Cable tells the world: no more location grants

After decades during which governments of both parties spent billions on attracting foreign investment, the Business Secretary, Vince Cable, has declared that Britain can no longer afford to "splay out" grants and subsidies to attract companies to locate in the UK.

Mr Cable said: "Having very substantial amounts of money which we are splaying out in grants and subsidies to companies, we cannot do that. There is a budgetary problem which we inherited. The second reason is that it is actually very bad policy."

Instead, said Mr Cable, the coalition would concentrate on setting competitive business tax rates, cutting regulation, training workers and looking after the broader economy.

In his emergency Budget last month the Chancellor announced a progressive reduction in the headline rate of corporation tax, though this had been one of the polices Mr Cable expressed some scepticism about in opposition. The Business Secretary's radical change of policy came even though UK Trade and Investment, an arm of his department, said that a record number of countries invested in the UK last year. Inward investment generated 94,000 jobs over the past year, said UKTI, a 20 per cent rise on the previous year.

Mr Cable was speaking at a UKTI-sponsored conference on inward investment, attended by representatives of more than 100 of the UK's leading investors, including representatives of Motorola, Tata Group, Toyota, Siemens and Pfizer.

Ever since the Thatcher government achieved the breakthrough of inducing the Japanese car maker Nissan to build a plant Sunderland in 1985 – with lavish investment grants and tax breaks – ministers have relied on offering financial incentives to foreign concerns to attract new capital, technology and management techniques.

By general consensus, foreign capital and globalisation has transformed the performance of sectors of the economy from cars to the post-Big Bang City. However, the new Government seems determined to rely on other methods of persuasion.

Other European nations, notably France, initially sceptical of the UK as an "aircraft carrier" for Japanese firms wanting a base within the European union, have since followed suit. Over the past decade Western Europe has lost out as a favourite destination for direct investment in favour of the former Comecon states, China, India, Brazil and other fast-emerging economies.

Echoing Mr Cable, the Prime Minister David Cameron added: "We want Britain to be a place where companies can grow and succeed, where the world's best companies thrive, where great ideas and innovations are turned into great products and where we have a world-class workforce."

"We are determined to deliver the pro-business environment investors need; getting the deficit down to create certainty and stability, cutting business taxes, delivering flexible employment and cutting red tape and regulation."

According to the UN Conference on Trade and Development (Unctad), the damage to global flows of direct investment in 2008/9 has been reversed a little recently, but FDI flows to the UK were "markedly lower" than before the recession. In 2009, says Unctad, FDI into the UK collapsed by 92.7 per cent from £97bn to just £7bn.

The shopping spree is over

* Media speculation about savage cuts to public spending may have played a role in depressing consumer confidence in June. The Nationwide Consumer Confidence Index slipped to 63 from 66 in May, the lowest reading for a year. Chatter about the scale of the cuts and tax hikes needed to restore public finances to health may well have seen consumers deciding to hold off from major purchases, Nationwide said.

* However, now that the emergency Budget has been delivered and the reality of the cuts is becoming more clear, there is some hope that consumers will at least have a better notion of where they stand. Nationwide's chief economist, Martin Gahbauer, said: "With greater clarity about future fiscal plans, it may be that we begin to see confidence stabilise somewhat in the coming months." But short-term concerns remain. The share of respondents who expect "some or many" jobs available in six months time fell to 23 per cent from 29 per cent. Those expecting "few" jobs to be available jumped to 53 per cent from 46 per cent.

* Nationwide's reading of consumer sentiment is in line with other surveys. The definitive GfK/NOP survey also fell back in June, the fourth consecutive month of decline. Again, that survey was conducted before the Budget. Whether consumers feel better or not, the slow growth in wages and the rise in VAT to 20 per cent will constrain their spending.