View from City Road: Forget capital allowances

The Confederation of British Industry and other business organisations that put their names to an open letter to Kenneth Clarke are right to say that without permanently higher levels of investment, Britain faces the prospect of further boom-to- bust cycles of the type that have blighted our industrial performance for 50 years or more. It is odd, however, to see the CBI attaching its name to the list of tried and failed policies suggested to correct the position.

In particular, business leaders would apparently like to see the Chancellor reintroduce full first-year capital allowances for at least the first pounds 200,000 of spending on plant and machinery. Such measures have always had a superficial vote-catching appeal to them.

And why not? If it helps to pump prime investment which otherwise would not have happened, what is wrong with that? Any immediate loss to the Revenue is eventually made up as the capital spending starts to generate solid tax-earning payback.

What short memories the CBI and the others must have. All the evidence suggests that capital allowances, far from being the force for good they appear to be, are often harmful.

Nigel Lawson spent his first couple of Budgets dismantling a capital allowance system which in practice had brought few if any benefits to the economy. There was a tendency either to use them as a straight tax dodge or for the purpose of uneconomic investment that no rational businessman could ever have contemplated. Much of the investment so generated fell by the wayside.

As Lloyds Bank points out in its latest economic bulletin, one of the encouraging features of the present recovery is that, having been driven initially by a rise in consumer spending, the impetus is now shifting towards a more investment-led recovery than was the case in the early 1980s. Lloyds believes the climate for investment growth is more favourable now than for years and predicts that gross fixed investment in 1995 will be at its highest since 1988-89.

The reasons are many and varied. Industrial and commercial companies are reporting record levels of financial surplus. Lemming-like as ever, banks are falling over themselves to lend, often on terms that seem suicidal. And outside traditional lending there are now a legion of other ways to finance spending.

But, perhaps most important, businessmen may be starting to believe the rhetoric of Mr Clarke and Eddie George, Governor of the Bank of England. High and sustained levels of investment rarely have anything to do with capital allowances, or any other fiscal dickering. But they have everything to do with the possibility of achieving sustained growth in a low- inflation environment.

With long bond yields still at more than 9 per cent, the financial markets have plainly still to be convinced. And until they are, the prudent businessman will not find it easy to lower the return thresholds on his pet investment projects.

On the evidence so far, however, Mr Clarke does seem to be making some headway with the wider business community. If next month's Budget does dredge up some new system of capital allowances, the Government will risk a great deal of credibility for little or no return.