Bold and urgent action on business investment is required to secure growth

Europe is in crisis and the CBI remains deeply concerned about the lives of Ukrainian citizens. In this tough period, the CBI has been heartened by the actions of members to mobilise support across the UK and adapt with haste to government sanctions. Businesses and government must continue to do what they can to help Ukraine.

At the same time, we must not lose sight of the UK’s structural economic issues. A backdrop of huge pandemic debt, upward pressures on public spending, and a concerning outlook for growth demands urgency. The CBI is calling for bold action from the government on business investment, to escape a post-pandemic low-growth trap and build a more resilient UK economy.

Pandemic debt and public spending pressures give special importance to the need to increase exchequer revenues. Bringing down debt to a manageable level is a necessary precursor to achieving the low tax economy the Chancellor recently outlined in his Mais lecture – and ultimately boost long-run, sustainable growth. Raising additional revenue will also help the government follow through with public spending pledges, including on Levelling Up. It’s clear that money is needed, and the most sensible way to find it is to go for growth.

The fiscal prize from boosting growth is huge. Analysis by the CBI’s tax and fiscal policy team estimates that around £100bn could be added to the Treasury’s coffers by 2030 if the UK manages to beat the Office for Budget Responsibility’s (OBR) October 2021 baseline projections of 1.3 – 1.7% growth and realise a more ambitious 2.5% annual rate of growth. Sustained real growth of this magnitude may seem difficult to achieve, but it is not unprecedented – the UK economy grew by an average of 2.7% in real terms over the decade preceding the global financial crisis. As well as paying off debt, a £100bn gain could help fund the planned budget increases for the Department for Health and Social Care from 2022-23 to the end of the Spending Review period. It is three times the committed funding announced in the Queen’s Speech for Levelling Up.

Given the importance of growth, the UK’s recent economic performance is concerning. At the end of Q4 2021, UK GDP was 0.5% below its pre-pandemic level resulting in a stark gap with the US which is seeing GDP 3.1% above their pre-pandemic level. Meanwhile, the OBR has forecast that UK GDP growth is set to fall to 1.3% in 2024, in part due to the super-deduction coming to an end, before increasing slightly to 1.6% in 2025 and 1.7% in 2026. The recent Bank of England forecast is more gloomy still, expecting growth of only 1.0% in 2024. All of these forecasts pre-date the Ukraine crisis, which will only result in an even more pessimistic outlook.

It is clear that a response is needed: the government needs to boost business investment and set the UK on a higher growth path. More investment means a larger capital stock which allows for more goods and services to be produced with the same level of labour and other resources. Greater investment can boost short-run growth, but an economy’s rate of investment also has a significant impact on long-run growth. This is because capital accumulation can drive long-term productivity. Not only can capital investment by a business have positive spillovers, where other businesses benefit from the learning of a specific business on account of its investment, but firms can lower their own production costs over time on account of greater investment in a process called ‘learning by doing’.

A focus on boosting business investment is particularly justified when looking at the UK’s historical performance against competitors - the UK has stood at the bottom of the G7 for close to four decades, with this gap widening. In 2020, business investment made up around 13% of GDP across the G7, compared to just over 9% in the UK. Importantly, the Ukraine crisis is likely to have a negative impact on investment intentions of UK firms. This is the worst possible timing, as business investment intentions were quite high coming into 2022.

In light of this, the CBI has set out measures in a submission to the Chancellor in the build-up to the Spring Statement. A key ask is a new permanent 100% investment deduction to act as a successor to the super deduction. Survey analysis by the CBI shows that this new investment deduction could increase annual capital investment by 17% by 2026, worth £40 billion a year. Other measures include policies to power productivity, spur innovation and investment, boost energy efficiency, and improve access to critically in-demand skills.

Now more than ever, the UK needs to build a resilient economy and set the conditions for strong growth.

CBI Economics, the CBI’s economic consultancy division, is well-placed to carry out economic analysis grounded in a strong understanding of the policy landscape, and which is heard by key policymakers. We also carry out business surveys to test the views and plans of UK business on topical issues, and deliver economic briefings to boards and senior management teams.