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£10 Billion Investment Tax Cut Extension Set for Rejection in UK’s Autumn Statement
November 13, 2023
Until recently, measures to support growth in the UK economy in the form of an extension of a £10bn tax cut aimed at boosting corporate investment had been pre-approved. Now, however, Chancellor Jeremy Hunt is ready to say no to business calls. There are no plans to extend these reliefs in the Autumn Statement. Let’s break down what has changed and how it will affect businesses in this article.
Hunt to Reject Calls to Extend £10 Billion Tax Cut
In the latest twist in the UK fiscal policy debate, Chancellor Jeremy Hunt faces a tipping point. Despite mounting pressure from industry leaders, Hunt is not expected to renew £10bn in relief aimed at stimulating corporate investment. The decision comes amid a gloomy UK economic outlook, proposing a preference for fiscal prudence over aggressively boosting growth through corporate incentives.
In the Spring budget in March, the Chancellor introduced a multi-billion pound investment relief, saying he wanted to make it permanent “as soon as we can responsibly do so”. The introduction signalled an intention to help stimulate economic growth. However, the policy, designed to cushion the impact of the increase in corporation tax from 19 per cent to 25 per cent, is likely not to be extended beyond its three-year term.
The economic rationale for this decision is related to the current fiscal difficulties, exacerbated by the recent sharp rise in government borrowing costs. Industry leaders are preparing to use a series of meetings with Hunt to lobby for an extension of the policy in the Autumn Statement to help counter the worsening outlook for the economy. However, Hunt is expected to tell them that public finance constraints prevent him from changing course.
Economic Growth vs. Fiscal Stability: The Policy Dilemma
While the Chancellor is expected to place a strong emphasis on supporting economic growth and increasing business investment, sources close to the government have pointed to the high cost of the policy and the fragile state of the public finances.
So, let’s look at what was originally planned and has already been presented. “Full expensing” investment relief, introduced in April, allows companies to recover the expenses on investment in IT equipment and machinery by writing them off against corporation tax. It was seen as a move to improve the UK’s business competitiveness. The initial cost of the policy in 2023 was £8bn, and the Office for Budget Responsibility estimates that its continued implementation could cost about £10bn a year.
Alex Veitch, head of policy and analytics at BCC, said research carried out across the country showed the scheme was already having a positive impact. It was stated that the companies also want the government to expand eligibility to include leased assets.
However, there appears to be a recognition of the precarious state of the public finances, and that’s the main thing that has changed. In October 2023, Hunt warned that difficult decisions would have to be made. The cost of long-term government borrowing on financial markets reached its highest level since 1998. This is a clear trigger for careful budgetary management. Hunt suggests a tough path between stimulating growth and ensuring economic stability.
The Chancellor has faced pressure from Conservative MPs demanding tax cuts. As per a Confederation of British Industry report, private sector activity continued to fall in the three months to October amid a decline in services, distribution, and manufacturing. Firms were held back by high costs, staff shortages, and demand conditions. Strong action to mobilise the workforce and streamline planning processes is seen as vital to improving UK productivity.
A separate report by the manufacturing group Make UK stated that extending the full cost recovery policy is important for companies when planning investments. A survey found that most firms plan to invest in artificial intelligence and other advanced technologies, but 40 per cent of them believe the UK is lagging behind international competitors.
In summary, on the one hand, the market benefits from support measures, including the tax cut, but on the other hand, the British economy cannot afford such expenditures at this stage.
The major UK business groups are expected to engage in dialogue with Jeremy Hunt during Downing Street meetings, emphasising the importance of extending the full-cost write-off policy. However, there is a general understanding that such a change is difficult to secure given the current situation.
The British Chambers of Commerce has suggested a middle ground, proposing that the policy should be extended from three to five years to provide companies with greater certainty when planning investment. The private sector supported this idea.
Since the CBI reported a contraction in activities across services, distribution, and manufacturing, the need for decisive action to tackle the UK’s cycle of low growth is clearer than ever. This requires a bold approach to investment and productivity improvements.
Although there has been no official statement from the Treasury regarding potential policy adjustments, the clear advantages of full expensing for boosting investment and fostering growth are apparent. Nevertheless, a Treasury spokesperson said the UK already has the lowest corporation tax of all G7 countries and the most generous capital allowances regime of any major developed economy.
As the Chancellor prepares for the Autumn Statement, successfully balancing fiscal discipline and economic expansion is the main challenge, closely watched by leaders across a range of sectors.
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