Monday, March 09, 2020
Get businesses to invest or you can forget about levelling up
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

It is beginning to look a lot like the curse of the budget. This time last year the last chancellor but one, Philip Hammond, unveiled his spring statement for the economy, having had a budget the previous October.

In it, he looked forward both to an autumn budget and a three-year public spending review, which would conclude at the same time. Neither happened. Sajid Javid, his successor, having only managed a one-year spending review in September, was all ready to roll with a budget in November but the election was called instead.

Now, unless the Treasury or Parliament is put into lockdown, it looks as if we will get a budget on Wednesday, one of what officials describe as the new chancellor Rishi Sunak’s “three bites of the cherry” this year, to include a summer spending review and an autumn budget.

The task for this week is to ensure that the government’s planned big “levelling up” announcements, which the Treasury is still planning to deliver – a few days ago it proclaimed in a tweet, “we’re going to level up opportunity across the country” – are not overshadowed by coronavirus and the response to it. At the very least, the health emergency will provide the chancellor with cover for relaxing the fiscal rules.

Important though coronavirus is, it would be a pity if it overshadows everything else. When a chancellor makes big announcements, particularly on infrastructure spending, and the expected additional £100bn over five years, the announcement part of that policy is important.

Infrastructure projects take years to deliver, and are subject to delays and cost overruns. It is an important part of the strategy, therefore, that those who stand to benefit from this part of the government’s levelling-up agenda know that it is on its way. Otherwise, “levelling up” might soon be in danger of becoming as mocked as David Cameron’s “big society” programme.

Infrastructure announcements have also become more complicated, following the recent court decision on the Heathrow third runway. They have to be zero carbon compliant, which is why, as the BBC has reported and the Treasury confirmed, the full detail of the government’s national infrastructure strategy will not be published this week.

An additional problem, identified by the Resolution Foundation think tank, is that it is no use investing in shiny new infrastructure when existing facilities are crumbling. As it puts it: “The legacy of three decades of relative underinvestment has been a decline in the quality of our stock of infrastructure assets relative to other advanced economies, particularly in areas like health, social housing, prisons, and transport links outside of London. Future increases in investment need to focus on reversing this legacy as well as equipping the country to meet new challenges.”

There is another key challenge, which is to ensure that infrastructure investment in the regions is accompanied by business investment by firms. When, last weekend, Javid the former chancellor gave an interview outlining what he would like to have put in the budget. Most of the attention focused on an apparent plan to cut the basic rate of income tax from 20p to 18p in the pound. Though anything is possible these days, briefing in recent days suggests that this is unlikely to see the light of day.

Less noticed was another part of the Javid plan, which was to reduce the tax burden on business and introduce “full expensing”, allowing firms to immediately and entirely deduct the cost of investment from their tax bill. Such a move “could make a difference quite quickly” particularly to productivity.

As it happens, there is an oven-ready plan to do this, devised by Professor Peter Spencer, himself a former Treasury official, and colleagues at York University. It was sent to Dominic Cummings, Boris Johnson’s chief adviser, two months ago.

The proposal, “How to align the UK’s corporate tax structure with national objectives”, takes as its starting point corporate tax reforms dating back to Nigel Lawson in the 1980s, under which rates of corporation tax have been lowered, but so too have the tax breaks for investment and other expenditures by business.

The result of these reforms, says the York paper, has been to remove a bias towards investment and replaced it with a strong bias towards debt finance, because the interest on debt is allowable against tax. The reforms “have favoured service industry at the expense of capital-intensive manufacturing industry and so added to the imbalances in the economy caused by globalisation”.

The government has already tentatively reversed one aspect of the previous policy, by not proceeding with the corporation tax rate cut from 19% to 17%. The York paper says it should go further, neatly dovetailing with the government’s levelling-up agenda.

More generous investment allowances, it says, would benefit manufacturing industry, which has “positive spillovers” for productivity and high-wage jobs and for regionally rebalancing the economy in favour of the north. It might also narrow the UK’s very large trade gap in manufactures.

Currently, the depreciation rate on investment in plant and machinery is 18%. The York economists would raise that to 40% and say that there is a good case for 100% relief, “if the government really wanted to deliver a big investment boost”, and as Javid hinted at. The upfront costs are high but fade rapidly over time. Something like this should be in the budget.

It is not the only thing. In a paper for the think tank Onward, “Levelling Up: rebalancing growth-enhancing spending”, released on Friday, the Tory MP and former adviser to George Osborne and Theresa May Neil O’Brien argued that productivity-enhancing spending has favoured Britain’s already productive regions.

This applies to transport spending, as is well known, where spending in London per head has averaged nearly three times that in the rest of the country in the past decade. It applies to culture, where London has received five times the average per head spend as the rest.

It applies, crucially, to what O’Brien describes as innovation, a buzzword for this government. As he puts it: “Taking direct government spending and university research funding together, London saw R&D funding per head of nearly twice the UK average - £3,900 compared to a national average of £2,300 over the period 2001 to 2017. The next highest spending was seen in other high productivity regions: the East, South East and Scotland. The share of the core research budget spent in just three cities, Oxford, Cambridge and London, rose from 42.1% in 2002/3 to 46% in 2017/18.”

How to spread this out better? O’Brien notes that some regions combine low R & D spending by business with low spending by government and that funding for such regions should be ring-fenced. The innovation budget should also be devoted to funding streams which are more industrially focused, he argues, and the research spending that flows through universities should be judged on its regional as well as its overall economic impact.

There are plenty of good ideas around. The challenge is to deliver.