Osborne's budget misses a golden opportunity for clean energy

It may sound a little odd, but Budget day in the UK has always provoked in me rather more excitement than it should. Not because I have deep concerns about the Chancellor's impact on my taxes to HMRC.

But since reporting on clean energy policy and finance in the US, where the fiendishly complex tax system is even more loathed, I've had a renewed appreciation of tax codes as an expression of a nation's deepest values in the same way that a nation's music or cuisine reflect the spirit of its people and resources. 

Osborne called his Budget one that "rewards work" but Labour leader Ed Miliband described it as a  "millionaire's Budget".

Beyond the usual Punch & Judy script between the Tories and Labour, what is George Osborne really saying in this budget about the British psyche and the needs of its people - or perhaps in this budget he was speaking more of the sensibilities of a politician born to privilege with no real appreciation of what motivates people to work hard.

Osborne knows that what comes out of his red box will go straight to royal assent without parliamentary debate. In the US, the president's budget is thrown to the congressional wolves who tear it apart and piece it slowly back together again with compromises on both sides.

I don't know which system is better, but given the apparent lack of intellectual rigor, Osborne's third budget could only be improved by parliamentary interrogation.

Shale gas

It's clear that the UK is in danger of an energy crunch  - a fifth of its capacity will drop from the grid by 2020.

The UK government plans to introduce a package of oil and gas tax measures to secure billions of pounds of additional investment in the UK Continental Shelf and will publish a strategy for gas generation in autumn 2012, recognising that gas-fired electricity generation will continue to play a major role in UK energy supplies over the next decade and beyond.

To avoid catastrophe, Osborne wants to encourage the oil and gas industry to unlock the potential remaining in the North Sea. I get that. 

But what I don't get is the £3bn in tax credits to tempt an industry which has balance sheets bursting with idle investment £££s and $$$s. It's naive to think that this will make a huge difference to gas exploration companies - it's a bit like giving Warren Buffet $3m. It would be more than most individuals could ever hope to earn in a lifetime, but yet for Buffet, it's pin money he doesn't need and neither do the oil and gas companies. 

Global companies would probably have been happy enough with the reduction in corporation tax - 26% to 24% in April 2012, down to 22% in 2014 - one of the lowest in the world. As the US shows, a high corporate rate is no bar to corporate success.

Fossil fuel producers and generators are most attracted to the UK because of the economics of high electricity prices. Does Osborne perhaps think that the toothless Ofgem will force utilities to pass through the reduced cost of electricity generation from lower gas prices once drilling into the UK's shale has begun?

If he'd wanted this particular tax break to be warmly received, he should have connected the dots here for the electorate, probably because according to a shale gas report in 2010: "It is expected that it will take about two to five years to firmly establish the potential of shale plays in Europe and it is only after 2020 that the production will have any considerable affect on the supply of natural gas."

In any case, most of Europe's shale gas is going to come from Poland, where ExxonMobil, Chevron, ConocoPhillips, Marathon Oil, Talisman Energy and Chevron are elbowing each other out of the way. Osborne is taking a huge risk with taxpayer money by trying to attract this kind of investment: aside from the environmental downsides of hydrofracking, open land is scarce and expensive in the UK, unlike Poland where the population density isn't anything like as great.

Streamlining redtape and permitting can also have the same impact as tax breaks for large exploration companies - without having to make spending cuts elsewhere from the most vulnerable. Let's hope Osborne's gamble works - so that tax receipts from oil companies will be worth more than the £3bn lost by the taxpayer.

There is additional uncertainty over reserves of oil and gas remaining in the North Sea - forecasts were not included in the budget. I spoke with a geologist working for a small company hoping to explore small reserves in the North Sea that the oil majors wouldn't even consider because of their relatively tiny size. The geologist told me that calculating estimated reserves at such small scales increased uncertainty about what could be recovered: it was really more about pot luck than seismic surveys.

Does Osborne really think he will spark a miniature oil & gas rush back to the North Sea? Some figures would be helpful but I doubt the chancellor will rush to publish such de minimis numbers.

Alan McCrae, energy tax partner, PwC, said: "Overall, the package is to be welcomed as a boost for investment in the oil and gas industry in the UK.

"The proposals to extend field allowances for oil and gas projects will help mitigate against the very high rates of tax suffered by oil and gas companies and will allow some projects to proceed that would otherwise not be viable. By careful targeting of the incentives, these projects should now be able to go ahead and, by doing so, will enable them to make a significant contribution to future Government revenues from the oil and gas industry.

