- The Chancellor should make full expensing permanent at the forthcoming Autumn Statement. Doing so would raise long-run investment, and increase real wages and economic growth
- Permanent full expensing is a vital step in counteracting Britain’s chronically low rate of capital investment, which was 20% lower than the OECD average in the decade before the pandemic
- Research by the CPS and the Tax Foundation has suggested that making the current version of full expensing permanent would boost the long-run capital stock by 1.5%, and deliver a 0.8% boost to wages and a 0.9% boost to GDP
- Temporary full expensing, by contrast, will tend to change the timing of investment rather than the overall amount, with firms bringing plans forward to gain from favourable tax treatment
- The long-run costs of permanent full expensing are relatively low at around £1.4 billion per annum, and would be substantially offset by the economic benefits, or even outweighed altogether
The Chancellor should use the forthcoming Autumn Statement to make full expensing a permanent feature of the tax system, to signal that Britain is serious about investment and economic growth.
‘Permanent Full Expensing‘, by CPS Research Director and Head of Tax Tom Clougherty and Deputy Research Director Karl Williams, argues that the measure – introduced in the Spring Budget – has been relatively successful, but needs to be made permanent to realise the full benefits.
Britain has enjoyed the fastest growth in business investment in the G7 since the super-deduction was introduced. But the authors argue that this is likely due to a shift in the timing of investment rather than an overall increase. By contrast, research by the CPS and the US-based Tax Foundation earlier this year suggested that making the current version of full expensing permanent would boost the long-run capital stock by 1.5%, and deliver a 0.8% boost to wages and a 0.9% boost to GDP.
Failure to make full expensing permanent would push the UK further down the Tax Foundation’s International Tax Competitiveness Index, where we already rank 30th of 38 OECD countries and 28th in terms of the attractiveness of our corporate tax regime.
The Office for Budget Responsibility has expressed concern at the predicted cost of making the measure permanent, but the briefing argues – as have other experts such as the Institute for Fiscal Studies – that this is the result of short-term thinking. Over the longer term, CPS/Tax Foundation modelling found that the cost of full expensing would fall to around £1.4bn per year, even on a static analysis, i.e. without taking account of the potential growth generated by the policy. Other versions of full expensing, using more generous definitions than the Treasury’s, would have even more significant economic effects.
Karl Williams, CPS Deputy Research Director and co-author of the briefing, said:
‘Introducing temporary full expensing back in March was a positive sign but it was never going to be enough to deliver the investment the UK needs to grow. That change did bring forward investment but mainly by shifting the timing, rather than the overall amount.
‘Previous research by the CPS and the Tax Foundation suggests that making the current version of full expensing permanent would boost the long-run capital stock by 1.5%, and deliver a 0.8% boost to wages and a 0.9% boost to GDP.
‘As such, making full expensing permanent should be at the top of Jeremy Hunt’s list for next week’s Autumn Statement.’
NOTES TO EDITORS
- ‘Permanent Full Expensing’ is available to download here.
- Tom Clougherty is the Centre for Policy Studies’ Research Director and Head of Tax, Karl Williams is the CPS Deputy Research Director.
- The CPS has written extensively on the case for full expensing, often in conjunction with the Tax Foundation. See our previous papers ‘Does Britain Mean Business?’, ‘After the Superdeduction’, ‘Boosting Growth as the UK Leaves the European Union’, and the Tax Foundation’s annual International Tax Competitiveness Index.
- Karl Williams is available for interview. For further information and media requests, please contact Emma Revell on 07931 698246 and [email protected] or Josh Coupland on 07912 485655 and [email protected]
- The Centre for Policy Studies is one of the oldest and most influential think tanks in Westminster. With a focus on taxation, economic growth, business, welfare, education, housing and green growth, its goal is to develop policies that widen enterprise, ownership and opportunity.
Date Added: Thursday 16th November 2023