Annual Investment Allowance increase would double business investment

Increasing the Annual Investment Allowance from its current rate of £1m to £5m would more than double projected business investment growth, according to new analysis.

Budget Annual Investment Allowance Finance Money Cash Growth - image courtesy of Depositphotos.
Raising the AIA to £5m indefinitely would set the UK on a significantly higher growth trajectory – image courtesy of Depositphotos.

In its Autumn Budget, the government announced it would temporarily raise the Annual Investment Allowance (AIA) – a policy designed to encourage business investment in plant and machinery – from £200,000 to £1m until the start of 2021.

Although this was widely welcomed, the UK economy is set to miss out on important productivity gains if the policy does not go further to incentivise businesses to invest.

Under Chancellor Phillip Hammond’s existing policy, business investment is expected to be boosted by 1.7% over the next five years.

However, raising the AIA  to £5m indefinitely would see business investment increase by up to 4.1% – setting the UK on a significantly higher growth trajectory,  according to research conducted by Cebr on behalf of accountancy and business advisory firm BDO LLP.

Hammond’s policy will also see labour productivity rise 0.3% by the end of 2023, the findings showed. If the AIA was raised to £5m, this figure would increase almost five-fold to 1.4% during the same period.

This would generate an additional £27bn to the UK economy over the next five years if British employees worked the same 52.9 billion hours performed in 2016.

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Commenting on the research, Tom Lawton, head of manufacturing at BDO LLP, said: “With four-fifths of investment coming from businesses, it’s essential that the government fosters an environment which is conducive to this.”

Calling on the government to raise the Annual Investment Allowance to £5m indefinitely in a bid to boost the economy at a time of heightened uncertainty, Lawton continued: “Although an increase in the AIA will lead to a direct reduction in the total level of corporation tax receipts, there will be offsetting increases in other tax receipts from elsewhere in the economy.”

UK productivity growth

UK productivity growth has stagnated considerably since the 2008 financial crisis, falling behind that of its G7 counterparts.

GDP per hour worked in the UK increased by just 1.1% between 2008 and 2016 – compared with 8.5% in the US, 7.4% in Japan and 6.5% in Germany. This sits well behind Britain’s pre-financial crisis trend.

While the UK’s level of output per hour (USD 48.1) was above that of Italy (USD 47.7) and Japan (USD 41.5) in 2016, workers in the United States (USD 63.5), Germany (USD 60.0) and France (USD 59.1) are all significantly more productive than the UK for every hour they work.

If this sluggish rate of growth persists, the UK will continue to limp behind its G7 peers, BDO’s analysis concluded.