The UK government prepared its 2023 Spring Budget with one main objective: to turn the page on 2022’s disastrous Autumn Budget that led to the resignation of then prime minister Liz Truss, without losing sight of strategic objectives such as stimulating capital investment. So in the Spring Budget, the corporation tax rate was raised to 25%, accompanied by the introduction of a ‘full-expensing’ capital allowance that allows businesses to deduct 100% of their capital investment in equipment and machinery from their tax bill.
The measure, whose overall value is estimated at £9bn per year, runs for three years until 2026 and replaces a similar super-deduction that expires this year. Investment minister Lord Dominic Johnson tells fDi why the move “prompts companies to invest now”, but also shares his worries that the dash for subsidies triggered by policies such as the US Inflation Reduction Act “will create distortions in the market”.
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Q: Why has the government decided to renew the existing incentives for capital investment?
A: The capital allowance included in the Budget is a very important measure to spur investment. We have had an issue with soft domestic investment — companies investing in their own plant and machinery and expansion — since 2014. This measure is a good one because, given its temporary nature, it prompts companies to make their investment now.
The government cannot run companies’ businesses and create private-sector wealth. What it can do, though, is create the environment and the momentum to boost confidence, which then creates further momentum on the back of that, because positive economies are a self-fulfilling prophecy.
This measure [the UK's new investment allowance] is a good one because, given its temporary nature, it prompts companies to make their investment now.
Q: But temporary measures will hardly boost capital investment in the long term.
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A: Having a time-limit element is quite powerful because it incentivises companies to make their decisions now rather than delay them.
In terms of permanent tax changes, two of our main priorities are to keep the debt level down over the long term and to reduce inflation. Investors can’t take sensible long-term investment decisions if they can’t control the cost of capital because of a high-inflation environment. The most important thing is to get inflation down, which reduces interest rates and the cost of capital, and gives companies predictability and stability.
Q: The Autumn Budget by then chancellor of the exchequer Kwasi Kwarteng has generated the opposite result, as it increased the cost of capital in the UK. What went wrong there?
A: If you are too radical with taxation policy — or you don’t properly cost out fiscal policies — then you are going to lose the confidence of the markets.
If the economy grows as we hope it will, and if this temporary measure spurs the investment that we hope it will, that will give us more options to reduce the level of taxation.
This is a low-tax government. We all passionately believe that the more we can allow businesses to retain their profits — the more individuals can retain their earnings — the better. But we have to make sure that is balanced against sensible fiscal strategy that keeps inflation down over the cost of capital.
Q: Capital investment in certain strategic sectors, such as automotive, has been weakening. What is the government doing to shore it up?
A: We have invested very heavily in the auto sector. It’s essential that we transition our auto sector from internal combustion engines to the vehicles of the future — be it sustainable fuel vehicles or, of course, electric vehicles (EV).
If I look at the last big investments in the UK, most of them have had support from government initiatives in one way or another. We are absolutely determined to be a centre for EV production. I would push back against criticisms that we’re not doing enough because we’re doing a huge amount — it’s a competitive landscape.
The US and Europe are announcing their own measures. Going through the US Inflation Reduction Act, half of me thinks that it’s great that they’re investing, playing catch-up, because they haven’t really been investing in the green technology revolution. But half of me also believes that, frankly, these incentives are not very effective in reducing inflation, which goes back to my point about what the government is trying to do here.
There’s also a high degree of protectionism, which again, this government isn’t a proponent of. We believe in liberalising our markets and creating more free trade around the world, which we think will make us better off. That is easily more powerful than simply having grant funding for EV manufacturing.
Q: Private companies have become more vocal in demanding support from European governments to keep up with the kind of incentives offered overseas. Is there a risk that private investment will get misallocated in this market environment?
A: The government has a very powerful role to play in incentivising markets, particularly new technology, and the £2.5bn investment in quantum technology we announced in the Spring Budget is a good example of that. Similarly, the investment we’ve made in the Automotive Transformation Fund — which will invest up to £850m in the development of a British EV industry — is also very important.
Taking the automotive industry into the future, into a new technology, is not straightforward. It means ending production lines, building new facilities and helping these companies transition. And that’s the role that the government plays when it comes to facilitating capitalism.
But when I think of policies like the Inflation Reduction Act, half of it is good as they’re investing in their clean growth technology, which will benefit the world. But, I don’t think they are the sort of policies that we want to pursue, because it does create disincentives and capital needs to be allocated where it will generate the highest rate of return. That's what drives our products or services, and our journey from the swamp to the stars.
At the same time, it’s a balance, because if you look at how the semiconductor industries were created around the world, government support was incredibly valuable. If you look at our clean energy revolution in the UK, government support in terms of guaranteeing a relatively high offtake price was essential.
But I worry that this dash for subsidies will create distortions in the market, which I don’t think are particularly healthy. And we’re trying to get the balance right in the UK. I think in the long term we will benefit from it, even though clearly there’s a lot of noise around that at the moment, and we have to compete even harder to attract companies to invest in the UK.
I worry that this dash for subsidies will create distortions in the market.
Q: You have spent most of your professional career in finance and asset management. What’s your take on the growing number of UK companies ditching the London Stock Exchange to list in the US?
A: For some companies, listing in a specific jurisdiction is right for them and their customer base, it’s where they want to build their brands. So I’m sympathetic to how companies make their decisions, but I would push back slightly on the headlines that suggest that London is no longer the international listing capital of the world. Only in 2021, we had a record year for listings in the UK, when we had the highest number of initial public offerings since 2014 and highest level of capital raised since 2007.
As someone who spent his whole life running investment management businesses in the UK and around the world, the UK market remains the capital for investment management. The skill sets for international investment management are in the UK. Obviously the US market is much bigger and more appropriate for some companies, but my plan for the future is to use the trading relationships that we’re building, for example with a country like India, to become the capital funnel into those economies; and the same for the Gulf states.
The future for us is making sure that our listing environment is powerful in terms of future technologies — that’s green technology, net-zero technologies, life sciences, research and development, and so on.
But if I can make us the next destination, either for secondary listings or for being the prime portal for international investment into these new growing economies such as India, then that will be a real triumph. And we are going a long way down that line. So I’m quite positive about the future of London as a listing capital.
This article first appeared in the April/May 2023 print edition of fDi Intelligence.