Candice Horbacz
Capital investment is universally acknowledged as a fundamental driver of innovation, enhanced productivity, and sustainable economic growth. It forms the bedrock upon which modern economies build resilience, create high-value jobs, and foster technological advancement. Yet, a looming challenge threatens this crucial engine: significant investment incentives in several key nations, collectively representing a substantial portion—nearly a fifth—of global private investment, are slated for reduction or expiration in the coming years. This impending rollback presents a critical juncture for policymakers, offering a potent opportunity to solidify long-term economic prosperity by embedding these pro-growth policies into permanent legislation rather than allowing their temporary nature to undermine future investment.
At its core, a business’s decision to invest in physical assets—be it a new manufacturing facility, state-of-the-art machinery, or advanced digital infrastructure—hinges on the projected profitability of such ventures. A paramount factor influencing this profitability is the tax treatment of investment costs. When businesses are permitted to immediately deduct the full cost of an investment from their taxable income, it significantly de-risks the undertaking. This ‘full expensing’ approach eliminates concerns that the real value of deductions will be eroded over time by inflationary pressures, thereby lowering the after-tax cost of investment and making new projects more attractive. Conversely, the prevailing practice in most countries mandates that businesses spread the deduction of these costs over many years, sometimes even decades. This protracted recovery period diminishes the present value of the deductions, effectively raising the after-tax cost of an investment and disincentivizing capital formation.
The specific regulations governing how much of an investment’s cost can be written off each year are known as depreciation schedules, and the deductible amount itself is referred to as a capital allowance. These mechanisms are vital tools for shaping a nation’s investment landscape. The time value of money, a core economic principle asserting that a sum of money is worth more now than the same sum will be at a future date due to its potential earning capacity, plays a crucial role here. When deductions are stretched over time, their real value is diminished not only by inflation but also by the opportunity cost of not having those funds available sooner.
A recent comprehensive report by the Tax Foundation on capital allowances across developed countries paints a concerning picture. It reveals that, on average, the 38 member states of the Organisation for Economic Co-operation and Development (OECD) are projected to allow businesses to deduct only 70.1 percent of their investment costs over time by 2025, even after accounting for the time value of money. This figure underscores a systemic disincentive to investment across much of the developed world. The situation is further exacerbated in periods of high inflation. For instance, with the OECD annual inflation rate projected at 3.6 percent in 2025, a mere increase from 2 percent to 3.6 percent in inflation can reduce the recoverable investment costs by as much as 4 percentage points. In such an environment, an average of 33 percent of investment costs would effectively be non-deductible in OECD countries, representing a significant drag on capital formation and economic dynamism.
The Economic Rationale for Robust Capital Allowances
The economic theory underpinning generous capital allowance regimes, such as full expensing, is rooted in fostering a tax system that is neutral towards investment decisions. Traditional depreciation schedules create a bias against investment by taxing the returns on new capital at a higher effective rate than existing capital or other forms of income. Full expensing corrects this distortion, allowing businesses to recover their investment costs immediately, thus reducing the effective tax rate on new investments to zero at the margin. This encourages companies to invest more, leading to increased capital stock, higher worker productivity, greater innovation, and ultimately, higher wages and more robust job creation.
Historically, various countries have experimented with or implemented forms of accelerated depreciation or full expensing to stimulate economic activity. In 2022, a handful of countries, including Chile, Estonia, and Latvia, stood out by allowing businesses to deduct the full costs of all investment. Other major economies, such as Canada, the United Kingdom, and the United States, offered full deductions for specific categories of investments, particularly in equipment. The positive ramifications of such reforms were evident in their impact on the International Tax Competitiveness Index (ITCI), an annual ranking that assesses how well countries’ tax systems promote sustainable economic growth and competitiveness. Over a 12-year span, improved capital allowances contributed significantly to Canada’s climb of eight places, from 25th to 13th, and the United States’ remarkable ascent of 15 places, from 29th to 14th, in the ITCI. These gains underscore the direct link between favourable tax treatment of capital and a nation’s global economic standing.
However, the cautionary tale of Chile serves as a stark reminder of the perils of temporary policy. As its full expensing regime phased out, Chile’s corporate tax rank plummeted by nine places in a single year, from 16th in 2022 to 36th. This rapid decline highlights how the withdrawal of investment incentives can quickly erode a country’s competitive advantage and deter capital inflow.
A Volatile Global Landscape: The Cycle of Expiration and Reinstatement
The global trajectory of capital allowances has been marked by a concerning volatility. From a high of 71.2 percent (or 69.1 percent when weighted by GDP) in 2022, the average amount of investment costs businesses could deduct experienced a steep fall to 68.8 percent (67 percent weighted) in 2024, largely due to the expiration of temporary policies. This decline translated into a higher after-tax cost of investment, creating uncertainty for businesses planning long-term projects.
Yet, a silver lining appears on the horizon for 2026. Projections indicate a rebound in capital allowances to 70.1 percent (79.3 percent weighted), primarily driven by the foresight of countries like Germany, Lithuania, New Zealand, Canada, and the United States, which have either reinstated or made permanent some of their vital provisions. The substantial increase in the weighted average is predominantly attributable to policy shifts in the United States and Canada, two economic powerhouses whose investment policies significantly sway global trends. Nevertheless, this positive momentum is again threatened, as from 2026 to 2030, further expirations of these temporary policies are anticipated to cause another dip, with deductible investment costs projected to fall to 69 percent (67.6 percent weighted). This cyclical pattern of introduction, expiration, and partial reinstatement creates an environment of unpredictability that undermines strategic business planning and long-term capital formation.
National Responses: A Patchwork of Progress and Precarity
Several nations have recently taken distinct paths in response to the expiring investment incentives, demonstrating a varied commitment to supporting business investment through their capital allowance regimes.
United Kingdom: Leading with Permanent Full Expensing
The United Kingdom has emerged as a frontrunner in solidifying its investment landscape. Following the expiration of its temporary "super-deduction" of 130 percent for equipment in March 2023, the government wisely replaced it with a permanent full expensing regime. This allows businesses to immediately deduct 100 percent of their eligible plant and machinery investments from taxable profits. Additionally, investments in long-life assets are subject to a generous 50 percent first-year deduction. In a landmark announcement during the 2023 Autumn Statement, then-Chancellor Jeremy Hunt confirmed the permanent status of full expensing, eschewing its previous expiry date of March 31, 2026. This decisive move was widely lauded by industry leaders and economists. The Office for Budget Responsibility estimates that this permanence is expected to yield substantial long-run economic benefits, including a 0.9 percent increase in GDP, a 1.5 percent boost in business investment, and an 0.8 percent rise in wages, relative to a scenario where the pre-2021 law would have been reinstated. This demonstrates a clear commitment to fostering a stable and competitive environment for capital formation.
United States: Advancing but with Gaps
In the United States, the journey towards robust capital allowances has been more complex. The "bonus depreciation" provision, initially adopted in 2017, commenced a gradual phase-out in 2023, with the first-year deduction declining by 20 percentage points annually. However, a significant legislative development in 2025 saw full expensing made permanent for certain qualified investments. Tax Foundation
