New Prime Minister Liz Truss’s stated agenda of cutting business taxes in a bid to bolster investment in the UK has been questioned by a “progressive thinktank”, which has said that the country’s low headline rate of Corporation Tax under recent Conservative governments has not had such an effect.
At the time of typing, new Chancellor of the Exchequer Kwasi Kwarteng was set to hold a “fiscal event” or mini-budget, at which he was expected to outline further details around tax cuts. Ministers have argued that reducing Corporation Tax rates in the UK could help unleash an investment boom in Britain.
However, the Institute for Public Policy Research (IPPR) said that such a stance hadn’t been borne out by the outcomes under previous tax-cutting Conservative administrations.
The thinktank pointed out that the UK’s Corporation Tax rate of 19%, being the lowest in the Group of Seven (G7) large and wealthy nations, has not been effective in bringing about increased private investment or quicker economic growth.
Evidence that tax cuts haven’t helped spur investment
The headline rate of Corporation Tax in the UK was 30% in 2007 but had fallen to 19% by 2019. Such repeated tax cuts did not, however, prevent the UK from slipping behind Italy and Canada to record the lowest private-sector investment in the G7 as a share of national income.
As reported by Reuters, across the Organisation for Economic Co-operation and Development (OECD)’s broader group of 31 mostly wealthy nations, the UK had the fourth-lowest business investment in 2020.
Furthermore, research by the Social Market Foundation found that Corporation Tax reductions had a net cost to the exchequer of nearly £73 billion between 2010 and 2018. Only in one of those years did a rise in business investment exceed the cost of such a policy.
Despite this, the Prime Minister has signalled her continued determination to keep the tax low, reasoning in a recent interview with the BBC that “Corporation Tax needs to be competitive with other countries so that we can attract that investment.”
To this end, her Government is expected to reverse a planned rise in Corporation Tax to 25% next year, as had been set out by former Chancellor of the Exchequer Rishi Sunak in 2021.
Condemnation of a “failed race to the bottom”
Dr George Dibb, head of the IPPR’s Centre for Economic Justice, commented: “Slashing Corporation Tax is just a continuation of a failed race to the bottom that hasn’t delivered for the UK economy. Tax cuts are not a magic bullet to increase investment and growth.”
He added that “if the Government were serious about boosting investment, it would be listening to businesses who want a serious economic strategy to support growth, boost innovation, and increase our low productivity. Instead, it thinks it can cut tax and deregulate its way to growth, which has failed before.”
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