From the TUC

Why cutting corporation tax would make things worse, not better

06 Jul 2016, by in Economics

Before the Referendum – which seems like another era! – George Osborne said that post-Brexit he would introduce an emergency budget containing £30 billion of extra tax rises or spending cuts. Such a move would sharply escalate the austerity already shrouding much of the country, the impact of which doubtless contributed to the referendum result. Fortunately, he has now replaced this threat with the more sensible decision to drop his target of reaching a budget surplus in 2020, which at least opens the door to using government spending to stimulate demand at a time when there is an acute danger of economic and political uncertainty tipping the country back into recession.

As well as abandoning the budget surplus target, George Osborne has set out a five point plan for the economy. At the heart of this is a proposal to cut corporation tax to less than 15%, which would give the UK one of the lowest rates of corporation tax in Europe and in the OECD. His apparent aim is to show investors that Britain is still ‘open for business’.

This is not, however, the right move to boost the UK’s economy, and a surprising array of voices have coalesced to warn against it. In short, cutting corporation tax is very unlikely to lead to increased investment, either by existing UK businesses or in term of inward investment by foreign businesses. It will, however, undoubtedly hurt government revenues at a time when there is a vital need for the government to stimulate demand and act decisively to steady frayed economic nerves and address stark social divides.

To go into a bit more detail: firstly, cutting corporation tax is very unlikely to boost investment by UK companies, many of which are already sitting on vast piles of cash; it is lack of confidence, rather than lack of funds, that is holding back investment by UK firms. Private sector profitability in 2015 reached its highest level since 1998 (excluding the financial sector), yet levels of business investment fell in the last quarter of 2015 and first quarter of 2016, having grown for the previous four quarters. This does not suggest that boosting corporate profits will encourage UK companies to invest.

In terms of the impact on inward investment, access to markets and availability of labour and inputs are more significant factors than corporate tax rates in determining where foreign companies may choose to invest. As the Financial Times argues,

Companies’ main worry now is whether investments they make in Britain will produce a profit at all, not the rate of tax they would pay on them.

If corporation tax were a decisive factor, Bulgaria, with a rate of 10% corporation tax, would be a magnet for inward investment – which it is not.

There is also a risk that cutting corporation tax rates will irritate European Union countries who fear a race to the bottom on tax at the same time as the UK is attempting to negotiate access to the EU single market, which should be the clear priority for government in terms of securing the UK’s economic future. Chas Roy-Chowbury, Head of Taxation at ACCA, the professional body for accountants, has suggested that if the UK took advantage of Brexit to offer deals on tax that were contrary to EU rules, it could actually put companies off, because of concerns about retaliation from other countries. And the OECD’s head of tax said that an ‘aggressive’ tax offer ‘would really turn the UK into a tax haven type of economy’, adding that there were practical as well as political barriers to making this work.

In domestic political terms, this is again the wrong move at the wrong time. The hardship created by austerity has been unevenly distributed across regions and across social groups, and a strong feeling among many that they are not participating in the economic recovery trumpeted by the government undoubtedly contributed to the referendum result. The divisions created by the referendum have not yet started to heal, and it is essential that politicians across the political spectrum make addressing these rifts an absolute priority. Tax cuts for corporations will do nothing to address the real anger and difficulties faced by people in areas where public services have been cut, pay rises are a distant memory, homes are unaffordable for local people and a lack of regional investment means that jobs are scarce. Addressing these problems is the clear and urgent priority for the government. The planned cut in corporation tax from the current rate of 20% to 17% announced in the March budget, will, if it goes ahead, reduce government revenues by over £1 billion per year, and that is without the additional cut that George Osborne has now proposed. Announcing cuts to corporation tax rather than a programme of public investment sends a message that the government remains out of touch with what people want and need.

The Financial Times devotes a long leader article to explaining why the proposal to cut corporation tax is ‘unhelpful’, arguing that ‘Osborne’s immediate task is to avert recession’ and ‘now is not the time … to set long-term tax policy’. Chillingly, it speculates that George Osborne’s proposal may be seen as an application to retain his position as Chancellor, as cutting corporation tax may fit with outlook of some of the contenders for the Conservative leadership. The fact that the Financial Times even suggests this shows how low our expectations of government ministers have become; the country has surely suffered enough at the hands of Conservative politicians putting their own careers above the interests of the country that elected them.

It is significant that the proposal has not been met with a chorus of approval from business groups. In fact, the UK’s main business organisations have published an open letter calling on the government to take immediate action on two fronts: firstly, making an unequivocal statement affirming the rights of EU citizens working in the UK to remain here; and secondly, taking action to progress long-planned infrastructure projects. Not only was there no mention of tax, but the proposal on infrastructure would be harder to achieve if government revenues were reduced because of cuts to corporation tax.

The letter concludes:

Addressing these key issues would be a shot in the arm for business confidence, and send the right signals across the world.

Certainty for EU citizens in the UK and delivering infrastructure investment are what the business community believes would stimulate business confidence; let’s hope George Osborne, and all the politicians jostling for positions of leadership and power, are listening.