- Lowering tax on profits is not a ‘magic bullet’ to boost much-needed economic growth, says IPPR paper
- Despite a “race to the bottom” on corporation tax, UK business investment has been among lowest of 38 developed economies
- Analysis casts doubt over government intention to reverse Sunak tax reforms and calls for other measures to boost growth
The UK had the lowest rate of business investment of any G7 economy in 2019, according to new analysis by IPPR of OECD figures, despite also having the lowest corporation tax rate for the previous two decades. The tax on companies’ profits was reduced to 19 per cent, its lowest level this century, in 2017.
The UK fell behind Italy and Canada to have the lowest private sector investment in the G7 group of leading economies as a proportion of GDP in 2019, the analysis finds. The following year the UK also ranked 28th for business investment of 31 members of the wider group of developed countries who are members of the OECD (Organisation for Economic Co-operation and Development).
The analysis, ahead of this week’s emergency budget, casts doubt on the government’s plan to reverse the rise in corporation tax planned by former chancellor, Rishi Sunak. Corporation tax, levied only on companies’ profits, is currently due to rise to 25 per cent next year.
Liz Truss, the prime minister, and her chancellor, Kwasi Kwarteng, argue that lower taxes on companies’ profits lead to higher business investment, which spurs faster economic growth. The chancellor has set raising UK growth to 2.5 per cent a year as the top priority for the Treasury.
However, the evidence of the last 15 years in the UK is that repeated cuts to the corporation tax rate – from 30 per cent in 2007 to 19 per cent since 2017 – have not led to higher private investment or growth, IPPR says in a short paper published today. Meanwhile, the IPPR paper says, most developed economies have both higher rates of corporation tax and higher levels of private sector investment than the UK.
Instead of focusing on tax cuts to spur growth, IPPR says this would be better achieved by smarter and more strategic policy making. It calls on the government to:
- Commit to an industrial/economic strategy that seeks to increase investment and productivity across all sectors
- Target a mission-oriented approach, with the government setting "a direction of travel and clear missions” so that businesses have a better idea of future growth opportunities
- End the chop-and-change policy churn that has resulted from five new government approaches in just eight years - confusing businesses, undermining UK economic credibility and stability, and damaging investment
- Adopt a “whole-government” approach to growth, as with the Biden administration - which means moving beyond tax and the Treasury to tackle problems with housing, energy, transport infrastructure, skills policy, and childcare
- Target any necessary tax reductions narrowly to avoid them being overly costly or supporting unproductive firms, and reduce other “dead-weight” costs where public funds support activity that would have happened anyway
Dr George Dibb, head of the Centre for Economic Justice at IPPR, said:
“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 - in fact, despite having some of the lowest levels of corporate taxation, business investment in the UK is the lowest in the G7. We’re not just falling behind the largest economies either, the UK is consistently in the worst performers in the OECD club of 38 developed economies.
“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.”
Dr George Dibb, the report’s author, is available for interview
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NOTES TO EDITORS
- The IPPR paper, Cutting corporation tax is not a magic bullet for increasing investment, will be published at 0001 on Tuesday Sept 20. It will be available for download at: ippr.org/blog/cutting-corporation-tax-not-magic-bullet-for-increasing-investment
- Advance copies of the paper are available under embargo on request
- Figure 1 – The UK has taken part in a global “race to the bottom” on corporation tax
Source: OECD, 2022
- Figure 2 – Private sector investment is lower in the UK than competitors
Source: IPPR analysis of OECD, 2022
- IPPR is the UK’s pre-eminent progressive think tank. With more than 40 staff in offices in London, Manchester, Newcastle and Edinburgh, IPPR is Britain’s only national think tank with a truly national presence. ippr.org