From the TUC

Business Investment & Corporation Taxes

22 Mar 2012, by Guest in Uncategorized

Yesterday’s OBR forecasts show a collapse in business investment growth and a recovery that is now more reliant on consumption. This came following a Budget in the Chancellor announced another cut in corporation, one that will cost £920 a year by 2016/17. After the increase in the personal allowance this is the single largest giveaway in the Budget in terms of cost to the Treasury.

George Osborne told Parliament that:

We’ve already cut the rate from 28% to 26%.

This April it is due to fall again to 25%.

I can announce today a further cut of one percent – to be implemented right away.

From next month, Britain will have a corporation tax rate of just 24%.

And we will continue with the two further cuts planned next year and the year after.

So that by 2014, Britain will have a 22% rate of corporation tax.

The biggest sustained reduction in business tax rates for a generation.

A headline rate that is not just lower than our competitors, but dramatically lower.

18% lower than the US.

16% lower than Japan.

12% below France and 8% below Germany.

An advertisement for investment and jobs in Britain.

And a rate that puts our country within sight of a 20% rate of business tax that would align basic rate income tax, the small companies rate and the corporation tax rate.

Boosting about how low our corporation tax is might please certain sections of business but what will it actually do for ‘investment and jobs in Britain’? The answer, according to the OBR, is ‘not a lot’. If they thought otherwise they wouldn’t have made sharp downward revisions to their investment forecasts.

But don’t just take their word for it. Today’s Lex column in the FT notes that headline rates don’t actually tell us a great deal.  As they note ‘the UK offers fewer allowances for companies than other G20 countries on investment in fixed assets such as plant and machinery’.

A point picked up by the paper’s Martin Wolf who argues today that the cut in corporation tax was of ‘dubious’ benefit and instead:

A far more sensible proposal would be to increase investment incentives and maintain – or even raise – headline rates. The broad aim would be to make the system neutral between  retentions and distributions while encouraging investment, which is extraordinarily low.

As the TUC made clear in its most recent Economic Report the appalling low level of business investment is a major (and long term) challenge to the UK economy. Corporations are sitting on a cash pile of over £700bn which they are reluctant to investment whilst the economic outlook is uncertain, a point echoed last week by the Economist.

A cut to corporation tax is highly unlikely to make them investment – instead it will simply increase profits (which are already relatively high) and add to the cash sitting idle on balance sheets. Targeted increases in investment and capital allowances would be a much more effective stimulus to growth.

The sad fact is that the Treasury, at least on some level, accepts this. Capital allowances were increased in the Enterprise Zones in Scotland, London, Wales and Yorkshire & the Humber yesterday. But only £5-20mn a year was allocated to this, in contrast to the circa £700-920mn spent on cutting the headline rate.

A government serious about increasing business investment would make raising capital allowances a far higher priority than cutting corporation tax, even if it generated fewer easy headlines.