"The plans to give oil and gas companies greater certainty regarding tax relief for their decommissioning costs will also help the investment climate. This will give them significant reassurance over this area of uncertainty which has been blocking potential transactions in the North Sea. These transactions are important to the future of the UK oil and gas sector as the region matures and further significant investment is required to maintain production."

Reduced tax credits

Taking away tax credits for parttime workers speaks volumes about Osborne's attitudes to those on a low income. It's a hypocrisy that he wants to reduce benefits for low income or no income households without provision of an encouraging alternative. He is saying loud and clear: I'm going to reduce benefits, but provide no alternative for growth.

For many, part-time work is a stepping-stone to other things: a step down from full time work; a step up from unemployment; a step into the unknown to support a new venture dreamt up by someone with entrepreneurial flare.

But to claim that reducing the top rate of tax will encourage "competitiveness, encourage entrepreneurship and support growth" entirely misses out a demographic willing to take risk with little or no capital or little or no income. I would encourage Osborne to read the US tax code on independent contractors and make contact with the Kauffman Foundation if he a) wants to encourage growth as the Kauffman Foundation clearly shows that entrepreneurs are the real drivers behind economic growth and jobs; b) encourage British people to take a different path from claiming benefits.

Renewable energy 

Wind industry players who were hoping for market signals and signs of encouragement from Osborne will be bitterly disappointed - UK energy ministers should also be disappointed with their chancellor, CharlesHendry in particular.

Osborne's budget simply doesn't play to the UK's strengths: the offshore wind potential is huge and with the European mainland still in financial crisis, the chancellor has missed a golden opportunity to attract investment from companies like Vestas, Gamesa and the countless wind developers looking to other markets. 

Osborne could have offered the UK as a safe haven investment opportunity amid the headwinds of the European debt crisis.

As Europe's common energy market approaches in 2014, the UK could have positioned itself as a major electricity exporter as Spain is already doing. But the 2012 budget was probably the last chance to send a clear market signal and allow the industry to mature.

Tax breaks for clean energy investments also would have been very welcome to attract inward investment and unlock the huge amounts of capital washing around the City of London, but always seem to end up being spent in another country.

Osborne would do well to read up in US tax credit incentives such as the Production Tax Credit for wind and the Investment Tax Credit for solar which drives the clean energy industry.

Osborne says he wants to make the UK the technology hub of Europe. Well, the UK is pretty good at this already, but Osborne's Wallace and Gromit film tax credit will be extended to video games, animation and TV programmes. 

That's a good thing. But a focus on digital services and products will hardly turn the UK into a technology hub and it's a tiny industry that could never grow to the scale or potential of the clean energy industry. Scant mentions and context of innovation indicate that Osborne hasn't really grasped the potential of technology to drive the growth so badly needed in the UK. 

Strong liquor over lunch at the Ivy and a topped up expense account for Soho media executives could have something to do with the direction of Osborne's fiscal affections when clean energy should have been a strategic focus for export markets that will only continue to grow.

I would prefer to be proved wrong with my reading of the 2012 budget, but if taxes are expression of the values of a nation (and its government), then George Osborne seems to be saying: I want to encourage established businesses to earn more by doing less, but everyone else has to do more for less in return. 

Osborne's unpopular budget might cost his party the next election because so little of it plants seeds for real growth - we'll have to wait and see how the economy responds. But those he was elected to serve could end up paying a much higher price for his oversights.

Britain's entrepreneurs need some X Factor to escape the Dragon's Den

Napoleon is said to have disparaged Britain's fitness for war by describing the country as a "nation of shopkeepers…". The phrase is attributed to the economist Adam Smith as Britain began to boom at the start of the industrial revolution.

But as the UK's manufacturing economy has withered over the past 30 years, the populist assertion that Britain is a nation of people that likes to shop (consume) rather than make products that are of use in attempting to assert economic dominance rings more true than ever.

Good news for UK manufacturing results in headlines like: UK manufacturing output increases more than expected.

But is it all bad news? A report from PwC in 2008 claimed that although manufacturing had declined in the UK, the sector had created high levels of productivity.

The future of UK manufacturing:Reports of its death are greatly exaggerated claimed:

In 2008, the UK was still the 6th-largest manufacturer in the world by value of output, as ranked by the UN Council for Trade and Development. 2006 was a record year for UK exports, and according to a 2008 report by BERR (the UK Department for Business Enterprise and Regulatory Reform) 25% of UK exports in 2006 were high-tech goods, compared with 22% in the USA, 15% in France and 11% in Germany. And perhaps most strikingly, over the past two decades Britain’s Manufacturing sector has delivered greater productivity gains than Britain’s Services sector.
 

