We caught up with Louise Hellem, our Director of Economic Policy, to find out how we built the business case behind one of the CBI’s biggest Budget asks.
Q. We’re asking for a successor to the Super-deduction, which ends in April, just when the Corporation Tax rate is set to increase by six points. Why is this so important?
A. This is all about the UK maintaining its global tax competitiveness and avoiding the drop in business investment that is so crucial for growth and jobs.
Q. Is there any evidence that the Super-deduction has worked?
A. Yes. We conducted a survey of our members last year, which showed a fifth of business investment planned while it was in place would not have happened without it – with another fifth brought forward to benefit from it. And we’re talking about the kind of investments that improve efficiency and boost productivity.
Q. So what are we suggesting the replacement could look like?
A. We’re asking the government to introduce full expensing on a permanent basis for capital investment – that means a business can reduce their taxable profit by the full cost of an investment, in the year they invest. If that’s not achievable straight away, we’ve proposed a three-year roadmap to full expensing, starting with a 50% allowance – letting businesses deduct half the cost of an investment in the year they invest, and half of the remainder in following years so they recognise over 96% of the value in 5 years – from this April.
Q. Why are we so sure it will make a difference to business investment?
A. We worked with Oxford Economics to understand the impact it could have. We tested different scenarios. The first, the introduction of a permanent investment deduction of 100% from April 2023, by increasing main rate plant and machinery allowances from 18% to 100%, and a 50% writing down allowance for special rate assets instead of the current 6%. The second, increasing plant and machinery allowances from 18% to 50%, with a 25% writing down allowance for special rate assets.
The research found that under the first – our preferred ‘full expensing’ scenario – we could see a 21% increase in the level of business investment per year by 2030/31 (an extra £50bn a year). And that would equate to a 2% bump to GDP – £53bn higher than it would otherwise be.
But even increasing plant and machinery allowances to 50% would still provide nearly a 13% boost in business investment per year, leading to a 1.2% (£31bn) higher level of GDP over the same period.
Q. Was there a difference in the upfront cost to government between the two scenarios?
A. There is an upfront cost to this reform, as the deduction is passed through to firms quicker, but it doesn’t cost more in the long-run overall. In fact, our analysis shows the net impact on the government’s balance sheet is positive. This is because improving cash flow to businesses boosts investment therefore profits and employment which increases tax receipts relative to our baseline forecast.
Q. Obviously the Treasury is going to be cautious about any measures that could fuel inflation. Is this a risk here?
A. No. The same research shows that in either scenario, the increase in investment increases the potential output of the economy. This means more can be produced without creating inflationary pressure and this helps offset any pressure on prices from higher demand.
Business investment in the UK was already lagging behind our international peers. With the Corporation Tax rate rising and the end of the Super-deduction we risk falling further behind. We need a plan that boosts business investment. And we’ve done the analysis – we know this measure can be a win all round for business, the government and the economy.
Read more detail on the economic modelling behind our call for a permanent investment deduction.
