Investment down 21.8% ¬´ Duncan’s Economic Blog.
A timely reminder on the state of investment in the UK comes from the ONS this morning.
"Business investment for the second quarter of 2009 is estimated to be 10.2 per cent lower than the previous quarter and 21.8 per cent lower than the same period last year."
I continue to be amazed that collapse in investment is not being debated whilst the size of the deficit is. The real threat to Britain’s economic future is a lack of investment, not increased public debt.
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“Investment” is an interesting concept. When one purchases shares, nothing has been added to productive capacity. It is just a transfer of ownership. Similarly when one purchases land. It is just payment of a release fee. Building infrastructure, factories, machines, etc is real investment. I hope the figures just refer to genuine physical capital which has been added to.
Now it is interesting that the tax system penalises those who genuinely invest, since that is the way the business rate operates.
Time for reform?
The rate of writing down allowances on the general pool was cut from 1 Apr 2008 from 25% to 20%, so it is hardly surprising if after a company budget cycle i.e. in the company year two years later, we see a big drop in capital investment.
To simplify. One way that corporations obtain investment funds is through selling shares. It is the original sale of the share that the corporation gets it’s money.
While the stock market is mostly a means of transfer of ownership, which can also been seen as a transfer of the investment, you need to also note that it is also a way for the original/current owner to ‘cash in’ on his investment.
Without the market, corporations would need to redeem these shares when the owner wants his investment back, costing them the use of some of their funds which would have to be placed in reserve for this purpose, and costing owners in terms of a price dictated by the corporation (and not the market).
The stock market also enables investors to gain access to the money their investment has generated and as a result generates tax revenue for Governments in terms of capital gains taxes. And as far as taxes go, some Governments, such as the US, recognize long-term investments over short-term, with lower capital gains rates.
Also keep in mind, that corporations also have the ability to sell as-yet un-issued shares into the market if they need additional capital as well as purchase shares back if they think the share price does not reflect the real value of the corporation.