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Budget 2010: Government to decide which industries get a leg-up?

London, UK (25/03/2010)

LONDON (Management Today) Yesterday, the Government suggested that it knows better than the market about where to invest.

Who’s better placed to decide where capital should be allocated across UK plc: the central Government, or the market? We suspect a large number of MT readers may be in the latter camp – but with yesterday’s Budget, Labour placed itself firmly in the former. With its state-owned green investment bank and venture capital fund, not to mention its doubling of capital allowances and its pressure on the state-controlled banks, the Government is basically saying that it will (to some extent) control how capital is divided across the economy. There’s only problem: Government is traditionally very, very bad at this. Just look at the RVCFs...

On the face of it, yesterday’s Budget contained several business-friendly measures, as we discussed yesterday, including the cut to business rates, the increase to the investment allowance, more tax relief for entrepreneurs, more Government contracts for SMEs, and a kick up the hindquarters for RBS and Lloyds over business lending (plus a legal body to help small firms seek redress).

However, what the Chancellor unsurprisingly neglected to mention was that the NI and fuel duty hikes won’t be reversed, while the minimum wage will rise by 2.2% in October (the British Chambers of Commerce said this ‘took some of the shine off a budget that had small and medium-sized businesses at its heart’). Equally, it’s also apparently hoping that the decision to freeze personal allowances – thus effectively ensuring we all pay more tax – will slip under the radar.

But more broadly, perhaps the most interesting theme to come out of the speech was the Government’s renewed enthusiasm for state intervention – apparently bolstered by the ‘success’ of its measures to stave off economic meltdown in the last 18 months, and more recently, by Nissan’s decision to build the Leaf in Sunderland (for which the Government seems to be taking sole credit). The doubling of capital allowances will inevitably be of more use to manufacturers, who need to buy machinery, than service firms. The £2bn green investment bank will give a leg-up to low-carbon technologies. And with its £500m Growth Capital Fund, civil servants will be trying to pick winners among companies with a turnover of up to £25m.

However, this has never been a Government strong suit – and we don’t just mean historically. According to a critical recent paper by the House of Commons Public Accounts Committee, the Government’s regional venture capital funds have lost 93% of their value since they were set up in 2000: £74m of taxpayer cash has dwindled to £5m. That’s an annual return of -16%.

The Tories argue this money would be better spent giving every business a tax break, so the market can decide where the investment should flow. Now recent events have rather undermined the case for an unfettered free market. But with a track record like that, can we really expect civil servants to do a better job?

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