We must grow ourselves out of debt

Allister Heath
BRITAIN has been spending more than it earns for years now, which is why the government and individuals alike are crumbling under a huge burden of debt. Two kinds of policies are needed to get us out of this hole: we must spend less; and we need to grow faster and more sustainably. Everybody has understandably been obsessed with the first option; but far too little attention has been focused on the latter policy. A shift in emphasis is long-overdue.

The private sector will be crucial to Britain’s recovery – so one basic pro-growth policy would be to try and turn the UK into a good place for companies to be based once again.

Given the collapse in our competitiveness in recent years, and the political consensus in favour of higher income tax rates, this will be an uphill struggle. Nevertheless, a good place to start would be to slash corporation tax.

This would make a massive difference. KPMG recently found the proportion of FTSE firms surveyed that were considering quitting the UK had jumped from six per cent the previous year to 14 per cent. Of the 20 FTSE 100 companies surveyed in November, four were actively considering moving. Of course, they may be bluffing; but virtually all governments (except, it seems, for the UK) agree that low tax rates help to attract investment and have been gradually reducing their taxes on profits.

The facts speak for themselves. In 1996, the UK’s corporation tax rate was joint fifth lowest in the OECD. By 2009, it was the joint 17th lowest. In 2000, a KPMG survey across 86 countries found that the average corporation tax rate was 31.1 per cent, above the UK's rate of 30 per cent that year. By 2009, the average rate across 116 countries was just 24.2 per cent, against the UK’s 28 per cent. The UK had the joint 29th lowest corporation tax rate in 2000; by last year, the UK had tumbled to 68th lowest. This is pathetic; but its gets worse.

The World Bank’s estimate of the total tax rate for 183 countries ranked the UK 67th. The World Economic Forum says 83 countries have tax systems that create fewer disincentives than Britain’s. A 2008 survey by PricewaterhouseCoopers found that total taxes (there are 22 separate ones) amounted to 45 per cent of pre-tax profits at FTSE 100 firms. They faced the third highest total tax rate, behind Belgium and the US; the third highest rate as a percentage of turnover, behind Canada and the Dutch; and the second highest for employment taxes per head, behind Belgium.

In a good primer on this whole business for the Civitas think-tank, Richard Baron and Corin Taylor (both based at the Institute of Directors) call for a 10-year policy to cut corporation tax to 15 per cent, reducing revenues by as little as £12bn a year after favourable behavioural effects are factored in, a price worth paying given how it would transform Britain’s attractiveness. Such a radical policy would almost align us with Ireland’s 12.5 per cent corporation tax rate.

It would also have an important indirect effect: even with debt interest payments remaining tax deductible, the bias against equity in the economy would be drastically reduced (lower overall tax would automatically reduce the advantage of debt).

It is vital to cut spending – but we must also grow the economy faster. Encouragingly, the Tories say they want to slash corporation tax to 25 per cent as a first step; but all politicians should read Baron and Taylor’s fine paper.