Business investment

The Left Foot Forward blog have made quite a big deal about a need to encourage business investment.  They have a reasonable point that falling investment is a key component of falling demand and a recovery will be vital to our broader economic fortunes.


Greg Mankiw, the world's 20th most influential economist, explains why he thinks investment is low:


"Why is business investment so weak?  Part of the reason is that the downturn is severe and investment responds to the overall economy.  Part of the reason is that the credit crunch makes financing more difficult.  Part of the reason is that the policy environment seems adverse to business.  I am referring here to a group of policies that include higher minimum wages, the seeming retreat from free trade, proposed mandates to provide employees health insurance, higher prospective energy costs from climate change regulation, and the likelihood of higher future tax rates resulting from the huge fiscal imbalance we are now experiencing.  All of these factors have worked in concert to depress business investment."


In other words, part of the fall is a cyclical decline with the downturn and the after effects of the credit crunch.  But, there is a also the simple fact that, on both sides of the Atlantic, the policy environment seems increasingly hostile to business.  Just in the Pre-Budget Report, we had the following:

    • Another increase in employees and employer's National Insurance rates, which will make it more expensive for firms to employ people.

    • A 75 per cent increase in the Climate Change Levy for energy-intensive industries.  Which will make it harder for them to compete with industrialising countries where there aren't any such levies.  This is just a small part of the massive and rising burden of climate change policies that we have reported on today.

    • A tax on bank bonuses which, whatever its political merits, sends the signal to firms in the vital financial services industry that they are targets for higher - at times punitive - taxation, particularly coming alongside the 50p rate.

On the other hand, we also had a corporation tax cut on patent earnings, which does appear to have encouraged new investment.  If Left Foot Forward want to encourage investment they should be trying to encourage more investment-friendly cuts in the burden of government on business and attacking measures that will put investors off.  That will mean that they need to support major cuts in spending, so that we can credibly convince investors that if they put their money in Britain the returns won't be taxed or inflated away.
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