Britain’s economy needs much more investment. Business says it’s unlikely to get it any time soon.
The Confederation of British Industry said in its latest forecast that a “short-lived recovery” in capital spending would end in 2023 because of tax hikes on companies.
Investment in the United Kingdom has lagged that of other advanced economies for decades, and the business lobby group’s forecast will deal a blow to Prime Minister Boris Johnson’s aspirations for building a high-wage and high-productivity economy.
Business investment would briefly rise above pre-pandemic levels by the end of next year, before slumping as companies are hit by a corporate tax hike and the end to a tax break on some investments in plant and machinery, the CBI said.
The corporate tax rate will rise from 19% to 25% in April 2023. UK finance minister Rishi Sunak announced the hike in March this year to help pay for the costs of the pandemic and reduce government borrowing. The tax break on plant and machinery, introduced earlier this year, will also expire in April 2023.
Investment stagnated following the Brexit referendum in 2016 as companies were deterred by the uncertainty over Britain’s future trading relationship with the European Union. It has dropped further since the start of the Covid-19 pandemic.
Capital spending by UK companies fell by 11.6% between the third quarters of 2019 and 2020, the CBI said.
By the government’s own admission, business investment was already low by the standards of other advanced economies. A UK Treasury factsheet published in April said: “Much of the UK’s productivity gap with competitors is attributable to our historically low levels of business investment compared to our peers. Weak business investment has played a significant role in the slowdown of productivity growth since 2008.”
Investment in technology, skilled workers and innovation are key to raising productivity, and boosting growth and incomes without pushing prices higher. The CBI’s warning comes as inflation continues to rise. It hit a 10-year high of 4.2% in October, and the Bank of England’s chief economist has warned it could exceed 5% in early 2022.
“I know from speaking with firms of all sizes that they have an ambitious investment mindset, and are anxious to implement growth plans. But while intentions have thawed, we’re coming up to a cliff edge in 2023,” CBI director-general Tony Danker said in a statement.
He said the tax break had been successful but industry needed targeted measures to encourage “the scale of investment we need, particularly in green technologies. A booster for growth is needed to protect and build on our recovery.”
Britain’s economy should grow by 6.5% in 2021 according to the UK government’s own Office for Budget Responsibility’s projections. But the economy won’t recover its pre-pandemic size until the first quarter of next year, the Bank of England forecasts.
The recovery has been hobbled by Brexit, which the OBR believes will cause more long-term damage to the economy than the pandemic.