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8 August 2018 | By Fiona Geskes Insight

Catching the Peloton: the business investment race

The UK's tax policy and what success in the Tour de France can teach us about boosting our productivity

At first glance cycling and the economy might look like they have very little in common. However, consider that in 2005 there wasn’t a single British rider in the Tour de France. Fast forward to 2018 and three British riders have won a total of six times since. What delivered this meteoric rise in success? A consistent campaign of investment, strong leadership and a long-term plan and vision.

The UK economy is in much the same place as Britain’s cyclists in 2005. Productivity growth has been lacklustre, constraining growth in firm’s output, wages and ultimately living standards. But as with cycling the opportunity to succeed is there for us to grasp.

The CBI’s new report ‘Catching the Peloton’ investigates the UK’s low levels of business investment. It finds that businesses in the UK spend less on new equipment, factories, and skills than any other country in the G7, despite this being one of the most dependable ways to boost productivity and drive economic growth. Business investment accounts for 9 per cent of our GDP, compared to 13 per cent across the group of G7 countries.

So why are we lagging the pace? Frequently cited reasons include measurement issues with the Office for National Statistics (ONS) data, the decline in our manufacturing base and the decision to exit the EU. But the CBI’s report shows that none of these can fully explain the gap – there are other structural issues at play.  As a result the solution needs to be structural too.

So how can we make sure investment is no longer a minority sport for Britain’s businesses?

Part of the solution lies in businesses doing more to adopt readily available technologies and management best practices. But government need to pull their weight in this partnership too. The Industrial Strategy offers the vision but the policy environment is what influences businesses’ decision making day-to-day.

There are a range of policy tools that can be used to create a positive policy environment for businesses, from investing in infrastructure and skills to improving access to finance. But tax policy is one of the few ways in which the government can directly stimulate demand for business investment.

Next to ensuring a stable, transparent and simple tax system for business, it is also about filling the gaps in our current framework, to accommodate changing technologies and a changing workforce. Intangible investments such as training and organisational capital can be key enablers of productivity improvements and the adoption of new technologies, however there is currently very little in the way of government policy to incentivise businesses to actively invest in these areas.

While the UK has the most competitive Corporate Tax rate in the G20, its capital allowance regime only allows businesses to recover 46 per cent of the cost of an asset, compared to an average of 64 per cent across the rest of the G7. Increasing the competitiveness of the UK’s capital allowances regime must be a priority, including addressing the lack of an incentive to invest in commercial and industrial buildings and creating a greater link between tax incentives and technology adoption.

Additionally, the government should look to build on success by supporting businesses’ confidence in the UK’s R&D tax reliefs.

Undoubtedly businesses will continue to face challenges, amid growing economic and political uncertainty, but that is exactly why now is the right time to put a foot to the pedal. And maybe British businesses can win it again. And again.

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