Foreign Direct Investment to the UK

Lord Gadhia Excerpts

Tuesday 10th September 2024 Lords Chamber

[Lord Gadhia (Non-Afl)]

My Lords, I commend the noble Lord, Lord Harrington, on securing this short debate. It is especially timely ahead of the International Investment Summit and the Budget scheduled for next month. The Harrington review was a thorough and comprehensive report grounded in evidence from a wide range of stakeholders. Its six headline recommendations provide a thoughtful and practical road map for improving the UK’s attractiveness as an investment destination. Indeed, I referenced the review during the King’s Speech debate, describing its proposals as necessary hygiene measures to revive investment, alongside the reinstatement of the Industrial Strategy Council.

Although the previous Government commissioned the report and made warm noises about its conclusions, they ultimately ran out of time to make meaningful progress. I hope the new Government will fully embrace this agenda. Global investors do not care much for domestic political tribalism. In fact, if anything, they are looking for the opposite: predictability, certainty and consistency—the three most coveted words for investor confidence. So, if the new Administration are serious about sending a positive signal to prospective investors, which I believe they are, then they would do well to show some continuity in this area.

However, we do have to face up to three broader issues regarding FDI. First, we are no longer the gateway into the EU, which was a previous tail-wind underpinning inward investment flows. The data speaks for itself: since 2016-17, we have seen a 30% drop in the number of FDI projects. The picture would be much worse if it were not for greenfield investments in renewables, notably offshore wind.

Secondly, taxation matters—not just corporate taxes but those levied on investors themselves. Even though headline corporation tax rates have increased, full expensing of capital expenditure, now permanent, should produce positive results over time. In contrast, on personal taxation, I believe we have miscalculated the impact of the latest changes to the so-called non-dom tax regime, which is often intertwined with FDI decisions made by high net worth individuals. The Treasury modelling will have made assumptions about the number of people expected to leave the UK. There is now substantial evidence that the assumed leaver rate has been far exceeded. We will, therefore, face the double whammy of losing Exchequer revenue and adversely impacting FDI. I ask the noble Lord, Lord Leong, whether the Treasury is monitoring this situation and whether the Treasury and the OBR are still confident that the measures announced in the March 2024 Budget will still raise £2.7 billion a year by 2028-29. I also fear that we are about to make matters worse through changes to the capital gains tax regime in the forthcoming Budget. The politics of envy is seductive but economically destructive. I hope that rationality will prevail. This is certainly the reputation of the current Chancellor, and the October Budget will be a big test of her judgment and instincts.

This leads neatly to the third factor influencing FDI: namely, general investor sentiment towards the UK. This is the ultimate intangible and not easy to pin down but arguably one of the most important ingredients determining the flow of FDI. Sentiment can be influenced by the smallest of issues, which is why the noble Lord, Lord Harrington, was right to call for the streamlining of cumbersome processes, removing obstacles such as planning delays and grid connections. Another issue that frequently comes up from inward investors is their poor experience at Heathrow Airport. It is literally the UK’s shop window, and we should be far more imaginative in making passport control a pleasant experience for incoming visitors, especially those bringing their cheque-books.

In conclusion, I am convinced that the UK can lead the world in attracting capital, but to do so we must regain our self-belief, natural pragmatism and fall in love again with wealth creation.