Good morning from New Economy Brief.

Though it is not the only way to measure economic success, increasing GDP growth remains a priority for most political parties. Debates on how to pull the ‘growth lever’ appear in the news every week and economists argue perpetually over how to fill the UK’s productivity and investment gap.

The latest attempt is ‘full expensing’, recently foregrounded by Chancellor Jeremy Hunt as he made the tax break on investment permanent in last week’s Autumn Statement. This week’s New Economy Brief explores the evidence on full expensing and asks if it is really the best way to boost investment, productivity and growth. 

Pulling the growth lever. 

Investment is the fuel that makes economies grow. Both public and private investment are vital to achieving economic growth, because improving physical equipment like machinery or intangible assets like software or skills helps businesses and the government produce goods and services more efficiently, which adds productive capacity to the economy. As it is National Productivity Week in the UK, we look at the Conservative government’s latest attempt to increase private sector investment - by making ‘full expensing’ permanent. 

The UK’s poor investment record. Firstly, it’s worth pointing out just how poor UK productivity performance has been in recent years. London School of Economics’ Anna Valero and John van Reenen explain that productivity has stagnated since 2008: “Labour productivity (GDP per hour worked) is 24 per cent lower than it would have been had it grown at its pre-financial crisis rate…and this has been the main driver of real wage stagnation over the last 15 years.“ They also note that “since 2008 amongst a set of advanced economies, only Greece had a lower investment rate than Britain”. IPPR also highlights that the UK consistently ranks lowest in the G7 for private sector investment as a percentage of GDP and among the worst of the 37 OECD countries. So by focusing on this issue in the Autumn Statement, the government was certainly highlighting a real and serious problem. 

What is ‘full expensing’? 

Chancellor Hunt announced a temporary introduction of ‘full expensing’ in the Spring Budget. This means larger businesses can deduct the full cost of investment in plant and machinery from their corporation tax bills, so for every pound a company invests (in certain types of assets), its taxes are cut by up to 25p. (There is already a £1m investment allowance, so this policy will do very little to increase SME investment). Hunt then decided to make this tax break permanent in last week’s Autumn Statement. As the Spectator’s Kate Andrews notes, making full expensing permanent (“the largest business tax cut in modern British history”) is a big win for free-market think tanks such as the CPS, ASI and IEA, who have “been pushing this for years.” It is also worth mentioning that full expensing has advocates beyond this group, and that Labour had not only been calling for it as a permanent measure recently, but had even been attacked for doing so by the government.

Will it increase investment? The Office for Budget Responsibility (OBR) predicts that making full expensing permanent will add just £14bn over five years to private sector investment, while reducing tax receipts by £30bn. That is, in the short term it will cost the government more than twice as much in lost receipts as it will stimulate in private investment. 

Taxes aren’t the barrier. One explanation could be that high taxes are not the main barrier to business investment. Baroness Minouche Shafik, former President and Vice Chancellor of LSE, summarised “hundreds of investor surveys” about businesses willingness to invest in a country. These consistently showed macroeconomic and political stability, high quality infrastructure and skills as the top priorities of businesses, but “low taxes and enterprise zones were always near the bottom”. Defenders of full expensing would argue that the policy’s full impact will take much longer to appear, stretching beyond the five year ‘scorecard’ window examined by the OBR, so assessing its benefits only over that period is short-sighted. These points have some merit.

The evidence from the ‘super-deduction’. This is not the first time the government has tried to use tax breaks to spur business investment recently. Back in 2021, then-Chancellor Rishi Sunak implemented a ‘super-deduction’ tax cut, allowing businesses to deduct 130% of the cost of “main rate” assets – more than the equipment’s total cost – from their taxable profits. But the OBR concluded that the two-year super-deduction experiment “does not seem to have significantly boosted overall business investment” either. And campaign groups like TaxWatch warned that the tax break would mainly benefit large corporations that would have made those investments anyway, wiping out the tax bills of a company like Amazon.

