WITH many economies – including the UK – struggling to achieve strong growth, there is naturally a focus on what governments can do to assist. The Prime Minister is making a major speech today about the key elements of the coalition’s plan, but I want to focus on one part: how a competitive tax system can incentivise enterprise and encourage investment.
There have been calls for radical changes to business tax. I welcome this debate, but would make one important point. We are delivering a bigger set of pro-business tax reforms than our global competitors or predecessors ever managed.
Corporation tax has been cut from an inherited main rate of 28 per cent to 23 per cent from this April, and to 21 per cent next April, giving us a considerably more competitive rate than the US at 40 per cent, France at 33.33 per cent and Germany at 29 per cent.
Further, reforms to the Controlled Foreign Companies tax regime are resulting in organisations moving their headquarters to the UK. We are also introducing the Patent Box and making research and development tax credits more generous. And from April, we will cut the 50p income tax rate – which signalled to businesses and entrepreneurs that Britain was not open for business – to 45p.
Our approach has been vindicated by evidence from a KPMG tax competitiveness survey published last month. In three years, the UK has moved from being an also-ran to the most competitive regime in the world, overtaking Ireland, the Netherlands and Switzerland. According to the report, stability, simplicity and advanced warning of changes were of high importance, and the government has worked hard to enhance these factors. Britain’s tax regime is now seen as an asset, not a liability.
Our approach is also radical by historical standards, even compared to the governments of Margaret Thatcher. Coming to power in 1979, when the UK faced severe economic difficulties – with borrowing high and competitiveness in decline – the Thatcher government pursued radical reforms, transforming the UK for the better. But from 1979 to 1983, the value of the net change in the corporation tax burden was less than £1bn in today’s prices.
The second Thatcher government had the advantage of benign economic conditions and was more radical. The 1984 Budget announced substantial reductions in the corporation tax main rate, from 52 per cent to 35 per cent, funded by reducing the generosity of capital allowances and other reliefs. But net changes was also worth less than £1bn in today’s prices.
In contrast, over five years, the total fiscal impact of changes to the corporation tax regime introduced by George Osborne, excluding the North Sea, amounts to a reduction of almost £7bn, at a time of considerable pressure on the public finances.
Of course, different times require different responses; capital is now more mobile and competition greater, so governments have to work harder to attract investment. But by historical and international standards, we have made our business tax system much more competitive.
David Gauke is a Conservative MP and exchequer secretary to the Treasury.