A worker in PPC&A's factory processes new orders as they benefit from the reshoring of manufacturing following global supply chain disruption in Birmingham, Britain, July 28, 2022. REUTERS/Molly Darlington

By David Milliken

LONDON (Reuters) -British manufacturers are investing the least in new equipment relative to their sales since 2017, according to a report from trade body Make UK, which urged the government to streamline tax incentives in next month's annual budget.

Make UK said manufacturers were investing the equivalent of 6.8% of their annual turnover in plant and machinery this year, down from 8.1% in 2024 and the lowest proportion in any survey in the past eight years. Investment in research and development fell to 6.2% of turnover from 6.5%, while spending on staff costs and training was becoming a greater priority.

"It's clear that we're at a critical juncture for investment, and there is a real sense of urgency. The forthcoming Budget must not only safeguard current incentives but refine them," Fhaheen Khan, senior economist at Make UK, said.

Britain's government published its first industrial strategy in eight years in June. Make UK said it was influencing manufacturers' priorities, including increasing their focus on decarbonisation, and encouraging around a third to invest more. Nearly 40% of the 170 businesses surveyed said tax incentives heavily influenced their investment choices.

Investment in Britain is below the average across advanced economies, contributing to weak productivity growth and lower output per hour worked than in the United States or most of northern Europe.

British finance minister Rachel Reeves announced a big increase in public investment in infrastructure and energy last year, funded by increased borrowing and taxes on employers.

Reeves is expected to have to make further tax rises and savings in her next budget on November 26.

Make UK urged her to maintain existing incentives for business investment and make it easier for smaller firms to claim some tax breaks, including those for software, patent revenues and bespoke equipment used for product testing.

"Simplification is key here. We know tax reliefs influence investment decisions, so the chancellor has a real opportunity to make them more accessible," said Mike Thornton, head of manufacturing at accountants RSM UK, who helped produce the report.

(Reporting by David Milliken; editing by Barbara Lewis)