Sunday, March 11, 2007
High taxes reduce UK's magnetism
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

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There won’t be a dry eye in the House, and tears will be shed in pubs, clubs and living rooms up and down the land. But as far as business is concerned, only one thing matters about Gordon Brown’s 11th and final budget on March 21, just 10 days from now.

Will it include measures to improve competitiveness, or will it continue what is seen in Britain’s boardrooms as a continuing loss of edge that will ultimately prove hugely damaging?

Business is restless. An Economist Intelligence Unit survey of international executives for the consultant Curzon & Co showed increasing concern over Britain’s high and complex tax system, weak infrastructure and productivity shortcomings.

A Mori survey of UK companies for the CBI late last year revealed that 22% had relocated some activities abroad and a further 17% were considering doing so. Most blamed the tax regime.

The CBI’s budget submission called on the chancellor to take a tighter grip on public spending to “end the slide in UK tax competitiveness”. By this it means even slower growth in spending in the summer comprehensive spending review than the 2% real rises in spending (compared with 4%-5% annually in recent years) signalled by the Treasury.

By squeezing the growth in spending to 1.6%, room would be made for cutting business taxes, the CBI said. The Institute of Directors, in its submission to be published this week, says Britain has reached a “fork in the road”. It wants even slower growth in spending — just 1.5% a year — and says the task of cutting business taxes is urgent.

“The corporate tax system must be kept competitive to increase UK prospects of attracting business which might otherwise be located in other developed countries, or indeed in developing countries,” it says. “The IoD calls for the standard rate of corporation tax to be reduced from 30% to 28%.”

Ernst & Young in a report, Helping Britain Thrive, also highlights the way UK company taxes reduce its attractiveness as a business location.

“Five years ago our corporation-tax rate was competitive and the UK was in a strong position in relation to other countries, but our ranking has slipped significantly, as a result of the government’s inactivity when faced with an emerging problem,” it said.

In 2000, Britain’s main rate of corporation tax, 30%, was below the OECD average of 33.7%. Britain has stood still, but the international average is now 29.1%. Within the EU, Britain now has the seventh-highest effective rate of corporation tax, a far cry from the days when the UK was among the lowest in Europe. Now even the highest — Spain, Germany and France — are not much higher than Britain, and the lowest, including the new entrants, are a long way below. Business-tax rates in Britain are roughly double those in Ireland.

Gradually the UK is becoming less attractive as a location for business investment. The share of European inward investment coming to these shores is firmly downwards. What we have not seen, despite rumblings, are any big names deciding to up sticks and relocate. If an HSBC decided to move its corporate headquarters, for example, the ramifications would be enormous. But the danger is real, and there must also be plenty of investments that could have come here but chose another location.

It is not all bad news. Brown’s R&D (research and development) tax credit has been successful in attracting research-related investment. Firms, particularly smaller ones, like the reductions in capital-gains tax he has introduced on business disposals.

But all this is as nothing compared with business discontent over what it sees as too high a rate of corporation tax. The chorus of disapproval is getting louder. Will Brown listen?

As it happens, calls from business for even slower growth in public spending are likely to be heeded. The word is that the chancellor will signal even tighter spending than the 2% a year real growth in spending previously set out in the Treasury’s illustrative figures. Big (and genuine) efficiency savings have apparently been unearthed across Whitehall.

Does that mean a “budget for business”? That expression used to happily trip off the typewriter but it has been dormant for a while.

One problem for business is politics. A chancellor about to become prime minister will not bend over backwards to announce tax cuts for business, even if he had the resources. Readers of this page know lower business taxes will generate jobs and prosperity. Most people, however, would see it as a Labour government rewarding its boardroom friends. There are not many votes in business-tax cuts.

It is also the case that, while business is warning of a fast-approaching crunch point, that is not the message from others. You may have got the impression from some reporting last week that the International Monetary Fund’s latest assessment of the UK economy was highly critical.

