UK plc is being held back by lack of business investment

A lack of funding will act as a drag on long-term growth – Jeremy Hunt should look at a tweaked version of a policy pushed by his predecessor, writes James Moore

EasyJet and Rolls-Royce have powered a concept aircraft engine with hydrogen. Britain badly needs this sort of investment (Rolls-Royce/PA)

Mercifully, it looks as if the recession we are facing is going to be a lot shorter than was originally feared. The Bank of England has said as much. The widely followed EY Item Club of economic forecasters is of a similar view. Its latest update is out today.

The Club now thinks that the current downturn will be neither as long nor as damaging for the economy as were the nasties that hit UK plc in the 1980s, 1990s, and 2000s.

There are also reasons to be cheerful about inflation. While it is expected to be high by historic standards throughout this year, the Club thinks we’re past October’s 11.1 per cent peak. It has the Consumer Prices Index falling to just under 4 per cent by the end of this year.

It isn’t all good news. But you knew that was coming. Average earnings are expected to trail rising prices for the remainder of 2023. The downturn is also forecast to be deeper than previously feared.

The impact of tighter fiscal policy and a deeper recession, particularly on business investment, means the Club’s growth forecast for 2024 has also been downgraded.

Business investment will be something of a talking point as we start the week.

CBI director general Tony Danker will also address it when he makes what is billed to be “a major speech” at University College London. In it he will declare: “Growth still matters.”

Well, duh. But this is Danker being cute. There are politics at play here. The CBI boss will surely be aware that restive Tory MPs have also been calling for growth, and that their clamour has increased in volume of late. Ditto the Tory press.

Not all of the ideas espoused by the latter pair are good. Some of them are positively Trussian. The Tory party, along with Britain’s right wing generally, doesn’t seem to have learnt much from Rishi Sunak’s disastrous predecessor, or even recognised the damage she did to the economy.

Danker’s pitch has more to recommend it.

“Our international competitors in Europe, Asia and the US are going hell for leather on green growth and getting firms investing. We are behind them now, and seem to be hoping for the best,” he will say.

He has a point there.

His members are clearly restive. Corporation tax is set to be hiked by six points in April, which is a big number.

On the other hand, it should be recognised that the state has done an awful lot for British business over the past few years, with generous support made available during the pandemic followed by subsidies to take the sting off the energy price shock.

Some payback was thus due. There is also little evidence that the Tories cutting corporation tax did much to stimulate investment, which was the stated intent, when it was on a downward path.

However, Danker is right to highlight the lack of anything resembling an alternative plan or strategy.

Sunak had a crack at that when he was in No 11. Thanks to him, businesses currently receive a generous tax break for investment. The so-called “super deduction” cut the tax bills of businesses engaging in capital spending for investment purposes by a significant amount.

According to a CBI survey, 22 per cent of investment qualifying for the tax break would not have taken place in the UK without it.

Another 19 per cent of investment qualifying for the deduction was brought forward to take advantage of it at a time when that investment was badly needed.

A survey of its members by the Institute of Directors found that 13 per cent had made investments they wouldn’t otherwise have made, which is a smaller number than the CBI’s but still notable.

The downside of the policy was that it was quite expensive. But the net cost is lower if you take into account that investment typically yields a payoff, in this case for both the taxpayer and the economy. It is something we could do with more of.

Sunak had promised a replacement while he was chancellor. But since then a lot of water has flowed under the bridge, and he now has a new office next door to his old one. What plans had been formulated appear to have been lost in the long grass of Whitehall. Perhaps his successor Jeremy Hunt might care to send out a search party?

“Announcing a permanent successor at the spring statement could increase annual capital investment by 17 per cent by 2026, worth £40bn a year,” the CBI argues.

Of course, you’d expect the CBI to say that. But that doesn’t mean it is wrong.

The British economy needs investment to stimulate growth.

It doesn’t need Liz Truss’s reckless, unfunded tax cuts. It never did. But some of Sunak’s tax breaks, carefully targeted at businesses with a view to getting the motor running? If accompanied by careful monitoring, that would be worth trying.