Today’s Spending Review from the Chancellor set out plans for a single year as opposed to the usual three year Spending Review envelope. The review focuses on the immediate priorities, most of which are, quite rightly in response to the Covid-19 pandemic, but also begin to tackle the Government’s all important levelling up agenda.
So what was announced and what does this means for manufacturers?
1. Increases to the National Living Wage and National Minimum Wage confirmed:
There has been a lot of speculation this year that any increases to the National Living Wage and wider National Minimum Wage rates may be shelved in light of the pandemic, and the impact that the pandemic has had on unemployment. However, the Chancellor confirmed that the NLW rate will rise next year as will the other NMW rates. What’s more the NLW will apply to those aged 23 and 24 as well as those aged 25 and over.
For many manufacturers, the NLW rate itself does not cause a significant impact, but what will have an impact is the knock on effect on pay differentials. Make UK is currently surveying members on pay settlements. We will be looking at whether the anecdotal evidence we hear, pay freezes and for many cuts, will translate into qualitative data from our survey. If it is the case, it’s like that squeeze of pay differentials will definitely be felt next year.
2. An extension of the apprentice incentive payments for employers and continuation of Kick Start:
Protecting skills and jobs has been the primary focus from Government during the pandemic. The Job Retention Scheme has undoubtedly saved jobs, but unfortunately due to the last minute extensions, has not saved them all. Make UK’s latest Manufacturing Monitor found that half of manufacturers have made redundancies.
But it’s also about skills and skills retention.
Today the Chancellor announced the extension of the apprentice incentive payments for employers - £2,000 for those employers that recruit an apprentice. Apprentices have always been the lifeblood of many manufacturing businesses, however this year, on the back of reduced demand and cutting of employee numbers, manufacturers have had to make tough choices which has resulted in a decline in the number of companies recruiting apprentices in the next year.
There is an urgent need to get these numbers back on track, or risk a major skills crisis in the coming years. Increasing the incentive scheme will help small businesses get their apprenticeship programmes back off the ground. But there is more that can be done. Giving employers greater flexibility on spending their Apprenticeship Levy would continue to provide opportunities for young people and productivity for business.
3. Big increases to innovation spending with £14.6bn funding for R&D:
The manufacturing sector accounts for 66% of R&D in the UK. Today’s announcement of £14.6bn for R&D is therefore of critical importance and a major win for Make UK and its manufacturing members.
Make UK’s Innovation Monitor 2020: Bouncing Back Smarter found that manufacturers are pressing ahead with their digital journey, with more firms moving from pre-conception phase to revolution phases. But what’s holding them back? Access to skills and access to finance. If we are to become a global leader in the adoption of digital technologies and, put science and research at the heart of our economy, then financial backing from Government will be vital. This will especially be the case if the UK is to lose EU funding such as Horizon 2020.
4. A major boost for infrastructure and a refocus on local projects to effectively support levelling up:
Within days of our new report, Reviving and Rebalancing Regional Economies, the Chancellor made significant infrastructure investments, aligned with much of what manufacturers have been calling for.
We saw confirmation of a new National Infrastructure Strategy, a levelling up fund worth £4bn which will allow local areas to bid to fund projects, a new National Infrastructure Bank (based in the North of England) to aid the levelling up and net zero targets and finally the Green Book being rewritten to favour regional projects driving up the levelling up agenda.
As we found in our report, infrastructure has long been the Achilles heel of the UK economy, causing a wide range of economic impacts from poor connections to ports and lack of broadband. The need to invest in both physical and digital infrastructure is not just about a short term boost to increase shovel ready projects to provide employment and growth, it will be one of the pieces in the jigsaw of the UK’s productivity puzzle. Using the National Infrastructure Bank and Strategy, as well as changes to the Green Book, can also unlock the power of UK manufacturing and productivity, as well as crucially support the rebalancing of our regions.
5. But the domestic environment remains ever-challenging with economic forecasts looking bleak:
While there are some great wins for manufacturers, we can’t help but notice the worrying forecasts that the Chancellor presented us today. The OBR’s forecasts being more pessimistic than we had predicted, and that the recovery process will be more protracted. We also heard that worrying figure of a 7.5% unemployment peak in the second quarter of next year indicating that the extended Job Retention Scheme will prove largely ineffective if a forward looking plan is not in place to replace the scheme post-March 2021. Starting from a lower base, GDP is expected to grow by 5.5% in 2021 and 6.6% in 2022 with an expectation that the UK will still be picking up the pieces of lost growth until at least 2025. More so concerning, is the budget deficit which will be at £394 billion (or 19% of GDP) by the end of this year — its highest level in decades.
There remains a strong case then to put in place consistent, longer-term sector specific support that mirrors our international competitors. Key strategic sectors, in particular aerospace and automotive, employ substantial numbers of high value, and well paid jobs in areas of the country that are essential to the levelling up and re-balancing of our economy. They are advanced technology companies whose skills will be vital in developing the green and digital futures which will help solve many of the societal challenges we face. To ensure they are at the vanguard of this new economy, it’s vital their futures are secured with short term support now