Britain's budget changes 'unlikely' to woo Gulf investors

Britain's Chancellor of the Exchequer Philip Hammond raised the country's AIA tax relief 400% for the next two years in a bid to boost both domestic and international investment
Britain's budget changes 'unlikely' to woo Gulf investors
Britain’s Chancellor of the Exchequer Philip Hammond
By Alicia Buller
Thu 01 Nov 2018 07:56 AM

The UK’s newly raised ‘Annual Investment Allowance’ (AIA) is unlikely to stimulate more foreign investment within the country, according to experts.

Britain’s Chancellor of the Exchequer Philip Hammond unveiled a string of bold directives on Monday with the aim of kickstarting the nation’s economy, including raising the country’s AIA tax relief from £200,000 ($257,000) to £1 million ($1.2m) for the next two years in a bid to boost both domestic and international investment.

However, Wes Schwalje, COO of Dubai-based research firm Tahseen Consulting, said the UK's investment incentives are "not a substitute for political uncertainty about Brexit".

The expert said: “The change in the AIA is not significant enough to overcome larger concerns about the post-Brexit future.

“GCC firms are typically making bigger investments in the UK and so – like other large firms in the UK – they are likely to hold back on planned investments in the near term.”

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Schwalje added that the temporary AIA increase seems more likely to jumpstart investment by UK SMEs rather than promote significant investment by internationally mobile investors.

He said: “The stalled Brexit talks have been a frustration in boardrooms across the globe with the lack of clarity on the post-Brexit future. This guessing game has created a policy vacuum which makes it hard to justify investments.”

Uncertain times

The results of the recent EEF/Santander Investment Monitor show that only one-third of large British companies are planning to make capital investments. The same survey shows that three-quarters of small companies are delaying their investment plans due to Brexit uncertainty.

Schwalje said: “With Brexit emerging as a significant factor holding back investment, the increase in the annual investment allowance is a sensible, confidence-building measure, albeit only a stopgap, to get businesses investing again and to help British companies adapt to life outside the European Union.”

Thomas Pugh, UK economist at London-based Capital Economics, commented that this type of tax initiative is designed to "bring forward" investment that was already planned.

Pugh told Arabian Business: “It is unlikely to be large enough to stimulate much additional investment over and above what was planned.

“What’s more, some 97 percent of firms are already below the expenditure limit so the impact on investment is likely to be relatively small.”

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Pugh added that there appears to be ‘no relationship’ between FDI and changes in the AIA.

“The previous [UK] increase to £500,000 in 2014 was accompanied by a drop in FDI. There may some impact at the margin but the tax break is likely to be used by companies bringing forward investment plans rather than foreign investors investing more in British companies.”

Gavin Serkin, managing editor, Frontier Funds Media and Intelligence, told Arabian Business: “The UK government has used its last major economic set-piece before Brexit as a rallying cry for confidence in the economy both at home and abroad.

“The declaration of an end to years of austerity and increases in spending is intended as a shot of tonic for Brits bracing for the deepest uncertainty that most of us can remember.”

Tahseen Consulting’s COO Schwalje said there is likely to be a ‘short-term decline’ in GCC investment in the UK, however the expert offered a positive long-term outlook.

He said. “There is a shared desire over the longer term to grow trade and investment driven by the need for British exporters to find new markets for their products and GCC economies to diversify their economies.”

Schwalje added: “Once political certainty returns to the UK, GCC investments will return.”

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