One of the most significant announcements in the Autumn Statement, at least in terms of what might stem from it, was the confirmation that full expensing of investing would be made permanent rather than, as previously intended, allowed for a period of three years. Permitting businesses to deduct 100 per cent of certain investments from their pre-tax profits should help kickstart a deeper appetite for investing in research, and new plant and machinery, along with workplace skills. Helping businesses to feel positive about taking the investment plunge matters more than ever when the economic backdrop is so challenging, and we lag our international peers in the investment stakes. It is a recognition that growth has been flatlining and likely to remain in damp squib territory for some time to come.
The Office for Budget Responsibility (OBR) remains cautious on real gross domestic product (GDP) growth over the next few years. It expects GDP growth this year of just 0.6 per cent and similar (0.7 per cent) next year. It has also revised down its estimate of the medium-term potential growth rate to 1.6 per cent, from a forecast of 1.8 per cent in March. By 2026 to 2028, the OBR thinks average growth will pick up to just below 2 per cent as interest rates finally fall back and the squeeze on real wages eases, and it says the impact of permanent full expensing on potential output will continue to build, from 0.1 per cent in 2028-29 to slightly below 0.2 per cent in the long run.
Part of the current growth problem is the macroeconomic climate. The Bank of England insists there will be no let up in the battle to drive inflation back to target – that means a restrictive backdrop for some time to come. Its strong, consistent messaging and small bullish signals from the private sector – such as the purchasing managers November survey indicating expansion and returning strength to new orders – have combined to persuade some observers to shift their timescale for rate cuts from midway through 2024 to later in the year. However, Pantheon Macroeconomics believes that because fiscal policy will dampen GDP growth substantially in 2024, the Monetary Policy Committee could still reduce rates next year with a potential start date of May. By the end of 2024 it expects Bank rate to sit at 4.5 per cent.
Others flag new inflationary pressures. Charles Hall at Peel Hunt suggests that the increase in the national living wage will be materially inflationary given that a large proportion of employee pay levels will be directly or indirectly linked to it. A good example of this is in the food industry where the measure could add around £35mn to typical large producer with a wage bill of c.£500m.
Tax giveaways also carry inflation risk, although probably not the National Insurance boost delivered in November. Instead it’s election-linked tax giveaways that could destabilise inflation expectations, warns the Bank of America. It thinks the Bank will maintain rates at 5.25 per cent through 2024 with the first cut coming in February 2025.
The macro backdrop will eventually change, but measures to address stagnant productivity are required now. Importantly, besides the investment tax break lever, Britain has also been adopting tactics used by its peers to ramp up efforts to secure increased levels of inward investment, with some results being delivered in the past week. The UK’s second investment summit took place, two years on from the first, generating 12,000 jobs and £29bn of investment in sectors such as technology, energy, infrastructure and research. Separately, Lord Richard Harrington published his review (commissioned back in March by the chancellor) into how business investing in the UK can be better supported.
Among Harrington’s recommendations are that the government needs to develop a clear business investment strategy headed up by a cabinet minister, with stated goals and measures to genuinely influence investor decision-making; and to ensure we have a dedicated, globally competitive and proactive Office for Investment. He points out that the problem of siloed and inflexible government systems must be addressed. Crucially the report recognises that “capitalism has changed” and that there is now an acceptance that governments should use taxpayers’ money and other resources to assist private companies in investment decisions. The stark reality is that it is what our competitors do. Making these changes, Harrington says, could inject billions of pounds from abroad into the domestic economy every year.
Stronger levels of business investment won’t transform the outlook for growth overnight, but they are important seeds to sow and this is a kernel of opportunity that needs to be passed on and committed to by whoever forms the next government.
