Investment and Economic Growth - Super-deduction drives surge in UK business investment

Here is an excellent read for Year 12 macroeconomics students. UK business investment is expected to rebound strongly in 2022.

In part this is due to the effects of a tax incentive lasting two years introduced by the UK government and Chancellor Rishi Sunak. The "super-deduction" tax incentive allows businesses to cut tax bills by 25p for every £1 invested in new plant and machinery.

For many businesses, if they have the internal funds such as retained profits available to finance an investment project, this is an opportunity to bring forward spending to upgrade their capital stock.

Higher business investment can then lead to an increase in the capital available per worker employed which in turn might be beneficial to lifting labour productivity and contributing to improved competitiveness and long run growth.

But as the article makes clear, UK business investment continues to lag behind capital spending in other leading countries. And it remains well below the trend level of investment spending that existed prior to the pandemic. Under-investment in new capital is one of the most significant supply-side problems holding back economic growth in the UK.

The tutor2u video below published in May 2021 looks at some of the factors that might explain the relatively low rate of capital investment in the UK economy and why investment matters for macroeconomic performance on both the demand and supply-side.