There are rumours that the government is planning tax cuts in the Autumn Statement, with the most commonly suggested (bar some token gestures aimed at the 'just managing') being a corporation tax cut, probably delivered through increased capital allowances provided to companies investing in the UK economy. These allowances, in effect, provide an up-front subsidy to companies buying capital equipment compared to the appropriate accounting treatment for that spend.
Given the government's philosophy, stated by Therea May at the Lord Mayor's Banquet last week, that it is competitive business that will revive the UK, this makes political sense to he party. Unfortunately it makes no economic sense.
The simple fact is that, unlike governments (who can take social factors into account and who have no effective cost of capital when there is less than full employment), businesses only invest when they can predict a rate of return on the investment made that exceeds the cost of the capital used to fund it. This rate of return essentially depends on three things. The first is the likelihood of demand for the product the investment will help deliver. The second is the prevailing cost of capital (or the expected interest rate). The third is the uncertainty in these estimates. The more uncertainty there is, the greater the rate of return that is required to emcourage investment. You can dress these variables up however you like: this is how it actually works.
And right now there are some massive uncertainties in economic life. Starting with the easy ones, Brexit, Trump and the far right (that has a loathing of unconventional monetary policy) create the likelihood of significant (in current terms) interest rate increases. That means that required rates of return used in investment forecasting will be increasing, significantly. Add in inflation uncertainty (which is related to real interest rate forecasting) and the risks have increased enormously. The result is that business will now demand much higher margins for safety: there is no other alternative course of action. And what that means is that right now, all other things being equal, the incentive to invest has fallen considerably.
But it's also not true that all other things are equal. The fact is that we face a world where a great many people have very little money. And they face likely increases in demand on their cash. Millions of people in the UK will see their benefits cut next year. There's also a good chance mortgage interest rates will rise. In addition we have no idea what Brexit uncertainty will mean for unemployment, and as importantly, the risk of unemployment. That risk has a big bearing on the savings rate: if you think you might face a rainy day you save for it, unless you're one of the people in the economy who already has so much they can already save, which means they do nothing for additional demand anyway. To summarise, consumer growth is going to be unreliable. Not impossible, but unreliable. That is also a significant disincentive to investment.
And then there is the biggest problem of all. Most investment is about innovation. It's about doing things better, or it's about making new things or its to meet new demands. In the UK meeting new demand has been about population growth. Brexit challenges that: it's pretty unlikely to be something most businesses will be relying on. In that case we're down to doing things better or making new things. And, right now I see remarkably little sign that there's a lot of innovation in the world. I've said it before, I know, but even a hint that the technological breakthrough that changes the way we work, play and share our world might exist seems remarkably absent from any news I see or hear. Bluntly, business seems incredibly bereft of ideas right now. It is why, as I argued in The Courageous State, they have spent so much time trying to capture the income streams of the state through privatisation, academisation, PFI, and so much more instead: the pickings have been easier for a generation of managers with little understanding of what real innovation, let alone entrepreneurial risk, means.
In other words, you can give more capital allowances if you want and take a political risk in doing so since these will only benefit large companies (small ones already enjoy generous reliefs, and rightly so in my opinion). But the reality is that the chance that this will deliver any significant new economic activity in the UK is very low indeed. This policy will instead give more tax reliefs to those who don't need them: big business is already sitting on enormous cash piles it has no idea what to do with. So we gain nothing but increased inequality as a result.
Direct interaction with business would work.
A targeted industrial policy to directly encourage the green technology businesses we need will be incredibly beneficial.
Spend more on university R&D and demand state stakes in the spin outs that happen to create value by all means: that would be money well spent.
But subsidising big business via capital allowances? That's like throwing money at a problem and hoping not all of it will be wasted when you already know most of it will be.
And that's likely to be the basis of the government's industrial policy, indicating they're as bereft of ideas as the businesses they will claim to be helping.
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We have seen a reduction in corporation tax since 2010. It should have boosted investment. When I checked i found:
the TUC figures on how the UK compares
https://www.tuc.org.uk/sites/default/files/TUC%20media%20briefing%20on%20UK%20investment%20gap.pdf
Precisely
So basically, the fairly typical policy solution that emerges out of Tory think tanks. Do something that incentivises/benefits the private sector and claim it is boosting investment when actually it ends up delivering nothing. (I’m thinking about housebuilding policies here.).
Also, the guardian says he will be doing something for just managing families. I’m hoping for a cut in employee NIC payments personally, if only because it is better than another cut in tax free allowance, and I can’t really see what else he might actually do.
businesses only invest when they can predict a rate of return on the investment made that exceeds the cost of the capital used to fund it.
