The UK economy could see an increase in business investment of £20 billion a year as Jeremy Hunt announces changes to business tax in Autumn Statement, as part of an aim to "[build] a stronger and more resilient economy".
Jeremy Hunt, the Chancellor of the Exchequer, has said he will cut taxes for business in his second Autumn Statement.
"Companies that invest in the UK will reduce their tax by up to 25p
for every £1 they spend on plant and machinery.”
“Due to the success of Full Expensing we are making it permanent,” said a statement from the Treasury on the change. “This means that companies that invest in the UK will reduce their tax by up to 25p for every £1 they spend on plant and machinery.”
Hunt, who became Chancellor last year after the ill-fated minibudget, announced a raft of new and refreshed policy designed around getting business to reinvest in the UK and raise wages all while balancing growth with keeping inflation under control.
On Tuesday, Hunt made a series of teaser announcements including, an expected offer of a one-year extension to 100% tax breaks for business investment and cut national insurance contributions.
Reductions in income tax were thought to be more likely in the spring when low-paid workers will also receive the near-10% increase in the minimum wage.
In March, Hunt delivered his first budget, which largely focused on domestic affairs: cheaper childcare for working parents, benefit reform, and capping energy bills. However, several financial services elements were involved.
Business investment, particularly keeping UK businesses invested on-shore, was one of the big themes of the statement. This is something insurers have long asked for: more incentives to invest in the UK and hopes of more projects and less red tape.
"Investment is a key driver of productivity growth, but business investment
has been a long-standing weakness in the UK."
This issue was mentioned in Sir Howard Davies’s speech at Insurance Investor Live | Europe in September. Asked if there was a deeper, structural decline in UK capital markets at play, Davies expressed hesitation at the amount of overseas investment he saw. “The UK is increasingly relying on overseas investment for income and critical infrastructure,” he said.
Industry stakeholders had hoped the flurry of Full Expensing would be part of this. Full Expensing was seen as key as “investment is a key driver of productivity growth, but business investment has been a long-standing weakness in the UK”. UK business investment accounted for 10% of GDP compared to the OECD average of 12.5% in 2021, said the announcement. "Since the introduction of the super deduction – the predecessor to full expensing – in 2021, investment in the UK has grown the fastest in the G7," said the Autumn Statement's official press release.
Hunt also offered updates and details on his Mansion House plan to encourage pension providers to ‘unlock’ funds. On pension changes the plan to drive innovation and unlock the first tranche of investment from his Mansion House Reforms has received £320 million.
In a press release, HM Treasury said this new investment vehicle was tailored to the “needs of pension schemes to support investment into the UK’s most promising high-growth companies”.
The money is the “latest step in delivering the Chancellor’s Mansion House Reforms unlocking £75 billion”, said the press release.
£250 million will be committed to two successful bidders under the Long-term Investment for Technology and Science (LIFTS) initiative, subject to contract. This will provide over a billion pounds of investment from pension funds and other sources into UK science and technology companies.
To complement private investment vehicles, a new Growth Fund will be established within the British Business Bank. The Growth Fund will draw on the BBB’s strong track record and a permanent capital base of over £7 billion to give pension schemes access to opportunities in the UK’s most promising businesses. “This has been welcomed by eight pension schemes [Aviva, L&G, M&G, Smart Pension, Aegon, Phoenix, AON and USS] and fund managers as a potentially valuable addition to the market,” it said.
On ESG and net zero issues, which have seen some controversy by the government in recent weeks, the government promised that the Climate Change Agreement Scheme will be extended. "Giving energy intensive businesses like steel, ceramics and breweries around £300 million of tax relief every year until 2033 to encourage investment in energy efficiency and support the Net Zero transition."
Hunt said that inflation is forecast to drop to 2.8% by the end of 2024, down from 4.6% recorded in October.
He also said it would drop to 2% (the Bank of England’s inflation target) in 2025. This a higher figure than what the Office of Budget Responsibility gave in March this year.
Hunt will give pay rises to lower-income workers, which could have some inflationary risks, and announced that a two percentage point cut to Employee National Insurance from 12% to 10% will come into effect from January 2024.
Yesterday, Swiss Re predicted inflation and interest rates in developed markets to stay higher in the next decade with global inflation forecast to moderate to 5.1% in 2024 and 3.4% in 2025.
Their report said that inflation was also “seen as largely won”; annualised inflation was down year-on-year at 4.6%, the lowest rate in two years, largely thanks to a fall in energy prices.
Financial services reaction was mixed with some saying it would do little to move the dial. “The fiscal headroom gained over the past six months (ironically through higher inflation), coupled with dire growth forecasts and internal Tory pressure stemming from the fall in polls, meant Sunak and Hunt had to act sooner rather than later,” said Neil Mehta, Portfolio Manager at RBC BlueBay Asset Management.
“However, we think this does little for the medium-term growth outlook and fiscal situation, which still looks very challenging. If polling doesn’t pick up in Q1 next year, we would expect further desperation from the government and unpredictable behaviour heading into the full budget in April. We continue to think the policy mix will become more convoluted and investors should be wary of holding UK assets such as the pound or gilts,” he added.
The Pensions Regulator (TPR) said it “welcomed measures to enhance the quality of the pensions industry [and] support innovation”.
"If the UK is to attract the capital needed to lead the global transition … we must
…address greenwashing risks and tackle … underlying investment barriers."
“We welcome these important policies which will help create a pensions landscape made up of fewer, larger, schemes which are well-governed and offer savers good value for money,” said Louise Davey, TPR’s Interim Director of Regulatory Policy, Analysis and Advice.
Others focused on the net zero aspects, and said the government was being too timid. "The size and scale of commitments made today fall short of a comprehensive response to the US Inflation Reduction Act, the EU’s Green Deal Industrial Plan, and similar initiatives in other jurisdictions," said James Alexander, CEO of UKSIF, in a LinkedIn post.
"If the UK is to attract the capital needed to lead the global transition to a more sustainable future, creating jobs and economic prosperity, we must build investor confidence, address greenwashing risks, and tackle more of the UK’s underlying investment barriers," said Alexander. "The Chancellor didn’t go far enough."
Hannah Gurga, Director General, ABI, said in her statement that the budget will help encourage new investment. "The insurance and long-term savings industry has committed to investing £100bn in green and good projects over the next ten years which will be tracked through our Investment Delivery Forum, following the introduction of Solvency UK."
"We also welcome the Chancellor’s commitment to ensuring any pension reforms secure the best outcomes for savers alongside the economic benefits," she said. "We’ll continue to work with our members and the government to discuss these important issues and how our sector can best support the ambitions for growth.”