Instability and fiscal rules. Business groups keep saying that a stable policy environment is essential for patient investment. It is hard not to conclude that the government’s hokey-cokey approach to business taxes in recent years (a temporary super-deduction, then temporary full-expensing, followed a few months later by permanent full-expensing) is somewhat suboptimal. Bear in mind that among the reasons for this policy churn have been the government’s attempts to keep within its own fiscal rules. This led to a series of temporary policy offers because their effects had ended by the fifth year of the forecast period and so did not count against the fiscal rules. Their main effects were to reward businesses for investment decisions they had already made, or encourage them to move money around between years to maximise their tax savings. Even those who think the policy has ended up in the right place can hardly argue that we got there by a sensible route.  

Is this a responsible use of taxpayer money? The end result is a policy which targets a real problem, probably will have some impact on it, but does so in an inefficient way. Given that it was one of the most expensive choices in how the Chancellor used his (much criticised) fiscal headroom, perhaps there are other ways to stimulate business investment which offer more value for money. 

Alternative ways to increase investment.

Aside from the arguments discussed above, one of the central criticisms of full expensing is that even when it does spur investment, it is indiscriminate and does not direct investment into key strategic areas. Future Economy Scotland’s Laurie Macfarlane argues that if the government is going to spend £30bn on a tax giveaway to businesses in the hope that they use this to invest, one might question whether it would be better value for money to invest that directly instead. This would guarantee investment, which could directly target strategic priorities and deliver higher multipliers (look out for an explainer on this coming soon in New Economy Brief).

Crowding in. IPPR’s George Dibb adds that the government’s scattergun approach “goes against an emerging international consensus that the state can "crowd in" private sector investment, with targeted, directional, market-shaping public investments” (See their paper Making markets in practice.) But the government’s plans mean public sector capital spending is set to fall from 3.6% of GDP this year to 3.1% in 2028-29, and it will cut public service spending by ~16.7% over the next five years. Essentially the government is asking businesses to invest, while cutting its own investment in the economy.

Learning from the US: Conditionality is key. Lots of investment, particularly in the green economy, is being lost to the US due to the scale and competitiveness of the tax breaks it offers. But the US approach has a key difference from the UK’s full expensing regime. US businesses only receive tax breaks if their investments in the green economy use ‘local content requirements’ - i.e. where goods are assembled or materials sourced domestically. This increases the multiplier effect on domestic job creation, and helps reshore its supply chains. Companies must also commit to new jobs being well-paying, unionised roles with benefits such as access to affordable childcare. In short, the incentives in the US are much more targeted than the blanket, economy-wide tax breaks used in full expensing, and they use the government’s power to intentionally shape the markets they intervene in and help coordinate investment decisions towards transformational priorities.

Corporate governance. Another way to increase business investment in the UK could be to reform that way investment decisions are made in the first place. It has long been argued that the ‘fiduciary duty’ on companies to prioritise shareholder returns at all costs leads to short-termism among UK businesses. Many argue that reforms to increase the power of workers and other stakeholders could lead to a more balanced system of decision making which favours longer term investment. A new paper from Demos and B-Lab UK argues that such reforms could increase capital investment by UK businesses by £86bn per year - without costing the Treasury a penny. (See Common Wealth’s Commoning the Company for more on this.)

A policy without a strategy?

As we have already seen, increasing investment in the UK economy is a worthy goal, and a necessary one if the country is to escape the kind of economic stagnation that forecasters predict in the near term. But doing this requires more than just one policy intervention, it needs holistic strategy which is currently lacking. The government hasn’t only jumped from policy to policy on full expensing; it still seems confused about what kind of policy environment is necessary to achieve its aims. 

