THE PRE-BUDGET leaks are coming fast and furious from the Chancellor’s team in an attempt to set the agenda and manage expectations of what Rishi Sunak shall say when he addresses the House of Commons next Wednesday.
We’ve already heard there will be no relaxation on controls of City bonuses and now we are being told the Bank Surcharge will be cut from 8 per cent to 3 per cent from 2023. The reason? Because that’s also the year when Chancellor Sunak is increasing Corporation Tax to 25 per cent – and by adding the 8 per cent surcharge Banks would suddenly be paying 33 per cent – highly uncompetitive by international standards.
The mass exodus of banks and City jobs predicted as a result of Brexit never materialised – but Sunak’s ridiculous tax hike would certainly have wreaked havoc with London’s position as a leading financial centre. So the word went out, he would be maintaining the competitive position of the Banks located in the UK. The practical economics of competition became far more important because of the potential embarrassment of higher tax rates failing to raise greater revenue and causing an economic crisis. After all 28 per cent of something is better than 33 per cent of close to zero.
The Chancellor who throttled the City would not be a good legacy.
Yet Chancellor Sunak fails to see the obvious logical flaw staring him in the face. If cutting business taxes is required to maintain the competitiveness of British-based banks surely cutting taxes of other British business sectors would have the same beneficial result?
Why abandon the original plan of cutting Corporation Tax to 19 per cent (where it sits at the moment) and increase it in the UK to 25 per cent when all that does is make businesses look to find ways of paying less tax, by employing complex tax-avoidance schemes, misallocating investment and resources into areas that would not otherwise make good business sense – or registering in different tax domains altogether so some other government gets the tax revenues?
We also have to remember there is a dangerous complacency in simply matching the corporate tax rates of other nations because the headline tax rate is not the whole story – the generosity of different national tax allowances brings significant competition to tax rates that otherwise look the same.
Countries like France with a supposedly higher tax rate can deliver a lower effective rate by providing deductions for R&D or software investment that are far more generous than that offered in the UK. If the Treasury believes such allowances can distort the economy and are best avoided then a genuinely low rate is a must, not just a pretty number.
It is generally unknown that Ireland’s corporate tax exemplifies this approach, providing a variety of schemes that can bring the current rate of 12.5 per cent down to an effective rate of 3-4 per cent through the use of allowances involving aircraft leasing and other schemes. It is no coincidence that some 80 per cent of the world’s commercial aircraft are registered in the Republic of Ireland even if they never land or take off from there – and explains why Ireland is sanguine about the G7-inspired plan for a minimum corporate tax rate of 15 per cent. The effective rate in Ireland for many large multinationals will continue to be well below 10 per cent – and being on the UK’s doorstep it is real the competition we face.*
The UK’s Chancellor has to get real, the Treasury needs to start raising greater revenues and fast – and the best way to do that is by making all business sectors more competitive internationally, not just banking.
The best way to do this is to take full advantage of deregulation that is now possible following Brexit as well as cutting tax rates rather than raising them.
Then there’s the optics. Our taxes are the highest as a percentage of GDP in living memory and the country has been told we face yet higher taxes. Our national insurance is going up, the £20 universal credit uplift has been axed, the lockdowns have led to broken supply chains bringing shortages and Council Tax is also predicted to go up next year. Meanwhile we live in a green pea soup of threats about expensive heat pumps that don’t work well in old buildings, having our gas boilers ripped out at our expense, having to replace our cars with EVs, where expensive and unreliable renewable power will be rationed.
A more dystopian economy would be hard to model – and then the Chancellor comes along and announces a tax cut for, wait for it (drum roll please) – the banks!! The public is expecting levelling up, not ordinary folk paying-up.
There’s no need for politics and economics to be so complicated – it only leads to mixed messages, and obvious contradictions that confuse voters. Keep it simple, go for growth, cut the red tape and taxes for everyone.
That’s the budget we need, but the omens suggest our economy will become even more regulated and highly taxed. I hope, nay, I pray I am wrong.
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*It should also be noted that the belief of a few Scottish nationalists in the idea of having a low corporation tax in an independent Scotland so as to generate a Celtic Tiger economy is utterly misplaced. Not only would Scotland’s politicians never adopt such a ‘neo-liberal’ approach they would also have to invent plausible and legal tax deduction schemes to at least match Ireland’s effective corporate tax rates. These tax systems cannot just be rustled-up overnight (what would it be, the leasing of ferries?) and would require real rates to be as low as 3-5 per cent to be competitive. A free market low tax Scotland is a pipe dream.
