What will the Budget do for Corporate Investment?

In the Budget the Chancellor tried to balance the competing objectives of stimulating investment in the short term, while signalling how some of the costs of the pandemic might be recovered in the longer term. Two key changes were: 

  • An increase in the main rate of corporation tax from 19% to 25% from April 2023; and
  • A “super-deduction” for new investment in plant and machinery for the next two years of 130% of its cost. 

Both of these will affect the incentive to invest over the next two years. The returns from all but very short-lived projects will now be taxed at a rate of 25%, creating a disincentive to invest now. But for two years that is more than offset for investment in plant and machinery by the temporary super-deduction. 

After the Budget, the Chancellor stated: “There was an idea that [corporation tax cuts] could help spur investment, and what we’ve seen over the past few years is that we haven’t seen a step change in the level of capital investment that our businesses are doing as a result of those corporation tax decreases.”1  The Budget reforms suggest that he believes that the allowances are more important for investment than the tax rate. But that is not generally true.

Two types of investment decision will be affected. First, multinationals must choose whether to invest in the UK or elsewhere. The impact of tax on this choice is measured by an effective average tax rate, (EATR). Second, businesses must choose how much to invest, given a location. In this case, the impact of tax is measured by an effective marginal tax rate, (EMTR), which is the proportionate increase in the pre-tax required rate of return on an investment due to tax.  

Both the EATR and the EMTR depend not only on the tax rate, but on how broadly the tax base is defined. Including state and local taxes on corporate profit, not only does the UK currently have the lowest statutory tax rate in the G7, it will still have the lowest statutory rate even from 2023. But apart from the temporary super-deduction, the UK has a very broad definition of the tax base. On reasonable calculations, it has the least generous treatment of plant and machinery investment. 

The table shows calculations for the EATR and the EMTR, defined below, for the G7. 


  EATR (%) EMTR (%)
Canada 9.5 9.6
France 9.3 8.3
Germany 10.7 11.4
Italy 10.0 10.3
Japan 11.0 11.9
USA 4.6 0.0
UK 2020 7.2 6.9
UK 2023 9.5 9.8
UK 2021 and 2022 4.2 0.4

Source: Own estimates2


These changes matter for investment. A consensus estimate from the academic literature is that a one percentage point rise in the EATR leads to a 2.5% reduction in inward flows of foreign direct investment. That suggests the reforms will induce a 5% reduction in FDI flows to the UK after 2023 – but a 7.5% rise in inward flows for the next two years, relative to the current system. On both measures, the UK’s combination of rate and base leaves it relatively attractive compared to the rest of the G7 - with the exception of the USA, which allows full expensing of investment and has a rate of 21%. From 2023 onwards, both the EATR and the EMTR for the UK jump, reflecting the higher rate – but neither is widely out of line with other G7 countries. But for the next two years, there is a clear benefit of the super-deduction, which reduces the EATR by over 3 percentage points, and the EMTR by over 6 percentage points. (There is a more dramatic fall in the EMTR because it is more sensitive to the tax base.) Without the announced rise in the tax rate from 2023, though, both of these reductions would have been a much larger.

Recent research also suggests that investment is sensitive to the EMTR. Based on recent evidence from CBT research3,  the rise in the EMTR in 2023 is likely to depress investment by as much as 20% relative to the pre-Budget position. But for the next two years, the super-deduction is likely to have a very strong impact on levels of investment, despite the announced 2023 tax rate rise. Although precise estimates are subject to a considerable margin of error, investment may be as much as 50% higher for the next two years. 

There is an important caveat, however. That is, other recent CBT research4 has examined the impact of investment incentives under conditions of economic uncertainty and recession, relative to more favourable periods. This finds that although there may be significant effects of investment incentives in good times, these effects are much weaker in times of greater uncertainty. 

It is hard to think of a period of greater uncertainty than now – and there is now probably more uncertainty about the future of corporation tax as well. And so, while there is some hope for a boost to UK investment in the short run, any optimism should be severely tempered by the difficult underlying circumstances created by the pandemic and Brexit.


Relevant research from the Centre for Business Taxation: 



BBC Today Programme, March 4

Calculations are for an investment in plant and machinery, based on the Devereux/Griffith approach, which is widely used, for example, by the OECD and the European Commission.

Maffini, Giorgia, Xing, Jing and Michael Devereux (2019) “The Impact of Investment Incentives: Evidence from UK Corporation Tax Returns”, American Economic Journal: Economic Policy 11.3, 361-89.

Irem Guceri and Maciej Albinowski (2021) “Investment Responses to Tax Policy Under Uncertainty”, Journal of Financial Economics, forthcoming.