), visited the North East on November 1 to attend a special skills event for local schoolchildren at The Biscuit Factory in Newcastle. Afterwards, she spoke to Alison Cowie about the opportunities and threats to UK businesses as they face one of the most uncertain periods in a generation

Firstly, what is your assessment of 2018 in terms of business?
2018 has been an interesting year for the UK economy. There have been some real high spots with terrific tech investment and strong export growth; the North East, in particular, has been doing very well in terms of manufacturing exports. The global economy has also been firing on all cylinders and the UK has benefited from that. But as the year has gone on, the impact of unresolved uncertainty over Brexit has started to bite. We’re seeing more postponed investment towards the end of the year, and this will show up in future growth.

What are the main opportunities and threats for UK businesses?
The opportunity is that the direction the world economy is moving in plays to the UK’s strengths. The UK is in the top two or three in the world in terms of the quality of our science base, and we have a reputation and a capability for innovation, creativity and in renewable energy. We also have a strong rule of law and great corporate governance. These things will help put us at the fore in the fourth industrial revolution.

The threats are two-fold: one is that we have quite acute skills shortages and infrastructure weaknesses that we must address, while the other remains the uncertainty over Brexit.

I do, however, remain very optimistic about the UK economy.

What about sectors that have struggled in 2018 – retail, for example?
Some sectors have faced severe challenges and retail is one of them. That’s because of a combination of factors. There’s been a massive move to online shopping in the UK – which is something, of course, that’s a strength of the UK economy – but it has created great challenges for retailers that own a lot of stores. Footfall to the high street has fallen and there are some other quite heavy burdens on our retail sector: very high business rates regime, the Apprenticeship Levy and the National Living Wage.

The sector is adapting and you can see investment going into automation and productivity improvements – but they are one of our most challenged sectors.

With manufacturing such a crucial sector in the North East, how, in your opinion, is the sector performing?
I’m a great supporter of manufacturing and the UK’s capability in it, and the CBI has set up a new manufacturing council in the last 18 months to promote this sector. The kind of jobs that manufacturing brings are high-productivity, high- paid jobs and the sector is also vital for our exports. The other thing is that as manufacturing changes, it is becoming far more integrated with technology. I was talking to one of our transport members today who was saying that far less of his business is about making hard kit; it’s much more about the digital services that go around it. Manufacturing is changing; it’s becoming more high tech and advanced – and that plays much more to the UK’s strengths. At the CBI, we’re really backing a manufacturing revival in the UK.

How do you think UK manufacturers are managing this transition?
The big manufacturers are, in general, getting on with it now, so the big companies, such as Siemens, British Aerospace and Nissan, have invested in high-tech manufacturing capability. The interesting challenge we have is how we encourage digital tech take-up by smaller companies. This is something that CBI is hugely focused on.

There are a lot of SMEs in the UK – and the North East – that are terrific but if they can just make the leap into some of these higher productivity technologies, they could see dramatic results.

But another point I should make in this context is that this transition does require reskilling and people’s skills base to change so that they feel comfortable with these new technologies. So it’s cultural and skills-based as well as about getting the right kit into our companies.

The CBI has been promoting the benefits of ‘flexible learning’ recently. Is this key to addressing these reskilling and cultural challenges?
The reality is that the world that we’re heading into is going to change for the people in it quite dramatically, and everyone’s skills base is going to need updating in far more rapid ways than ever before.

This idea of flexibility in the workplace – and what we’re talking about is here is being a new partnership between Government and business on how we have the right kind of flexible training in the workplace – is a massive opportunity and employers are really ready to step into it. The Apprenticeship Levy is part of this but that’s mostly about the journey starting out. There also needs to be ways for workers to be able to constantly update the skills.

