In the Spring Statement 2022, Chancellor of the Exchequer Rishi Sunak put forward a tax plan for reforming the rules on capital allowances — these are the laws that govern which investments are deductible from a business’s taxable profits and at what rate. Amid the confusion and controversy of the National Insurance contributions hike, Sunak laid out plans to reduce the tax burden for corporations by making changes to capital allowances rates, which will largely counteract the increase in the corporate tax rate going into effect in 2023. The proposed changes are part of an ongoing effort to encourage investment and the adoption of new technologies aimed at improving the UK’s lagging productivity.
Reforms are also planned for research and development credits, designed to reward companies for investing in innovation and to cover cloud-computing costs, with relief being permitted for overseas R&D. This will no doubt prove serendipitous for Sunak’s father-in-law — the billionaire founder of multinational IT company Infosys. It is unclear how much allowances for software and cloud computing will contribute toward improved productivity. As economist Robert Solow quipped in 1987, “The computer age was everywhere except for the productivity statistics.”
Similar attempts to boost investment were brought in under the chancellorship of George Osborne, but with little effect. Despite the tax-cutting policies implemented since the Conservatives first came to power over a decade ago, investment in machinery and equipment by the manufacturing and energy sectors remains well below the 2008 level. It is unlikely that Sunak’s reliefs for business investment will yield different results. To understand why these policies fail to stimulate investment in productive capital, it is important to consider the historical relationship between the adoption of technology and the regulation of labor markets.