When Rishi Sunak launched a consultation last month into replacing the temporary capital spending allowance that runs out next year, the chancellor said he wanted to build on the “momentum” of what he has called the “biggest two-year business tax cut in modern British history.”

But an FT analysis shows that at just over the halfway point, the so-called “super-deduction” allowance, which offers 130 per cent relief on purchases of equipment, is not delivering.

The Institute for Fiscal Studies called it “essentially a state subsidy for private sector investment in plant and machinery” when it was introduced last April. But it has had negligible impact on a business investment slump that began after the Brexit referendum in 2016.

The tax break was designed as a coronavirus stimulus, aimed at reversing the five-year fall in capital spending and boosting productivity. It was a key part of prime minister Boris Johnson’s plan to create a “high-wage, high-skill, high-productivity” economy.

“I want to build on the momentum of the super-deduction to drive and sustain growth in the UK, and we’re committed to doing that through cutting and reforming investment taxes,” Sunak said in early May as he launched the consultation to replace the tax break when it expires next year.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

A week later Andrew Bailey, governor of the Bank of England, told the House of Commons Treasury select committee that the super-deductor was “not at the moment having the impact that was expected.”

Official data show that quarter-on-quarter business investment fell 0.5 per cent in the first three months of the year. Compared to pre-pandemic levels, it was 9 per cent below the last quarter of 2019, in contrast to overall output that had fully recovered from the hit it took from the pandemic.

While the most recent quarterly data are often revised, the trend longer-term trend is clear with capital investment still 8.4 per cent below its level in the first three months of 2016, just before the Brexit referendum.

It is difficult to overestimate the size of the challenge both in terms of comparison with historical patterns or other countries.

In 2021, UK business investment corresponded to a smaller share of real gross domestic product than in any other G7 economy. Businesses in many large advanced economies are investing more than before the pandemic, but not in the UK.

“Business investment has been the Achilles heel of the UK economy for some time now,” said Sandra Horsfield, an economist at Investec. In contrast to the post-Brexit slump in the UK, capital spending in the US, is up 23 per cent on levels six years ago.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

And economists warn that with the economic outlook darkening, capital spending intentions are weakening just at the wrong time as the cost of living crisis adds to the impact of the pandemic and Brexit.

The OECD painted a gloomy picture earlier this week when it slashed its UK economic forecast to zero for next year — the lowest in the G20 apart from Russia — warning that business investment would “be damped by rising interest rates and lingering uncertainties.”

Horsfield said that with inflation at a 40-year high — ahead of any other G7 economy — the need to boost capital investment was even “more of a pressing priority” because productivity growth is key to being able to accommodate higher wage demands without fuelling further price rises. It would also help stimulate economic growth given the tight labour market and greater hurdles to immigration post-Brexit.

Martin Beck, chief economic adviser to the EY Item Club, said the worsening economic outlook, with the prospect of rising prices of raw materials and a slowdown in consumer spending, would “make firms warier about investing.”

Fhaheen Khan, senior economist at the manufacturing association Make UK, said manufacturers were increasingly diverting available cash to pay bills. “This can divert any funding available for investment away from productive activity to those activities that just allow a business to stay afloat,” he noted.

Last month, the Bank of England almost halved its forecast for the impact the super-deductor would have on business investment this year to 11 per cent from just under 19 per cent last August. Investment would stagnate next year, with the tax break expiring in March, and then fall sharply in 2024, according to the BoE.

Companies have been urging Sunak to come up with a permanent replacement for the super-deductor to help support investment for months and the latest business confidence surveys suggest the need is pressing.

Investment intentions fell to the lowest level in more than a year in May, according to a survey by the Institute of Directors. Another survey of mid-market businesses by consultancy RSM found the share of companies that planned to increase capital expenditure had dropped sharply this quarter.

Louise Hellem, director of economic policy at the CBI, said the government would “help inject confidence in the investment environment” by announcing a permanent successor to the super-deductor.

But other economists cautioned there was no easy way to address the depressed levels of capital investment in the UK. “Many businesses will want more certainty over where the economy is going before committing to material investment decisions,” said Simon Hart, lead international partner at RSM.