Increasing the Annual Investment Allowance (AIA) would more than double project business investment growth and provide a £27 billion boost to the UK economy, business advisory firm BDO has said.
AIA, which is designed to encourage businesses to invest in plant machinery, is currently set at £1 million, having been raised from £200,000 by Chancellor Phillip Hammond in his Autumn Budget.
Although the move was widely welcomed, BDO said the economy will miss out on important productivity gains if the policy does not go further to incentivise business to invest.
The advisory firm said investment would rise by up to 4.1% if AIA was increased to £5m indefinitely. Labour productivity is currently expected to rise 0.3% by the end of 2023, the research showed. But this would increase to 1.4% if AIA was raised to £5m, generating £27bn over the next five years.
The UK has suffered a productivity crisis since the financial crisis in 2008, lagging behind its G7 counterparts. GDP per hour in the UK grew by 1.1% between 2008 and 2016, compared with 8.5% in the US, 7.4% in Japan and 6.5% in Germany.
Tom Lawton, head of manufacturing at BDO LLP, said: "Investment is crucial to guaranteeing the UK's future prosperity, and is particularly significant given the country's ongoing productivity woes and the need to deal with Industry 4.0. With four-fifths of investment coming from businesses, it's essential that the government fosters an environment which is conducive to this. We would like to see a cohesive and sensible Industrial Policy, which would include an increased Annual Investment Allowance to support the opportunities and challenges that lie ahead.
"By raising the AIA in the 2018 Budget, the Chancellor took a meaningful step to promote business investment and productivity. However, the rise to £1 million for the next two years doesn't go far enough."
He added: "Although an increase in the AIA will lead to a direct reduction in the total level of corporation tax receipts, there will be offsetting increases in other tax receipts from elsewhere in the economy. Higher productivity would feed through into the earnings of those in employment, stimulating higher receipts from income tax, VAT (as a result of higher consumption), and stamp duty via indirect effects in the housing market."