But that report came out in 2008 - and that is ancient history since the financial crisis has changed the economic rules of engagement for good. 


Napoleon, however, is said to have had great admiration for America.


Today, Americans are proud to declare themselves a nation of entrepreneurs, and that this spirit is what has made the country the greatest economy in the world since the second world war. The respected Kaufmann Foundation supports this position by claiming that entrepreneurs are the real drivers of the economy.

So what can the UK learn? Tech City aims to become the "digital capital of Europe" and has attracted Cisco, Vodafone, Intel and Google, which has committed to funding an innovation incubator. But news that Facebook would prefer to expand its offices in the West End of London than be sitting next to its rivals on Silicon Roundabout should not have come as a surprise.

Companies are clustered in Silicon Valley, but rivals do not make good neighbours: Google has separate campus in Mountain View and Facebook is in Palo Alto. When was the last time you saw a Sainsbury's right next to Tesco's in the UK? Or for those listening in American, when was the last time you saw a CVS next to a Walgreens?

The reason why tech companies have coalesced in Silicon Valley is because of capital and intellectual resources. The VC capital that doesn't come out of Sandhill Road is negligible on a global scale, while Stanford University continues to generate world-changing heroes of the startup world.

Californian gold fever has struck even further afield. The Skolkovo Innovation hub in Moscow which aims to foment the same kind entrepreneurial spirit in Russia.

But Silicon Valley has a real X-factor that's impossible to replicate: it is a complex ecosystem which turns so many Silicon Valley startups into global household names.

Tech City has one ingredient right - its location in Tower Hamlets puts it in a position for cheap rents for startups, but within walking distance of access to the UK's greatest concentration of capital in the City. Although Wellington, the largest VC firm in the UK is located in Mayfair, close to many other PE companies and hedge funds.

But the brain power factor is missing. The UK's centres of clean tech academic excellence are at least a tube or train ride away at Imperial College London or the Cavendish Laboratory at the University of Cambridge. Another downside of Tech City is that it will be focused on trying to find the next Google or Facebook.

James Caan, formerly the nice guy on Dragon's Den, has started a column in the Evening Standard to offering advice to budding entrepreneurs. But in the UK in general, there seems to be a focus more on services, than actually making things or even designing widgets that the world wants but are made elsewhere. And Dragon's Den investors lack the vision (and capital) of their US VC counterparts.

Sir Richard Branson is probably the most successful British visionary entrepreneur of our time. But he hasn't really started companies that make things - most of his companies sell services - with the possible exception of support for algal biofuels which could potentially have a huge impact on the world.

James Dyson is the only other household name who springs to mind who does actually design products, not just sells services. In this list of Britain's top 100 entrepreneurs, how many of them are in the manufacturing sector? As the Economist points out, successful economies of the future should be making products and creating services with global market value, ie we must start making things China wants, and fast.

The UK's coalition government makes a hue and cry about how to Get Britain Working again. Cutting benefits is a short cut to the streets, however. It's not a fast track to entrepreneurial wealth.

Coalition policies are loaded in the wrong direction and someone with a grain of good sense - Vince Cable? - needs to force the Chancellor into decisive action to encourage SMEs. Cutting corporate tax isn't enough… how about tax benefits for investments rather than cutting upfront costs. George Osborne's policies take with one hand, but don't give those savings back to society in the most useful way. Where is his evidence that straight cuts in corporation tax lead to direct investment?

Germany, on the other hand has weathered the economic crisis precisely because of the policies it legislated (and values it espoused in avoiding debt).

Instead of mocking poor ideas on Dragon's Den and lionising forgettable X-Factor stars, why not introduce some real competition into the UK?

The CleanTech Open in the US showcases some of the best energy industry innovations in the world and although its competitors are not household names, it gives entrepreneurs something to aim for - with access to mentoring, networks and potential capital.

How about also looking at the better elements of the US tax code, such as the 48c manufacturing tax credit, which stimulated investment in new factories to make equipment for the solar and wind industries?

One simple way to emulate the US is by changing the laws on bankruptcy. Once a company has gone bust in the UK, it's very hard for that entrepreneur to start over again. We need to eliminate some of the downsides to taking risks and remove the stigma of failure.

Thomas Alva Edison, still America's most beloved inventor, famously said of failure: I didn’t fail 1,000 times. The light bulb was an invention with 1,000 steps.

But he wouldn't have been allowed to fail his way to success without the financial support of John Pierpont Morgan.

The UK shouldn't need a war to force the issue as Germany did. But shouldn't the summer's riots be a warning shot that if left unattended, even Britain's shopkeepers might have to bring down the shutters on their failing businesses.