By Claire West

The CBI has called on the Government to protect economic growth in its forthcoming Spending Review. As it limits spending, it should prioritise areas that foster the economy’s ability to grow, the leading business group said.

It made the call as it published its submission to the Treasury ahead of the Spending Review next month. The Government previously announced in the Budget that it will make £32bn of annual spending reductions by 2014/15.

The CBI agrees that government spending must be limited to avoid major tax rises that would damage our economy and undermine competitiveness. However, the Government must protect investment in areas that do most to foster economic growth while making savings by re-engineering public service delivery, reforming public sector pensions and reducing spending in other areas.

The Government should therefore prioritise spending on investment in infrastructure; knowledge assets such as and research and development; and human capital via education and skills.

John Cridland, CBI Deputy Director-General, said:

“The Government rightly decided to limit public spending. The alternative would have been tax rises and other consequences that would have damaged the economy for years to come.

“Cutting spending means tough choices. We think that the need for economic growth, not the noise of the loudest voice, should determine where cuts are made.

“The Government must improve the efficiency of public services and focus the limited public money available on areas that do most to galvanise growth.”

The CBI said three areas of investment must be prioritised: infrastructure investment; knowledge assets and human capital. The CBI emphasised the importance of investing in transport infrastructure in particular, as this offers high returns and will play a crucial role in boosting domestic and international trade.

As well as direct Government investment, barriers to private sector investment in energy and communications infrastructure also need to be addressed. For example, by simplifying the planning regime.

Regarding infrastructure investment, the CBI is calling for:

Public sector capital investment to be returned to 2.25% of GDP as soon as possible
Existing transport assets to be maintained
Work on Crossrail and upgrades to the London Underground network to continue
Savings on existing transport spending, including reducing the concessionary fares budget and the number of Highways Agency contracts
All public sector transport projects to undergo more rigorous value for money assessments
Action to attract more private sector funding for transport. For example, by increasing the contribution of direct user payments and tax increment funding.
The CBI’s recommendations for investment in knowledge assets include:

Co-ordinating Research & Development spending across the Government
Refocusing regional innovation support and shifting the balance towards more business relevance in R&D at a national level
Setting out a clear defence strategy for dealing with identified threats, ensuring priority areas have adequate resources
Cutting regional-national duplication of effort on manufacturing and other growth sectors
Re-focussing general business support significantly and delivering all of this via the internet, whilst focusing face-to-face support on high-growth businesses.
Regarding investing in human capital, the CBI is calling for:

Business-relevant research to be encouraged, for example, by maintaining funding for the Higher Education Innovation Fund
The Train to Gain programme to be scaled back for larger firms and for hard-to-reach companies to be better targeted
An increased focus on STEM skills
An increase in the number of employer-led apprenticeship places
Welfare reform to get more people back into work, including increasing the use of means-testing for some universal benefits
Greater use of private and third sector providers to deliver personalised welfare to work support.
Ian McCafferty, CBI Chief Economic Adviser, commented:

“Cuts will necessarily affect GDP growth in the short term, but smart choices will give the economy the ability to grow. The Government must use its limited resources to support a healthy private sector recovery so it can pick up the slack from the public sector.

“Given the very high returns that new infrastructure offers, the planned cuts to net public sector investment are a concern. Public sector capital investment should be returned to 2.25% of GDP as soon as possible. We also need to invest in building up our knowledge and skills base as this will help boost our competitiveness.

“At the same time, the efficiency of government must be improved across the board. This twin approach to prioritising public spending will help smooth the path to Budget balance, helping the public finances return to a more sustainable footing.”

In the public sector generally, the CBI submission highlights two main areas for action in the Spending Review: increasing competition to assist in driving down costs, and getting the public sector on to a sustainable footing by tackling unfunded liabilities, such as public sector pensions. The Government should also press ahead with more radical plans to re-engineer delivery to ensure value for money and maintain the quality of frontline services. The CBI’s proposals for public sector reform are set out in two recent publications: Doing More With Less and Time for Action.

To protect investment, it will also be necessary to ensure that welfare spending is more carefully targeted at those who need it, via more means testing and other measures.

The CBI is calling for:

Private and third sector providers to be able to compete with existing public service providers on a level playing field
Procurement processes to be improved and greater transparency in public service contracts
The management of public sector pension schemes to be improved, including tightening scrutiny of early retirement and further changes to contribution rates and retirement ages

Consideration to be given to moving public sector workers to a Defined Contribution pension scheme.