As understatements go Sir Ron Garrick’s revelation last week that he was ‘a wee bit worried about exchange rates’ must rate highly.
The managing director and chief executive of pumps and valves specialist Weir Group made his comments after the hike in the pound which followed the City’s warm reaction to last week’s Budget.
Chancellor Gordon Brown’s Budget speech had started off with sympathy for manufacturers: ‘I fully recognise that a strong pound makes life difficult for exporters,’ he said. However, the following 45 minutes contained precious few words of comfort, and the pound has since risen across most major currencies.
Graham Mackenzie, director general of the Engineering Employers Federation, is more than a wee bit worried. ‘The key issue for engineering and manufacturing remains the exchange rate,’ he said.
The TUC is also worried. It forecasts 200,000 job losses, mainly in the manufacturing sector, if interest rates and sterling remain high.
For Britain’s machine tool industry, a barometer for manufacturing investment, the effects of the high pound ‘are disastrous and overshadow everything else’, according to its trade body, the Machine Tool Technologies Association. The same is true for the chemicals, iron and steel industries.
Mackenzie believes interest rates should remain unchanged, to avoid the risk of sustaining the high pound. ‘Export order intake has been slackening for over 18 months and the adverse consequences for the engineering sector will mount through 1998,’ he warned.
‘Our pre-Budget submission to the chancellor had three key points: an avoidance of measures which would aggravate the impact of the high pound, a reduction in the negative cashflow consequences of the proposed changes to corporation tax, as well as new measures to sustain investment, despite the difficulties in exporting.’
Despite the avalanche of gloomy predictions, the Budget did contain much to please industry. The long-trailed changes to corporation tax went further than predicted to the benefit of small companies. Brown confirmed that the new main rate of corporation tax will drop to 30p from April next year but added that the rate for small companies will also drop by 1p to 20p. And he said corporation tax will remain low for the length of the Parliament.
Small and medium-sized companies are also to be excused the move to the US model of quarterly payment of corporation tax when advance corporation tax is abolished. Large businesses will pay instalments based on current rather than a past year basis, meaning they will have to forecast profits in an unstable world economy. But Brown insisted companies would not be penalised heavily for getting it wrong.
Another piece of good news was the introduction, from 1 July, of a new rate of allowance for investment in machinery and plant of 40% (up from 25%) for small and medium-sized businesses. These are defined as companies with turnover under £11.2m, assets under £5.6m and less than 250 employees. The Inland Revenue estimates this will save such firms £140m tax in 1999 2000 and £160m in 2000 2001.
The Government also said it would review the case for continuing with enhanced capital allowances.
Mackenzie welcomed the concessions. ‘However, while the changes to employers’ national insurance contributions may be tax-neutral to the chancellor, for the engineering industry with its above-average proportion of higher paid employees, it will be an additional burden. The increase in the landfill tax and suggestions of an industry energy tax are also unwelcome,’ he said.
The Budget contained moves to encourage entrepreneurs. Brown’s plans for a venture capital fund of £50m will allow sums of up to £250,000 to be provided to university staff who need cash to develop ideas.
Brown said the fund, of which only £20m is provided by the Government, is needed because ‘for too long, the great scientific advances of British universities have gone on to become the manufacturing successes of rival countries’.
Brown also announced a 50% rise in tax relief to encourage venture capital investment, and income tax relief for investments of up to £150,000. He said he planned to taper capital gains tax payments from 40% after 10 years to 24% for non-business assets, and 10% for investors who built businesses with their own money. This will make it easier for founders of companies to leave ahead of their retirement age without taking a major tax hit.
The Budget left the offshore industry which feared heavy tax changes treading water, as the review of the fiscal regime for the offshore industry was extended. A consultative document is to be published in mid-April. But the eight-month consultation is delaying major new project decisions, says the industry, and is adding to pressure from falling crude oil prices.
Overall, the Budget has been praised for its social measures, continued fiscal tightening and encouragement for small business. Brown may feel a wee bit pleased with himself. But for how long?