Better UK productivity requires longer-term tax breaks, say business leaders

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Jeremy Hunt’s ambitions to bolster UK growth and productivity will falter if he fails to extend key tax breaks aimed at boosting investment, industry has warned ahead of this month’s Autumn Statement. 

The UK chancellor in March introduced a £10bn-a-year tax break that will last three years, permitting companies to “fully expense” investment. The scheme, which ends in 2026, allows businesses to deduct the full cost of an investment in the year it is incurred from the tax on their profits.

While Hunt has said he would like to make the tax break permanent, he has refused to commit to this because of the pressure on the public finances. 

Miles Roberts, chief executive of global paper and packaging group DS Smith, told the Financial Times that the failure to make such capital allowances permanent was a major obstacle to closing the UK’s productivity gap with the US and continental Europe.

Manufacturers would be reluctant to invest in the tools and automation required for higher productivity in the UK if they could achieve better returns elsewhere, he said in an interview. 

“Our productivity in the UK is lower than in France. It is solely due to investment,” he said. “UK industry has less investment per person than in some other countries. It comes back to . . . financial paybacks. The whole cash flow of a project is worse than in other countries that have a much higher allowance for capital.”

UK productivity grew by just 0.4 per cent annually between the 2008-09 financial crisis and the pandemic, less than half the rate across the club of OECD nations, according to the Resolution Foundation. For almost 20 years, the UK has ranked in the bottom 10 per cent of the Paris-based organisation’s business investment league table, the think-tank said in a recent report.

Another senior executive of a global manufacturer, who asked to remain anonymous, said: “These schemes make a huge difference to productivity. [Investment in] new technology makes you more productive. It is very uncompetitive in terms of investing in the UK at the moment.”

Roberts pointed to DS Smith’s project to build a biomass plant in France, one of 32 countries where it has manufacturing sites.

“We are receiving a straight cash subsidy against about 20 per cent of the cost of building the plant. There is also a more permissive regime in terms of what qualifies for tax relief,” he said.

“Certain governments, such as Germany, are also very good at supporting investment through offering subsidised financing for capital projects. The UK does not have anything really like this,” Roberts said.

“If you want to attract big investments, you’ve just got to think longer term and you’re going to have to commit to it and don’t change your mind halfway through,” he said.

Hunt in his March Budget set out the new capital allowances regime for businesses to offset a sharp rise in corporation tax and after ending a more generous two-year 130 per cent tax break for investment known as the “super-deduction”.

But he made the measure temporary to curb its costs and meet his fiscal rules, despite economists warning that doing so would shift the timing of investment instead of spurring extra capital spending.

Make UK said the super deduction, while generous, had a limited impact for that reason. “Businesses weren’t in a position to maximise these sort of incentives . . . because of the short-term scale,” said James Brougham, senior economist at the manufacturers’ trade body. 

“Generally, productivity performance in the UK isn’t so good per pound spent. We are unlikely to see some productivity improvement unless there is a joined-up long-term policy approach,” he added.

The Office for Budget Responsibility, the fiscal watchdog, said the new temporary allowances would bring forward capital spending and raise investment by more than 3 per cent initially, but that the benefits would fade after its withdrawal. 

Ahead of the Autumn Statement on November 22, Hunt has signalled that he lacks the fiscal room to make the programme permanent amid rising borrowing costs. The estimated cost of the expensing regime is about £10bn a year for each of the three years the policy is in place, with costs roughly similar if the scheme were to be made permanent. 

However, the Institute for Fiscal Studies think-tank has said that the true long-term cost of the policy would be in the range of £1bn-£3bn a year, since companies would deduct more investment up front than in future years, leading them to pay more tax later on.

The government said Hunt had “committed to introducing the measure on a permanent basis when he can responsibly do so”.

“Meanwhile, for the three years it is in place, the OBR projects it will increase business investment by around £6bn a year.”