UK corporation tax: Ian McConnell: Tories must not wriggle out of planned rise

Given the Tories’ track record during economic crises, their ideology and their backers, it would be little surprise if they did backtrack on their plans.

After all, it was the Conservatives who hammered ordinary households and people on low incomes and benefits in the wake of the global financial crisis while at the same time delivering massive corporation tax cuts and claiming we were “all in this together”.

However, any rational analysis of the economic situation would surely conclude that abandoning or even delaying plans to raise corporation tax is just about the last thing the Conservatives should do now.

Last time round, the huge corporation tax cuts delivered little, if anything, from a macroeconomic perspective. They were probably counter-productive because the money this cost would have been far better deployed elsewhere, at a time when the Tories were (like they are now) bleating about the state of the public finances. The Conservatives, in their wisdom, chose to make ordinary people pick up the tab for the global financial crisis, as they made all the wrong choices.

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Remember former chancellor George Osborne’s vision of “a Britain carried aloft by the march of the makers”, in his March 2011 Budget? This failed spectacularly to materialise. Business investment did not get going as the Tories had declared it would on the back of the massive corporation tax cuts, with many companies seeming keener to either keep their extra money or give it away in dividends than use it for major capital expenditure.

In short, business investment appeared to receive little or no boost from the Tories’ dramatic cutting of the main corporation tax rate from 28% in 2010 to 19%. And then investment took a further hit after the June 2016 referendum vote for the UK to leave the European Union.

It is interesting to note the planned rise in the main corporation tax rate does not take it back to where it was in 2010. And the rate in 2010 seemed plenty competitive in an international context.

While it is difficult to know whether the Tories will have the audacity to scrap the plans for the rise in corporation tax, one thing is absolutely crystal clear: to do so would be a grave mistake from the viewpoint of the economy and businesses dependent on consumer spending.

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The economy is undoubtedly in need of fiscal stimulus, rather than premature tightening in the wrong areas. Such tightening is, of course, already under way as the Tories display their usual lack of patience and staggering inability to take a view which also looks at growth and the beneficial impact of expansion on tax revenues.

However, what is crucial amid a cost-of-living crisis of epic proportions such as this one is that money is put in the pockets of people who will spend it.

Messrs Johnson and Sunak need to take a serious look at the massive tax grab which is occurring as a result of the Chancellor’s decision to freeze income-tax thresholds for four years from this April at a time of rampant inflation. And national insurance rates have been hiked for staff and employers.

The Organisation for Economic Cooperation and Development forecast this month that the UK would stagnate next year and be the worst-performing economy among the Group of Seven leading industrialised nations by a significant margin.

In its latest twice-yearly outlook, the OECD declared the UK Government “should consider slowing fiscal consolidation to support growth”. It observed the Johnson administration had already started to tighten fiscal policy. And it noted UK household incomes were falling in real terms.

Businesses with any kind of reliance on household spending, directly or indirectly, and the economy as a whole would clearly benefit from the UK Government focusing policy on helping people who have to spend all or most of what they have to live. This would help boost aggregate demand at a time when so many factors are weighing down upon it.

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Of course, the fastest and most direct and effective ways of providing such a boost seem to be anathema to the Tories.

Cutting value-added tax, as was done by former chancellor Lord Alistair Darling to great effect amid the global financial crisis, is one sure-fire way to provide stimulus, although it is expensive.

Increasing welfare benefits too is a sure way of getting money into the economy quickly.

If the Tories cannot abide such measures, they should look at other ways to get money to people who will spend it, and thus boost demand. They have seen once already that the corporation tax route, while it may appeal greatly to them ideologically and instinctively, is not an effective way of trying to revive an economy that is in grim shape. The Tories should be able to see this from their dismal economic performance since 2010 (although they might need to remove their ideological goggles for a clearer view).

Of course, much of the economic woe, we should remember, is of the Tories’ own making, not least in terms of Brexit. It should go without saying that Brexit is something that will have a long-term crushing effect on the economy regardless of anything else, unless the UK rejoins the single market and regains the huge benefits of free movement of people and frictionless trade.

In terms of fiscal policy, what is required is simple. Money needs to be put back in the pockets of people who will spend it. This is the most effective means of supporting the beleaguered UK economy. Boosting consumer confidence and spending will also help businesses all along the supply chain.

It is obvious and straightforward but, when it comes to the economy, the Tories have a habit of making a real meal of things, to the cost of millions of households.