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.