You mention the Apprenticeship Levy. The CBI has been lobbying the Government about changes. Why so?
The Apprenticeship Levy has been challenging for businesses, but not because they don’t think it’s a good idea to have a significant investment in apprenticeships. The problem is how easy it is to use for training. The levy has been too inflexible, too bureaucratic and as a result has led to a 48 per cent reduction in new apprenticeship starts – which is a disaster. The CBI made short-term and medium to long-term requests to Government. The three short-term ones have all been accepted by the Chancellor. One is to be able to use the levy through more of the supply chain; that was ten per cent, and now it’s 50 per cent. We wanted there to be much faster approval standards by the Institute of Apprenticeships, and that’s happened. And in the latest Budget there was also the announcement that the co-payment that an SME has to pay towards an apprentice will be halved from ten per cent to five per cent.

The CBI, however, doesn’t think these changes are enough and over time, it needs to turn into a more flexible and broader skills levy and recognise the needs of the whole of the workforce.

The CBI’s response to the Chancellor’s 2018 Budget on October 29 was that it had “more treats than tricks”. Can you expand?
It was a good Budget for business in that it recognised the central importance of encouraging investment. One of the most significant long-term problems the UK has had is underinvestment in the public and private sectors compared with peer countries. This extends back decades but it worsened after the financial crash. [CBI’s] big recommendation to Government was to make this a Budget to stimulate investment, particularly facing into Brexit, and we were pleased to see a significant increase in the annual investment allowance to £1 million, a lightening of business rates burden on SMEs, and the Apprenticeship Levy reforms that I’ve already mentioned. There was also good progress on the Industrial Strategy Fund and investment in technology take-up in the Made Smarter initiative.

There was a really good set of initiatives to try and counteract the drain on confidence that Brexit has created, but it did miss the mark in some areas.

Can you elaborate?

Going back to the challenges on retail, the UK has the highest commercial property taxes of any country in the G7. The fact that the business rates reform didn’t do anything for the big high street retailers was a real problem. It was a missed opportunity to lift the burden on these companies that are finding life so difficult. We need to remember that they are huge employers – especially of women on flexible working patterns – and they make an enormous contribution to our economy. The CBI will continue to campaign for wholesale reform of the business rates model.

The Chancellor also announced a digital services tax on big tech firms. There is real public concern around the fact that big tech players don’t pay very much tax in the UK despite having very big presences. The CBI absolutely understands that concern. However, the UK is a great magnet for tech investment at the moment – it’s one of
our great spots in our economy, creating jobs and creating opportunity, particularly at this time of uncertainty. We don’t want an un-level playing field with other countries and so [the CBI’s] strong recommendation to the Chancellor is to make those changes in lockstep with the international community.

What’s your assessment of Brexit?*

The biggest challenge to business throughout Brexit has been the level of uncertainty, and most companies have had to really confront the possibility of a ‘no deal’ and what they would do to mitigate that impact. There is a risk of no deal. We can’t ignore that.

The thing that remains so difficult – and which we communicate regularly to Government – is that the impact on jobs and investment is not in the future, it is now: 80 per cent of our members have reduced and postponed investment, 63 per cent of members who have contingency plans will have to press buttons on these by the end of the year if there’s no deal agreed. Very worrying is that some SMEs haven’t done anything at all to prepare for Brexit. Our estimates are about 14 per cent.

We think that the impact on the European Union would be significant. Estimates are that
it could put 1.2 million jobs at risk in the EU. We know that the impact of no-deal on the UK economy would be very significant but the risk of no deal still remains and, unfortunately, many businesses have had to plan for the worst.

What’s your outlook for 2019?

2019 will potentially be the most important year in the last 20 years for business. We will either be managing a very difficult situation in terms of a no deal, and it’ll be ‘all hands on deck’ to minimise the negative impact on our economy, or the more likely version – and the one that [the CBI] is very much hoping for – is the one where there is a deal and we unlock the transition period starting at the end of March for at least 21 months. Everyone can breathe a sigh of relief and we can move on to the massive opportunity of building the UK competitiveness and get back on to the issues that matter for our future, which are around skills, innovation, infrastructure, productivity and opportunities with the fourth industrial revolution.

The UK has so many strengths; we need to get back to talking about them, building on them while addressing the weaknesses.

The CBI’s message – assuming that there’s a Brexit deal agreed – will very much be one of optimism, pulling together, putting division behind us, and business working in partnership with Government to build that strong new economy of the future.

*November 1

Confederation of British Industry
www.cbi.org.uk

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