One can usually take a mental break when the budget speech turns to capital allowances. It’s the tinkering bit. This time was different. Rishi Sunak’s “super deduction” regime will allow businesses to offset 130% of investment spending on plant and machinery against profits for the next two years. So spend £10m on new equipment and reduce your taxable income by £13m, as the chancellor put it.
It’s an eye-catching pitch to companies as they await the hike in corporation tax in 2023. The cost to the Treasury over the next two years will be £25bn, which is enormous. The Office for Budget Responsibility calculated it is 10 times more generous than the equivalent temporary capital allowance measures introduced after the 2009 financial crash.
Will it work? With numbers of this size, it cannot fail to have some impact on business investment, a perennial weakness in the UK economy. Sunak cited the OBR’s forecast of a rise of 10%, or £20bn.
And yes, one can see how boards of directors, perhaps hesitating over whether to upgrade a production line until they’ve seen the strength of the recovery, would be encouraged to take the plunge. As PricewaterhouseCoopers pointed out, there may also be “levelling up” benefits since manufacturers, one big beneficiary, are more concentrated outside London and the south-east.
But there may also be a reason why such a blunt tool has not been used on this scale in the past. As well as encouraging fresh business spending, the Treasury may also find itself rewarding investment that would have happened anyway.
Take BT, whose annual capital expenditure budget is about £4.5bn. Its share price shot up 7% after the budget speech, presumably on the thought of the juicy allowances that can now be claimed over two years for the roll-out of fast-fibre broadband.
If BT responds by getting fibre to premises more quickly, that could be considered a benefit for the nation. But the gain may be marginal since the programme is well under way. Any acceleration may also be concentrated in cities, where it is easier to speed up, rather than rural areas.
So yes, Sunak should succeed in getting a few cashed-up companies to invest more rapidly than they might otherwise have done. But is this the most effective use of a £25bn tax break? It feels unlikely.
It’s time for a business rates review
The big supermarkets may have expected to get something for their money when, after squirming in the spotlight for too many months, they handed back their relief from business rates last autumn. The prize for doing the honourable thing, or so they probably imagined, would be the launch of a fundamental review of the entire business rates system. It didn’t happen in the budget.
Maybe the Treasury has decided a proper review is best conducted when it is easier to judge how much of the boom in online retailing will stick. But the review does need to take place – and soon. The current system is patently unfair on bricks-and-mortars retailers who pay rates on shops at values that are out of date by more than half a decade.
Ken Murphy, the chief executive of Tesco, has previously made the point that many of the high streets affected most severely by the current rates system are those at the centre of the government’s “levelling up” plans. Exactly right. Another round of temporary Covid tweaks and reliefs on rates will be welcomed by smaller retailers. But the main event – a full review – cannot be delayed much longer.
Infrastructure bank needs solid foundations
The chancellor was on weak ground in claiming to be launching “the first ever UK infrastructure bank”. We used to have something similar. It was the Green Investment Bank (GIB), created by George Osborne in 2012 and then sold to Macquarie of Australia in 2017.
At least the previous experiment proved the concept works, even if Osborne himself never seemed entirely convinced. Public money was used to back green projects from windfarms to street lighting systems. Private capital followed in its wake. There was even a small profit for the Treasury on disposal.
Let us hope the latest creation lasts longer than a single chancellor’s period in office. When they’re done well, these public-private partnerships can be very effective in getting infrastructure built.