That’s not entirely true.
If there are particular legislative requirements, businesses will in certain circumstances invest to fulfil compliance with them. An obvious one might be technical controls to meet the requirements of PCI-DSS or the upcoming GDPR; equally the desire not to be the next TalkTalk (after the debacle of how they handled the security breach last year) might drive some investment. But these are admittedly edge cases.
I am not sure I call that investment then
I call it legal compliance
Certain commercial radio stations (which pretend to promote a national ‘conversation’) are swamped with ads almost pleading with business owners to consider exporting (noticeable since 2010). And the thought strikes me that I’m sure such owners are well capable of addressing this without the need for direct appeals and therefore such ads are a symptom of an increasingly desperate government with an ideology in grave danger of being wholly discredited.
It’s odd how the guiding hand has to be so directed,isn’t it?
Richard’s observations about uncertainty and the rate of return are quite right, of course, but the crucial point is that which relates to demand.
Neoliberal governments and central banks persist in fighting the wrong war and flogging the dead horse of supply-side economics. They keep trying to promote investment when the inequality of income and wealth has ensured that the market for these investments is hopelessly diminished.
The opportunities that remain are mostly in rent-seeking rather than production, in redistribution through the capture of existing wealth. To the extent that casino capitalism increases inequality it further compounds the futility.
Assuming that the powers that be are to some extent aware of this (the IMF have been lecturing them about inequality and demand) one can only wonder about their purpose.
For my part I can think of two answers. One is the respectable version of cronyism and corruption (serving the lobbyists and vested interests regardless of macro outcomes). Beyond that there is the race to the bottom. In this case, post-Brexit, that means increasing the subsidies that are offered to big business so that they will be that much better when with compared the ones that are available in Europe and elsewhere.
So much for Theresa May’s kinder, fairer capitalism.
Speaking for the public sector work force I belong to, if they gave us a proper wage rise for once that would be more useful to the real economy than lining the already heavy pockets of big business.
The reasons for not giving that rise are purely ideological.
“And, right now I see remarkably little sign that there’s a lot of innovation in the world.”
Perhaps not in Europe, but there seems to be quite a lot of innovation in the world as a whole.
That, if true, says a great deal about why globalisation has failed
“And, right now I see remarkably little sign that there’s a lot of innovation in the world. ”
You are kidding? No. The world technology sector is massive, not just in electronics and software, but also in biological sciences, pharmaceuticals and a whole host of other industries. Maybe as an accountant you don’t see it or recognise it, but the rest of us do.
I am very far from being alone
I know there is some innovation, but life changing? I am not sure. And if it is it may be negative
So Alex,
“you don’t see it or recognise it, but the rest of us do”
Speak for yourself. An industry dedicated to superfluous upgrades,unwanted automation, premature extinction and making sure that society serves it (not the other way around).
It maybe new ‘technology’ but for many of us “innovation” usually refers to some form of improvement.
35 years ago I considered giving up studying for a degree in Computer Science at this country’s top university because e were expected to do a major software project with a mealy allowance of 30 seconds of CPU time per week on the $4 million university mainframe. Now I can buy a £4 computer that runs 1,000 as fast and has 250 times as much core memory.
Show me any other humasn activity that has shown a billion times price/performance improvement over the same period. That is innovation even if you don’t want to recognise it.
I did not say there had not been innovation
I said I could not see where equivalent innovation was coming from
In my view Alex I think that we had better slow down innovation anyway as it seems to be putting a lot of us out of work!
Now – if we human beings were REALLY clever – we’d realise this and be prepared to pay a certain and increasing number of us who are not working a citizen’s income to contribute to the consumption of such innovation instead of decrying such people as a burden on society.
Until that thorny problem is dealt with, I’d be quite happy to see a reduction in innovation believe you me!!
Also, do you not think that much innovation is misdirected? Others here point to silly ‘upgrades’ etc., but who in their right mind wants a car that drives itself? I’d prefer a car that cleans itself to be honest but only because my declining wages means that a trip to the car wash or car hand wash is just eating into the fewer pounds I’ve had in my pocket since 2010 thanks to the Tories.
Why do we get innovation that creates indolence when we could do with more effort dealing with cancer (linked to modern production impacts on the environment), or making old age more comfortable for example?
And the biggest innovation would be a fiscal one – this government (and others) putting their hands in their pockets and investing in their countries on behalf of the voters who bloody well put them there in the first place. Now how’s that for innovation!