Permanent Full Expensing

  • 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.