Policymakers Must Prioritize Permanent Investment Incentives to Foster Economic Growth

Capital investment stands as a cornerstone for stimulating innovation and ensuring sustainable economic expansion. As we look ahead, several key nations are staring down the barrel of reduced investment incentives that, if unaddressed, could stifle growth in a landscape that already accounts for a significant share of global private investment.

When businesses contemplate new investments, such as in production facilities or equipment, tax implications significantly influence their profitability. The ability to deduct investment costs immediately allows companies to make decisions without the added burden of inflation eroding their returns over time. In many countries, however, investments are subject to depreciation schedules extending over years or decades, thus elevating the after-tax cost of investment—especially critical in a high-inflation environment, which has persisted into 2025.

Current State of Capital Allowances

Recent analysis from the OECD shows that, as of 2025, the average capital allowance across its member countries allows for only 70.1% of investment costs to be deducted over time. This situation worsens in a high-inflation context, wherein an increase from a 2% to 3.6% inflation rate leads to a notable decline in recoverable investment costs—potentially up to 4 percentage points. Alarmingly, it suggests that, on average, 33% of investment costs may not be deductible at all.

Case Studies of Investment Deduction Policies

In 2022, countries like Chile, Estonia, and Latvia allowed businesses to fully deduct their capital investments. Meanwhile, nations such as Canada, the United Kingdom, and the United States implemented full deductions for specific equipment investments. These policy shifts are evident in the International Tax Competitiveness Index, where Canada and the U.S. have seen marked improvements in their rankings due to capital allowance reforms.

Notably, in a stark contrast, Chile’s rank plummeted after its full expensing regime was phased out, underscoring the critical nature of these policies for national competitiveness.

Trends and Temporary Policies

Unfortunately, many of these beneficial capital allowance policies are temporary. The expiration of full expensing policies has led to a rise in after-tax costs for investments, as the deductible amount slumped from 71.2% in 2022 to 68.8% by 2024. With countries like Canada and the U.S. poised to reinstate or prolong favorable measures starting in 2026, there's potential for improvement. However, this is coupled with an expected drop in deductible costs by 2030 as some policies face expiration.

Country-Specific Approaches

Policymakers must consider that Canada, Germany, and the United States significantly influence global investment trends. In Canada, a robust immediate deduction policy for machinery has witnessed a phase-out in 2024, although it was set to resume in 2025, highlighting fluctuations in ongoing incentives. Germany’s mixed strategy has seen partial reinstatements of accelerated depreciation through legislative acts, while Lithuania introduced permanent full expensing starting in 2026. These tailored reforms aim to bolster investment across sectors.

The UK has transitioned from a temporary super-deduction scheme to full expensing, with Chancellor Jeremy Hunt confirming long-term implementation to stimulate GDP growth and overall investment. In the U.S., conditions have recently been favorable for investments in residential and commercial buildings through temporary but substantial bonus depreciation benefits.

Implications of Temporary Policies

Temporary measures may push some businesses to accelerate their investment plans, but they largely just shift the timeline of expenditure rather than enhance overall investment levels. There’s a pressing need for more durable policy solutions that provide long-term certainty and predictable tax benefits to encourage sustained investment behavior.

The Path Forward for Policymakers

Given their significant roles in global investment, Canada and Germany must re-evaluate their investment policies to promote long-lasting incentives. Policies should shift towards making immediate deductions for all capital investments permanent and include adjustments for inflation—ensuring that businesses can navigate economic challenges without compounded tax burdens.