Rachel Reeves should slash taxes for electric car, heat pump and biofuel manufacturers to accelerate the drive to net zero, the Confederation of British Industry (CBI) has urged.
Companies involved in making batteries for electric vehicles (EVs) and low carbon heating should see their corporation tax slashed to 10pc, the business group said, in a major break from the headline tax rate of 25pc.
Businesses investing in research and development of low carbon technology should get a new “green innovation credit” with a headline rate of 40pc and those building factories deserve an “enhanced green super-deduction” at a rate of at least 120pc to support investment in EVs and battery manufacturing, the CBI said.
Rain Newton-Smith, chief executive of the CBI, said it would show the UK is a good place to invest – despite the tight public finances and the threat of other tax raids.
She said: “The Chancellor buoyed investor confidence recently by highlighting the strengths of the UK economy which sent the right signals that the UK is an attractive destination to invest and grow.
“The Budget can provide a tone-setting moment in the Government’s growth mission that can demonstrate to markets, investors, and businesses that the UK has a credible plan for boosting its growth trajectory.
“We recognise the Chancellor is walking a fine line with limited fiscal headroom. While we cannot risk the economic stability that is the bedrock of growth, we must be ambitious in our vision with Government laying the foundations for a prosperous future.”
The business group estimates the 10pc tax rate would cost the Government £238m per year in reduced revenues, while the super-deduction has a price tag of £389m.
It also called for the VAT rate on public EV charging to be cut from 20pc to 5pc – losing the Government £33m – and the abolition of VAT on home improvements such as replacing single-layer windows with double glazing.
Meanwhile the Institute for Public Policy Research (IPPR), a left-leaning think tank where Sir Keir Starmer has recruited key policy staff, said the Chancellor should change the borrowing rules to boost public investment.
It recommends the Government aim to increase public sector net worth, a measure which includes the value of assets such as student loans and public sector pension fund investments, rather than only looking at debt.
This could give the Chancellor more than £50bn of additional headroom to borrow for investment, according to the IPPR.
Carsten Jung, the economist behind the report, said that focusing the spending on road, rail and energy investment holds the most potential for boosting productivity, as well as upgrading healthcare services to make the public sector more efficient.
“The UK is stuck in a low growth trap, mainly caused by three decades of ultra-low investment,” he said.
“The new Labour Government has been elected on a platform to change this, but has inherited fiscal rules that neither promote growth nor succeed on their own terms in delivering fiscal sustainability.”
Ms Reeves has indicated she may be open to changing the rules, which currently look at the finances over the five years following each Budget.
“I hope that at the Budget the OBR will look at not just the short-term impact of boosting capital investment but also the long-term impact and the catalytic impact of public sector investment crowding in private investment,” she said in an interview with the FT.
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