CUT CORPORATION TAX…AND WHY ALEX SALMOND IS RIGHT

BILL JAMIESON                OCTOBER 25 2016          

An enduring memory of Alex Salmond’s period as first minister – and a central theme throughout his independence referendum campaign – was his call to slash Corporation Tax.

This, he argued, would at a stroke make Scotland more competitive, make us a Mecca for business and help us on the way to tiger economy status.

Today, as UK Chancellor Philip Hammond prepares for his Autumn Statement four weeks from now, he could usefully take a leaf from the Alex Salmond playbook.

Already there is talk that the UK could cut corporation tax by half from its current 20 per cent level if Brexit negotiations run into trouble.

The UK already has one of the lowest corporation tax rates in the EU but ministers believe a further cut could help keep companies in the UK and attract new investment. Other EU states could fear losing business to the UK should Britain allow companies to keep more of the profits they create.

Countries including Ireland and Singapore have credited a low tax rate with helping them attract new business. Ireland imposes a levy of 12.5 per cent while Singapore’s is 17 per cent.

The UK’s 20 per cent corporation tax rate compares to an EU average of 22 per cent. The tax rate is 29.72 per cent in Germany, 31.4 per cent in Italy and 33.3 per cent in France. 

The ever cautious Philip Hammond would almost certainly find a cut to 10 per cent far too bold for his liking –particularly given the budget constraints he faces. But the announcement of a cut to 15 per cent on November 23 would not be at all reckless – especially since his predecessor George Osborne pledged to cut the rate to 17 per cent by 2020.

And there are good reasons for doing so. Business confidence continues to struggle under a cloud of uncertainty in the aftermath of the Brexit vote. Expansion plans have been deferred while there are fears that the UK has become a less attractive place for investment.

A big cut in Corporation Tax would act as a boost to confidence, a stimulus to investment and give a clear signal that the UK is serious about attracting investment.

Hammond has indicated that fiscal policy will be “reset” and has stated that he is “prepared to take any necessary steps to support the economy and promote confidence” along with the Bank of England’s efforts.

However, he does not have quite the clear run for an activity-boosting Statement than first appeared to be the case.

The economy has proved more resilient than pessimists expected. And if the data remains firm, the prospects of a sizeable stimulus package will recede.

Preliminary estimates of UK third quarter GDP growth due on Thursday are expected to result in year-on-year growth actually edging up to 2.2 per cent in the third quarter from 2.1 per cent in the second quarter.

Growth of 0.4 per cent quarter-on-quarter would match the performance seen in the first quarter and would be better than the 0.3 per cent expansion in the third quarter of 2015.

The economy’s resilience in the third quarter has been helped by consumers’ willingness to keep spending, healthy services activity and the substantially weakened pound encouraging spending by overseas visitors to the UK and supporting foreign orders for UK goods and services.

However, the public finances have not at all improved, reducing his scope for tax and spending giveaways – even while ditching his predecessor’s borrowing reduction targets.

Figures last week showed government borrowing worsened appreciably last month. The budget deficit climbed to £10.6 billion in September, up from a shortfall of £9.3 billion a year ago.

And for the first six months of the fiscal year (April-September), government borrowing totalled £45.5 billion, taking it within £10 billion of the overall target of £55.5 billion. And this slippage is increasing rather than narrowing.

Central government receipts were up a disappointing 2.6% year-on-year in September 2016.  Meanwhile, central government expenditure rose 4.3% year-on-year in September.

So Hammond has limited room for fiscal stimulus in the Autumn Statement if he is to maintain credible adherence to fiscal discipline, albeit not as tight as previously targeted.

Others have argued that a public spending boost rather than tax cutting would be more appropriate. Oxford Economics says there is strong case for a fiscal stimulus and its modelling suggests that a package centred on a temporary increase in infrastructure investment would provide the biggest boost to GDP growth.

Scenarios run on the Oxford Global Model suggest that raising capital spending by one per cent of GDP in each of the next two years could boost GDP growth by 0.7 per cent a year over that period.

It also argues that such a package would, in some respects, pay for itself, with the public sector net debt-to-GDP ratio peaking at a lower level.

But there are low expectations of it being implemented. The main bar would be whether there are sufficient ‘shovel ready’ projects available. And there is the danger that political ‘pet projects’ would be embarked upon that do not deliver the economic benefit claimed of them.

Meanwhile the imperative remains to boost business confidence and to show the UK’s determination to be a highly attractive location for business investment and expansion.

A modified Alex Salmond-type cut in Corporation Tax would well fit the bill.

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