ABSTRACT
The frequency of both innovation and more routine change in the U.K. fiscal stance towards investment has often been noted in the literature. Whatever its other defects, one of which is the creation of uncertainty that diminishes the impact of policy changes if the complaints of the business community are to be believed, the variability of the tax and incentive systems and of their respective rates provides a unique, though little used, source of information on the effects of fiscal policy. The particular episode to be investigated in this paper is the substitution of cash grants for tax allowances in respect of manufacturing investment in plant and equipment between 1966 and 1970.2
Two specific questions will be addressed. The grants policy included two years, 1967-8, when the rate of grant was raised from 20 to 25 per cent for a pre-announced period of explicitly limited duration, and the government adhered to its schedule. The announcement.of the policy changed intertemporal prices, an instrument of stabilisation policy which has been widely recommended in the literature as a means of utilising substitution effects constructively, but whose efficacy has not previously been examined empirically. While similar devices have been used at other times and in other places, the duration of the temporary reduction in the net price of capital goods, and the government’s observance of the rules of the game, make this episode unique. In contrast, the temporary liberalisation of depreciation rules in July 1971, scheduled to last only until July 1973, was made redundant when still more liberal depreciation rules, in the form of immediate write-off, were introduced in the 1972 budget, before the explicitly temporary character of the 1971 measures could have changed investment decisions substantially. The suspension of the U.S. investment credit in October 1966, due to expire in December 1967, met a similarly premature end when the credit was restored after only five months. Future researchers will be able to draw
on Canadian experience with the temporary investment tax credit, introduced in 1975 to last until the end of June 1977; but at present the 1967-8 experiment is the only documented instance of an explicitly temporary change in the intertemporal price of investment in which the expectations generated by the announcement have not been falsified by the government’s subsequent actions. It should be added that the Canadian government’s extension, in the 1977 budget, of the investment tax credit for a further three years, while too late to dampen any impact the credit may have had, will presumably affect the credibility of any future announcements. Unless investment decisions are based on remarkably short memories, the implications of past experience for future policy decisions will be attenuated by the refusal of governments in all three countries to accept the constraint which is imposed on discretionary action when future fiscal changes are announced in advance.
