Time for urgent action to boost investment

You can imagine treasury officials’ eyes glazing over at the budget submissions that have been coming in from industrial lobby groups and trade associations in advance of the Chancellor’s pre-budget statement. But the one message the governmentcannot ignore is that capital investmentis at a dangerously weak level, and strong action is urgently needed to get companies to spend money on new technology.

Despite the fairly upbeat set of figures from the Engineering Employers’ Federation quarterly engineering outlook survey this week, the slight recovery in engineering output predicted for this year and next remains fragile. Prices and margins in the engineering sectors look set to remain depressed, thanks to the double whammy of the weak euro to spoil our export markets, and the relatively strong dollar to push up prices in dollar-denominated raw materials.

At the same time, narrow margins in engineering mean low returns to investors, and sliding stock prices and companyvaluations. As a result, City funding for capital investment is also scarce.

Investment has been flat for nearly two years, at a level which is too low to create the sustainable level of output to keep world class technology and engineering here in the UK. Joint government and industry initiatives like ‘Fit for the Future’ and the Industry Forum – which are aimed at transferring best practice from efficient companies to less efficient ones, and identifying where investment would produce maximum effect – will fail if firms cannot afford to spend hard cash on new equipment.

The government can help. Initiatives such as 100% capital allowances for small and medium sized companies will not solve the problem, but they would help, and would provide an encouraging signal that the UK is a country that is worth investing in.

Equally, enhanced tax credits for R&D would reward the most innovative and forward-looking companies. Coupled with an interest rate that may have now peaked, continuing strength in the world economy, and a recovery in the value of the euro, that may be all the help that British industry needs.