Sunday, November 19, 2023
Business investment badly needs a boost - can Hunt provide it?
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. Not to be reproduced without permission.

It is no secret that one of the themes of this week’s autumn statement will be that the chancellor wants to boost business investment. I say it is no secret because anybody sitting in the press galley of the House of Commons, or the public gallery, would have heard Jeremy Hunt saying it a few days ago.

Citing a 15 per cent productivity gap between the UK and Germany – in Germany’s favour – he said that a big reason for it was that Germany invests a higher proportion of gross domestic product (GDP), and that “Improving the rate of business investment is one of the most effective ways to boost productivity and people’s real disposable income.” He was, he added, proud of what had been done in the spring budget and hoped to build on it.

The most significant thing in this area the chancellor did in his budget eight months ago was to soften the blow of the increase in corporation tax from 19 to 25 per cent, by introducing for three years “full expensing” for qualifying business investment. Full expensing allows businesses to immediately deduct 100 per cent of the cost of investing in qualifying plant and machinery when calculating profits for tax purposes.

There are other things he is trying to do to boost business investment. His “Mansion House Compact”, announced in July, is a plan to get the biggest defined contribution pension funds to invest 5 per cent of their assets in unlisted securities, including tech startups, by 2030.

Mention of the spring budget suggests, however, that extending full expensing, or making it permanent, is firmly in focus, though on the same day in the Commons, the chancellor offered a slightly mixed message, criticising Rachel Reeves, his Labour shadow, for an unfunded “£10 billion commitment” to make full expensing permanent, as well as unfreezing the freeze on income tax allowances and thresholds, which he said was “irresponsibility from Labour”. It was probably just political knockabout.

If as seem likely the chancellor extends full expensing, he can be sure of praise from business, though some of his MPs may struggle to work out what is happening. The EEF, which represents manufacturers, said its member firms strongly support making full expensing permanent. Not only would the UK’s attractiveness as a place to invest slump if the policy were to expire after three years, but businesses operate on an investment cycle, and many will miss out if the incentive comes to an end.

As the EEF put it: “If we want to support businesses, and support them right, we need to understand what manufacturers want. They want capital allowances to be long-term, generous and accessible. Governments have done a great job on being generous, but we are just missing that final piece to have a system that works for all businesses, not just those that are in the right place at the right time.”

Tony Danker, former head of the CBI, who left under a cloud, has full expensing high on his wish list in a piece he has written for Prospect magazine. The CBI itself says full expensing could drive a 21 per cent increase in business investment and push up GDP by 2 per cent by 2030. The long-term cost o full expensing will be between £1 billion and £3 billion a year, according to the Institute for Fiscal Studies, which criticised the fact that the upfront cost prevented the chancellor from making it permanent in the spring, because it would fall foul of his fiscal rules.

It is a good thing that the chancellor is preparing to deliver what is being described in Whitehall as a “supply-side” statement this week. The UK has a business investment problem, which was well described by Rishi Sunak in his Mais lecture at the Bayes Business School in London, back when he was chancellor a mere 20 months ago.

“Capital investment by UK businesses averages just 10 per cent of GDP, considerably lower than the current OECD average of 14 per cent,” he said. “The lower level of capital investment we see by UK businesses is not primarily driven by the sectoral composition of our economy, or by differences in firm size, and is observed across all regions. This is a pervasive economy wide issue, it has been persistent for decades, and we must fix it to improve productivity, growth, and living standards.”

This is the challenge, and it is a huge one. Businesses used to say that the UK’s ropey industrial relations held down investment, but for the bulk of the private sector they have improved beyond recognition. Then they blamed high inflation but, until the recent inflation episode, there had been nearly 30 years of low and stable inflation.

Corporation tax was cut aggressively in the 2010s, before it was raised again from last April, but this failed to uncork the animal spirits of firms. The so-called super deduction tax allowance, under which firms could claim back 130 per cent of qualifying investment against tax, came and went, without triggering an investment boom.

Latest quarterly figures, for July-September, showed a 4.2 per cent fall, reversing a 4.1 per cent rise in the second quarter. The latest figures show that business investment has dropped back below its first quarter level, despite the fact that full expensing has been in place this tax year.

Businesses will point to some factors that have held back investment in recent years and prevented them from taking advantage, first of lower corporation tax rates and then more generous allowances.

The most important of these was the vote for Brexit in 2016, which snuffed out the post financial crisis recovery in business investment as effectively as blowing out a candle. Business investment in volume terms is currently 5 per cent up on its levels just before the Brexit vote, having risen by 51 per cent over the previous seven years.

There has also been the challenge of dealing with the highest inflation in four decades, which diverted businesses from the task of investing and improving. UK political instability has also played an important negative role and, as recent events have demonstrated, has not gone away.

Younger readers may need to be told that it is unusual to see governments tearing themselves apart quite so viciously as this one. David Cameron’s trajectory from special adviser to a chancellor 30 years ago, Lord Lamont, to foreign secretary, via 10 Downing Street and some years outside politics, would have been regarded as an implausible plot twist by the writers of The Crown.

Last week brought the good news of falling inflation, which will help, but the other constraints largely remain. It would be sad if Hunt’s attempt to raise the level of UK business investment fell on stony ground, like so many of its predecessors You can lead a horse to water …