The phantom industrial strategy? Last week the Chancellor decried ‘subsidies’ while government ministers objected to the very idea of an industrial strategy as ‘picking winners’. Kemi Badenoch, Secretary of State for Business and Trade outlined the government’s critique in the foreword to the new Advanced Manufacturing Plan: “I have been clear throughout that the UK will not be drawn into a distortive subsidy battle. For those of us who believe in the power of the market, the key to unlocking continued growth in our manufacturing industry is capital investment from the private sector, which sustains jobs and growth for the UK. No business secretary can pick winners, but Government can help companies succeed by removing obstacles in their way and focus on improving the business environment to ensure the sector is competitive.” And yet this Plan commits £4.5bn in direct public investment for specific sectors, and trumpets the prediction that  every £1 of public money spent will crowd in £5 of private investment. Not only does this sound suspiciously like industrial policy; it is also significantly more efficient in generating private investment than full expensing is likely to be. 

Ideological stubbornness. As the FT’s Helen Thomas notes, a proper industrial strategy is “the crucial thing missing from the vaunted UK business investment bonanza …Government should be specific about what it wants to target and create regulation to support its goal”. As part of such a strategy, you could imagine a form of full-expensing being a useful tool to stimulate private investment, which would complement direct public investment. Yet in isolation, the move towards full expensing looks very like a return to a narrow and outmoded ideological approach based on the mantra that the ‘market knows best’ and the ‘state shouldn’t pick winners’ (consult this Times editorial to see this argument in action). If this is the government’s only real plan to reverse more than a decade of stagnant investment, the prospects for success do not look promising.

Weekly Updates

Industrial strategy

The robots won’t save the economy. 15 years of technological changes have delivered very few gains to consumers, argues Giles Wilkes’ latest blog post. Looking at productivity gains across a range of consumables goods, Wilkes remarks on how few have become cheaper in recent years despite the progress of technology. He argues that this should make us sceptical of claims that AI and other technologies can kick-start sluggish productivity growth.


Transition ambition. The UK needs to rethink how it commissions energy infrastructure if it is to achieve Net Zero targets, argues Common Wealth’s Chris Hayes in an article for the New Statesman. Reflecting on the government’s recent struggles with its Contracts for Difference capacity auction process, Hayes argues that “the privatised and fragmented nature of the UK electricity system leaves necessary system-wide transformation vulnerable to private and uncoordinated investment decision-making based on individual projects’ profitability.” Instead, Hayes argues, public bodies like Labour’s proposed Great British Energy, should take a more active role in procuring energy infrastructure.

Monetary policy and inflation

Lords call for Bank reform. The House of Lords Economic Affairs Committee (EAC) has called for a shake-up of the Bank of England in a new report. In particular, the EAC criticised the Bank’s lack of diversity of economic perspectives, which it argued contributed to “complacency” about the likely path of inflation.

Fiscal policy

Headroom explained. “Minor adjustment” in economic forecasts leads to wildly different outcomes for the government’s ‘headroom’, argue Jo Michell and Rob Jump in a new blog. Looking at how the media narrative on the public finances went from ‘black hole’ in November 2022 to ‘headroom’ a year later, Michell and Jump argue that “Minor adjustments to the assumptions that generate these forecasts lead to outcomes an order of magnitude greater than the ‘headroom’ which attracts so much attention.” More importantly, they argue that “this is not a rational basis on which to conduct the planning of long-term spending and taxation,” because “the widely-quoted ‘headroom’ figures have no correspondence whatsoever to the amount of extra money the Chancellor could spend while meeting his rules.”


The ‘purpose dividend’. Reforming corporate governance rules to spread stakeholder-governed business models throughout the economy could deliver a £149bn ‘purpose dividend’ to the UK economy, argues a new report from Demos and B-Lab UK. The report argues that businesses that are not solely accountable to their shareholders tend to pay their workers more, invest more, and innovate more. If all businesses adopted this model and performed similarly to current purpose-driven businesses, the benefits could include higher capital and R&D investment, as well as adding over £2,000 to average wages for low-paid workers.

Housing and tax

Property taxation. The UK’s property tax system needs reform to discourage speculative investors from buying up additional properties, according to a new report from the New Economics Foundation (NEF). In particular NEF argues that stamp duty should be increased for non-resident purchasers and multiple-homeowners in a move that would “tilt power towards first time buyers and social landlords”.