Investment decline continues but Conservatives would cut capital allowances

Left Foot Forward has previously argued that the fall in investment is the real driver of the recession, and the biggest threat to recovery.

Today’s Q3 Provisional Business Investment Release from the ONS underlines this point.  Business investment fell by 21.7 per cent year-on-year in the third quarter and is now a staggering 24.1 per cent below its Q2 2008 peak. The falls are wide spread as the chart below shows.

Construction (down 42.3 per cent) has been especially hard hit, while manufacturing investment is down 28.9 per cent and service sector investment has fallen 28.1 per cent.

Urgent measures are required to reverse the slide in investment. David Cameron, as part of his plans to fund a cut in corporation tax, is planning the exact opposite. He said yesterday that he would fund cuts in corporation tax “by scrapping complex reliefs and allowances.” In practice this would mean (p.8-9):

• Abolishing the £50,000 annual investment allowance
• Reducing general plant and machinery capital allowances to 12.5 per cent
• Reducing long life plant and machinery capital allowances to 6 per cent

These measures are likely to lead to an even worse climate for business investment and hence mean a slower recovery. A spokesperson for the EEF manufacturers’ organisation told Left Foot Forward:

“There are two issues here. How you address the lack of confidence in the economy and the long-term competitivenesss of the tax system. EEF are looking for the continuation of support including first year capital allowances to be extended for 12 months.

“In the long run, while headline rates of corporation tax are important in terms of international competition, from a manufacturing perspective the importance of capital allowances cannot be underestimated. We would not support moves to put UK manunfacturing and their investment plans at a disadvantage particularly at a time when we’re looking to rebalance the UK economy.”

1. Jason Prince says:

   November 24, 2009 at 11:06 am

   RT @leftfootfwd: Investment decline continues but Conservative capital allowances cuts would harm manufacturing http://bit.ly/4FjqiI
2. Roger says:

   November 24, 2009 at 11:18 am

   The key question is whether we are in what Richard Koo has described as ‘a balance sheet recession’ like that in Japan from 1990-2005.

   If we are companies main interest is not going to be investment but paying down their debts.

   Problem is that in a balance sheet recession govt cannot do very much more than damage control – Keynesian measures are not useless in that they prevent a much deeper collapse but they will not restore pre-recession growth rates until company balance sheets have been largely cleared of debt – and as in Japan this could take a decade or more.

   In that context fiddling with corporation tax and its allowances is going to make very little difference.
3. Nelson Pang says:

   November 24, 2009 at 4:18 pm

   Nelson Pang read, Investment decline continues but Conservatives would cut capital … http://bit.ly/8hwI2k
4. Vidal Consulting says:

   November 24, 2009 at 8:56 pm

   Investment decline continues but Conservatives would cut capital …: David Cameron, as part of his plans to fu.. http://bit.ly/8mbfL4
5. Osborne's policies are no April Fool | Left Foot Forward says:

   February 9, 2010 at 9:33 am

   [...] life plant and machinery capital allowances to 6 per cent. With business investment continuing to fall off a cliff, it is not surprising that the manufacturers’ lobby group, EEF, say: “the importance of [...]