In fact it was glowing, praising Britain’s “impressive” economy and “decade-long record of strong and steady macroeconomic performance”. Britain is “competitive”, said the IMF, which also had good words to say about the “thriving” financial sector.

There was a time when Labour governments were deeply suspicious of the City, regarding it as the preserve of dodgy Tories in pinstriped suits. Now the pendulum has swung and Brown, along with his “City minister” Ed Balls, are in thrall to the Square Mile and Canary Wharf.

There is a lot to be optimistic about. Price Waterhouse Coopers, in a new report, predicts that between now and 2020 London will grow faster than Tokyo, New York, Los Angeles, Chicago and Paris, currently the world’s five biggest cities by gross domestic product. Driven by financial services, London will leapfrog Chicago and Paris into fourth place, it says, from sixth at present.

Financial services are indeed one of the economy’s great strengths. But there is a lot else. And the danger is that the glitter of the City is detracting from a worrying loss of competitiveness everywhere else.

PS Last week I wrote a column some construed to be a paean of praise to Gordon Brown. This week, a real walk on the wild side — words reflecting well on Tony Blair and, even more dangerously, Peter Mandelson. It does not concern the new Labour project.

A few months ago the Doha round of world trade talks appeared permanently becalmed. Suspended in the summer, they were dealt a further blow by the Democrats’ victory in America’s November mid-term elections and the prospect of a more protectionist Congress. So Mandelson, the EU trade commissioner, decided to call in a few favours. Knowing the prime minister was off on a trip to Washington, he briefed him beforehand on the need to get President Bush on side over trade.

Blair duly used his powers of persuasion, which was why when he and Bush held a joint press conference at the White House in early December their tone on the trade round was unexpectedly upbeat. Angela Merkel, the German chancellor, given a similar briefing by Mandelson, also applied some gentle pressure on a visit to Washington.

The result was that Bush decided to use the weight of the White House to get the trade round restarted, telling his officials to dig into the detail, which they did with the help of Downing Street. Mandelson then visited the White House with José Barroso, the commission president, for a meeting with Bush who, it is said, told him: “I trust you, so use your silvery tongue to get the deal done.”

That is why, following a fanfare announcement at the Davos world economic forum, the Doha talks restarted. The current position, says Pascal Lamy, director-general of the WTO, is that they are proceeding “fully across the board” with a view to early completion, though the US Congress could put a spanner in the works at any stage. Success is not guaranteed, but the chances are much better than they were. And the Blair-Mandelson axis played a big part in that.

From The Sunday Times, March 11 2007

Comments

David, do you honestly beleive that the rhetoric of lower spending growth will be as as tight as the PR people would suggest, or will it be similar to Gershon: an excercise in PR than in efficiency?

And what about all that spending using the PFI credit card, and the current account deficit?

Posted by: Ash at March 11, 2007 11:31 AM

You're right to be sceptical about cost and efficiency savings though I think the spending slowdown is genuine - it has to be. PFI is indeed a factor, though it has the virtue of maintaining capital spending during times of squeeze. In the old days, public sector investment was the first casualty of any squeeze.

Posted by: David Smith at March 11, 2007 04:56 PM

Business organisations complain about the complexity of the tax system then at every opportunity propose adding further obscurities. Businesses locating overseas because of the exchange rate know that blaming regulation and taxes is politically acceptable.

Remember that, as businesses themselves, the business organisations make a great deal of money out of seminars telling businesses how to navigate the tax and regulatory system. If it was too simple, that revenue stream would lessen.

Posted by: Paul Bivand at March 12, 2007 02:06 PM

David,

What IMF report is this from?

Thanks,

Nick

Posted by: Nick at March 12, 2007 10:26 PM

It is called the IMF's Article IV surveillance on the UK economy:

http://www.imf.org/external/pubs/cat/longres.cfm?sk=20488.0

Posted by: David Smith at March 12, 2007 11:00 PM