Carrot for the UK cake

Will Chancellor Gordon Brown take the lead from the US and Italy and introduce tax incentive programmes to help our ailing industries?

Wake up Gordon Brown. That noise you can hear is the sound of hope marching through the weary ranks of UK industry. The battle to get you to take manufacturing seriously is not over – the cavalry has just arrived.

In the US, a small but powerful group of congressmen has introduced legislation to allow US companies to treat all capital investment in high-tech equipment as an expense against revenue for tax purposes – the equivalent of 100% first-year capital allowances on all ‘productive assets’. The bill has strong bi-partisan support and stands a fair chance of becoming the centrepiece of the Bush administration’s next big tax reform.

In a separate move, Silvio Berlusconi’s new Italian government is introducing a law to give its firms handsome tax reductions if they re-invest their profits in new machinery and equipment, and in R&D.

Underlying both is the recognition that productivity is the single biggest factor driving economic expansion – the key to continued non-inflationary growth. And they argue that a fundamental way of increasing productivity is to get the latest high-tech equipment into the hands of their workers and businesses as soon as possible.

But there is some good news for the beleaguered UK industry. Instead of lecturing the manufacturing sector, the chancellor has asked the TUC and the CBI what can be done to improve UK productivity. There are now four joint CBI/TUC workingparties looking at investment, skills, innovation and best practice. They are due to report in time for the chancellor’spre-budget statement in November, and the pressure on the government to use capital allowances to stimulate investment will be intense.

Martin O’Neill, chairman of the Commons Trade & Industry select committee, believes there’s a good case for looking again at capital allowances. O’Neill is also a consultant to the Machine Tool Technologies Association, one of the bodies leading the UK push for increased capital allowances.

Good opportunity

‘Given the government’s commitment to increasing productivity and the DTI’s stated desire to clarify assistance to industry, this would be a very good opportunity to put the issue of capital allowances back on the agenda,’ he says. ‘And I imagine the MTTA and other industry organisations will be doing just that in their budget recommendations to the government.’

The US and Italian moves give a fresh spin to the argument for capital allowances, as Mathew Fell, adviser on competitiveness at the CBI, suggests. ‘If capital allowances are on offer elsewhere, then we should have a level playing field in the UK.’

Under the High Productivity Investment Bill introduced in the US Congress on 11 July by Phil English (Republican) and Richard Neal (Democrat), a broad range of ‘smart’ machinery such as machine tools can be written off in year one. This also applies to computers and software, telecoms and medical equipment. The bill also allows all other non-high-tech equipment essential to productivity to be written off in a shorter time.

The bill has wide support, ranging from the US machine tool, semiconductor, chemical and printing industries to leading corporations such as Corning, DaimlerChrysler and General Motors. A study to support the bill argues that traditional measures of productivity do not reveal the full extent of the economic benefits contributed by machine tools and related advanced manufacturing techniques. They do not take into account their benefits to manufacturers, for example, who can make higher-quality products faster and at lower cost, to consumers who pay less for products that perform better and last longer or to workers who acquire new skills and earn higher real wages.

As a result, argue the bill’s supporters, businesses want to invest in the most productive machinery and equipment, but taxes often stop them. When tax depreciation rates are low, machinery costs are effectively increased. But when businesses are allowed to deduct the cost of machinery more quickly, the cost is in effect reduced, and so more businesses will be able to buy more new machinery more quickly.

Jim Mack, head of government relations at the US machine tool industry trade body, AMT, says that in the last Congress there were probably 100 or so bills introduced that sought to reduce the tax depreciable life for a wide range ofdifferent equipment in different industries. Most failed.

The High Productivity Investment legislation is an attempt to consolidate all these efforts, says Mack. ‘The only rational way of writing off productive equipment is to treat it all as an expense against revenue. It is fruitless to assume there is some technologically-correct tax depreciable life for a particular piece of equipment. Unless you intend to extract a tax penalty for making investments in productive machinery, the only correct way to depreciate equipment is by expensing.’

Average out investment

In Italy, economy minister Giulio Tremonti introduced the Tremonti Law in 1994 during Silvio Berlusconi’s first, short-lived government. That granted tax relief to Italian industryfor reinvesting profits in new machinery and equipment.

Now he is to introduce a ‘new, improved Tremonti Law’. It will be broader, covering banks, insurance companies and the self-employed, as well as R&D expenditure.

Under the new law, companies will average out their annual investment over the past five years and receive tax relief on 50% of profits reinvested over and above that level. Tremonti also wants to slash overall corporate tax rates from 50% to 33%. The argument behind the law is that it will boost growth by encouraging higher levels of investment.

Tony Sweeten, chief executive of The 600 Group and president of the MTTA, says the US action ‘shows we are not alone in believing that capital allowances can be a spur to productivity growth’. And if the bill is passed, he believes it will help support the flagging US machine tool market and help UK exports. The US is the UK’s largest single export market for machine tools, which last year was worth £87.8m.

UK must act swiftly

But he adds: ‘We are aware that Italy is re-introducing capital expenditure support. And if the US bill proceeds, the UK needs to act swiftly to avoid being left behind. We will keep the pressure on government.’

The EEF also argues that capital allowances are an effective way to boost manufacturing investment, provided they are introduced on a permanent basis. Countering the Treasury’s charge that they are a waste of money, the EFF says: ‘Analysis of their effectiveness has been distorted in that they have been generally introduced as a temporary measure during economic downturns. They distort thetiming of investment spending.’

Malcolm Taylor, managing director of Bridgeport Machines’ European operations in Leicester, and a member of the CBI’s Manufacturing Council, is looking at ways to boost productivity. He believes that unless something is done soon the gap will widen between those companies that can afford to invest in higher productivity equipment and those that can’t.

He says his customers are buying Bridgeport machine tools to improve their manufacturing processes, rather than to provide metal-cutting capacity. ‘If they can’t do that, they don’t get the business. The only way to improve productivity is to invest.’

But as global manufacturing processes evolve, so the level of investment needed increases, he says. ‘My fear is that unless the government acts, many small firms are not going to be able to afford to invest to stay in the game.’