Supporting investment in the UK's future

Many of us hope that the UK’s economy has ‘weathered the storm’ following a series of major challenges.  Some of these challenges are now thankfully behind us, but it is clear there are a number of risks which continue to loom over our economy.

Productivity growth is stubbornly low - and although not just a UK problem, does mean that some of our international competitors are starting to outpace us. Business investment has also been poor; a problem because it’s one of the key ways of helping the UK to break the cycle of low growth.

A new report published today by BT Group explores some of the root causes of these challenges, and more importantly, suggests ways to fix it.  

As ever with issues of a national scale, the tone is set from the top. Indeed, the Prime Minster set out both the problem and the solution last year, in a speech he gave when Chancellor:

“Capital investment by UK businesses is considerably lower than the OECD average of 14%. And it accounts for fully half our productivity gap with France and Germany. Once the Super Deduction ends next year, our overall tax treatment for capital investment will be far less generous than other advanced economies. We’re going to fix that.”

Just last month, his own Chancellor set out an ambition to have “nothing less than the most competitive tax regime of any major country.”

These are important and ambitious goals, and the upcoming Budget offers a critical moment for the Government to deliver on both these promises - to turbo-charge business investment, and ensure that the UK’s tax regime is internationally competitive.

But how?

According to the CBI, over half of businesses have benefitted from the super-deduction over the past two years, an allowance which provided strong incentives for businesses to invest through allowing companies to write off 130% of the cost of qualifying projects.

BT Group was among the first and largest businesses to respond – immediately raising our investment in full fibre broadband, enabling Openreach to increase its target from 20 to 25 million homes and businesses, a quarter of which will be in rural areas.  

Introducing the super-deduction was an important foundation towards a more internationally competitive tax regime. That’s borne out by the findings of the Tax Foundation, who suggest that when the super deduction ends next month, the UK will fall to 33rd out of 38 OECD countries in the league table of capital allowance generosity.

Chart 1: Net Present Value (NPV) of machinery capital allowances in OECD countries

At a time when the economic growth which business investment could unlock is urgently required, the case for intervention at the upcoming Budget has never been clearer.

Why does it matter?

Tax is a significant consideration in how businesses make investment decisions. Not least, taxation levels affect how much cash a business will have to make these investments. For a business like BT which invests £4.8 billion each year in building and maintaining digital networks, available cash is a critical consideration for us to take into account.

Moving to a system of full expensing - or introducing more generous first year allowances set at 75% -would provide a significant boost to companies which are looking to make large scale investments.  

Introducing such a measure next month would be a strong statement on the direction of the UK. To improve business certainty, we believe an initial four year period would be appropriate, after which the Government should review what sectors or assets would benefit from longer term support.  Taking this action helps all of the UK:

• A boost to investment decisions across the economy. The CBI has estimated that full expensing could boost business investment by £40 billion a year by 2026.
• Four years would give more businesses the certainty they need to respond to a generous new scheme, more in tune with the investment cycles that businesses operate against.
• The UK would be propelled to the top of international rankings for the competitiveness of its capital allowance regime, at a critical time for unlocking business investment.
• It would not adversely impact the Chancellor’s ability to meet his fiscal targets, which are on a five year rolling horizon.
• There would be time for the Treasury to evaluate its effectiveness ahead of deciding on a longer-term solution.

“We’re going to fix that”

The Prime Minster and the Chancellor both clearly know what is needed to secure more business investment. The time is now right for them to seize the opportunity which this Budget offers – helping to secure more business investment, and boosting growth and opportunity across the country.