§ In my review of the economic outlook, I said that I was concerned about the prospective decline in private investment in the manufacturing sector. Our economic future, and especially the strengthening of our competitive position in world markets, demands that we should continue the progress we have made towards higher levels of investment.
59§ This progress should not only continue, it should also be as steady as possible. There is a tendency, which is easy to understand but none the less unfortunate, for private investment to fall away when the economy tends to be slack for other reasons and to be strongest when other demands are strongest.
§ The general effect of my other proposals in this Budget will be to stimulate the economy and in the process to stimulate investment. But I think that present circumstances demand that I should do more, and this has led me to consider the question of investment allowances. These are inherently more attractive to the recipients than initial allowances of the same amount because, unlike the initial allowances, they are not deducted from depreciation claims in later years. There are a number of arguments both for and against them. But after careful consideration I think that in present circumstances I must give priority to the need to encourage those who are hesitating about the timing of their investment plans. I have, therefore, decided upon a general restoration of investment allowances in respect of capital expenditure becoming due and payable after today.
§ The rates of investment allowance for the main classes of assets will be 20 per cent. for new plant and machinery and 10 per cent. for expenditure on the construction of industrial buildings. These were the rates in force under the 1954 Finance Act. In addition, I propose that expenditure on new plant and machinery shall be eligible for a 10 per cent. initial allowance and expenditure on the construction of industrial buildings for a 5 per cent. initial allowance. These two allowances together will take the place of the present initial allowances of 30 per cent. on plant and machinery and 15 per cent. on industrial building.
§ Capital expenditure on new mining works, which at present qualifies for a 40 per cent. initial allowance, will become entitled to a 20 per cent. investment allowance plus a 20 per cent. initial allowance. I propose no change this year in the present special treatment of capital expenditure on ships and on scientific research. Capital expenditure on new agricultural and forestry buildings and works will become entitled to an investment allowance of 10 per cent. as it was under the 1954 Finance Act. The general 60 provisions that were applicable to investment allowances when they were formerly in operation will again apply.
§ I want to emphasise that my main object in taking this step is to encourage firms, who are planning either extension or modernisation schemes, to put them in hand now. The new investment allowance will fortify the effects of the increase in initial allowances made last year. The kind of investment expenditure that I want to encourage is that which has as its object higher efficiency even more than expanded capacity. There is a certain amount of spare capacity available now in industries making capital goods which may be no longer available later on when we hope exports will have risen. This step is, therefore, an incentive to bring forward some expenditure which would otherwise take place later on. It is not, therefore, a fiscal provision which it would be right to expect to continue regardless of the state of our industrial economy. The special stimulus to investment which these allowances will provide is desirable in present economic circumstances. In different conditions such a special stimulus may be no longer justified, and then it would be equally appropriate to reverse the action I am taking now.
§ This partial replacement of initial allowances by investment allowances will cost the Exchequer nothing this year and £91 million in 1960-61. The tax proposals I have described will cost altogether £295 million this year, and this is as far as I can go in taxation reliefs. I must not only look to the cost of any reductions this year, but also to the problems which they may pose in future years.