Britain needs more world-class firms

Allister Heath
IF you want to understand why so many people have now become so downbeat about the prospects for the UK, look no further than yesterday’s survey of the Hundred Group of FTSE 100 finance directors. Their total tax rate – combining all taxes borne or collected by FTSE 100 businesses on the government’s behalf – has shot up as a share of total corporate earnings since 2007, despite the recession.

The total tax increased again from 38.2 per cent of total earnings in 2008 to 41.6 per cent in 2009, according to PricewaterhouseCoopers, which conducted the survey. This is much higher than most of the other countries that have so far been surveyed using a similar methodology.

The FTSE 100 paid or collected £66.6bn, 13.1 per cent of the government’s total tax receipts. At 21.4 per cent of taxes borne, employers’ national insurance contributions are the second highest cost for survey participants, following corporation tax at 44.0 per cent. Employment taxes collected on behalf of the government are also very high: income tax under pay-as-you earn (PAYE) was worth 26.5 per cent and employees’ national insurance amounted to 6.9 per cent of the cash handed over to the government by FTSE 100 firms.

Depressingly, using these stats to look at how value generated was distributed suggests that 56.6 per cent was paid to government in taxes borne and collected, with 32.3 per cent going to employees as wages and salaries net of employee taxes and 11.1 per cent in net interest on financing.

The survey also contains many interesting facts and figures about the FTSE 100. It employs 1.7m workers in the UK or 5.8 per cent of the total workforce and paid total employment taxes borne and collected of £17.2bn. For each employee, FTSE 100 firms pay £17,721 to the exchequer in employment taxes every year. The average FTSE?100 wage was £45,706, compared to a national average of £25,800. FTSE firms employ far more skilled, high productivity workers than their smaller rivals – and hence pay them more.

Large firms are clearly extremely important. It makes sense for the government to attract as many as possible to the UK. The current policy of hitting them and their staff with ever more onerous taxes and red tape is suicidal; in the short term, it brings in more revenues but over time it merely kills the goose that lays the golden eggs. It is nothing short of a national disgrace that some of Britain’s largest firms have moved their corporate headquarters to other jurisdictions, chased away by the government’s short-sighted hostility.

But there is another, just as important lesson: most people do not work for FTSE 100 businesses but instead for smaller firms. The UK desperately needs to encourage the creation of a new generation of entrepreneurial firms – and then put in place the conditions to allow them to grow and become the new giants of the future. A sign of a healthy economy is the rate at which new firms displace old ones at the top of the league tables; in the US, this was spectacularly illustrated with the rise of IBM, its dethroning by Microsoft and now the arrival of Google at the top of the tech tree. The UK is not as good as this. We need less tax, less red tape, better education, a stronger infrastructure, improved access to venture capital and universities that serve as incubators for start-ups. Above all, we need more creative destruction. Politically tough, sure; but not rocket science.