If the Chancellor had any doubt about the effect of capital allowances on industry, he needs look no further than Canary Wharf in London’s Docklands. Building is continuing at a frenzied pace, and the zone is reaching the critical mass required for it to effect a shift in the centre of gravity of London’s City institutions eastwards to Docklands.
As the announcement last week of the £2.6bn flotation of Canary Wharf showed, Enterprise Zone status and the 100% capital allowances that this entailed have allowed this development to succeed. Under Enterprise Zone rules, property developers could offset building costs against their tax bill. These tax breaks are still worth hundreds of millions of pounds, because initially many developments made losses so did not pay tax.
Not all would agree that this is a good use of public money. But capital allowances remain a powerful way for government to influence where and when private funds are invested. And the result at Canary Wharf, despite the early 1990s crisis which saw the project go into administration, now looks promising.
Given the right incentives, British manufacturers believe they could pull off a similar stunt, by investing in capital goods that will boost productivity and competitiveness for UK industry.
Many pre-Budget submissions from industry have called for 100% first-year capital allowances for small and medium-sized firms. If Gordon Brown can find the cash to implement this, it would be a bold and far-reaching step with a real chance of kick-starting an upward spiral of productivity improvements and better international competitiveness. An announcement on Tuesday would help UK firms to take a lion’s share of orders during the economic upturn rather than wait for the leftovers.