IF economic performance were in direct correlation with the number of Tory “fiscal events”, the UK could be top rather than bottom of the pile of the Group of Seven leading industrialised nations.
The Conservatives seem to have developed a real fondness for one or another sort of “fiscal event”, the name they gave to a set-piece last September from former chancellor Kwasi Kwarteng which eventually became known as a mini-Budget. Since last March, we have had one Spring Statement, a mini-Budget that was far more spectacular than the grown-up version in terms of its impact (which was lamentably detrimental), an Autumn Statement and a Budget.
There has been a fair bit of chopping and changing on policy over the piece but one thing has remained constant – a real grandstanding vibe from the Tories.
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The amount of spin has been dizzying, even before we get to the real-world effects of the generally dismal policy measures. Few will have forgotten surely that Mr Kwarteng triggered a full-scale financial markets crisis with his mini-Budget last September, requiring intervention by the Bank of England.
It has been quite the year for the Conservatives, although this has certainly not stopped them talking themselves up.
In his March 2021 Budget, Rishi Sunak, who was then chancellor, announced a hike in the main corporation tax rate from 19% to 25% to take effect from April 2023.
Then Mr Kwarteng scrapped the planned rise in his mini-Budget.
After he succeeded Mr Kwarteng as chancellor, Mr Hunt then reinstated the planned increase, which was confirmed this week.
It has been something of a real-life soap opera, with enough cast changes to confuse the most dedicated viewers.
And it was fascinating to hear Mr Hunt’s take on the corporation tax situation in his Budget speech on Wednesday.
In order to appreciate the full drama of the plot twist, it must be remembered Mr Hunt was a senior member of the administration led by David Cameron and featuring George Osborne as chancellor which came to power in 2010 with the support of the Liberal Democrats.
A key plank of this administration’s strategy was an enormous cut in corporation tax.
Mr Osborne, in his March 2011 Budget, promised “a Britain carried aloft by the march of the makers”.
The jump in business investment anticipated by the Tories on the back of their huge corporation tax giveaway failed spectacularly to materialise.
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The Conservatives cut corporation tax from 28% to 19%, an extraordinarily large reduction.
Mr Hunt has played a key role in the reinstatement of the rise in corporation tax announced previously by Mr Sunak. So it was fascinating to hear the Chancellor acknowledge on Wednesday the failure of the big policy measure of the Cameron-Osborne administration of cutting corporation tax dramatically. It is a pity he did not make his voice heard on this at the time Messrs Cameron and Osborne were so passionately pursuing their outlandish economic policy-making.
The context Mr Hunt provided also obviously begged the question about why the administration of which he was part previously had seen the need to cut corporation tax as far as it did, beyond any political or ideological leanings.
The dramatic reduction seemed entirely unnecessary at the time, and it still does. The largesse was particularly unpalatable at a time when those on the lowest incomes were being made to pay the price for the global financial crisis through a savage austerity programme which included terrible welfare cuts. It remains utterly unclear to this day on what basis, to use Mr Cameron’s words, we were “all in this together” as the poorest had to endure the most pain as the Conservatives reacted to the fall-out from the behaviour of major financial sector players around the globe in bringing on the crisis.
Returning to the context offered by Mr Hunt in his Budget on Wednesday, what the Chancellor did was highlight how competitive the UK would be on the global stage in terms of corporation tax even after the hike in the main rate to 25% which takes effect next month.
The Chancellor said: “Even after the corporation tax rise this April, we will have the lowest headline rate in the G7 (Group of Seven leading industrialised nations)…
“Even at 19% our corporation tax regime did not incentivise investment as effectively as countries with higher headline rates. The result is less capital investment and lower productivity than countries like France and Germany.”
As an aside, it is worth noting, on the productivity point, that the independent Office for Budget Responsibility said of the Brexit impact in its latest economic and fiscal outlook published on Wednesday: “Overall, while net migration has been higher than we anticipated, investment growth has been significantly weaker than we expected before the referendum, and our assumption about the impact of Brexit on the UK’s trade intensity is broadly on track. As a result, we have not revised our view that productivity will be 4% lower in the long run than if the UK had remained in the EU.”
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Going back to what Mr Hunt said about corporation tax, his comments surely quite simply amount to a relatively straightforward acknowledgement of the failure of a policy of an administration of which he was a senior member for years.
And, given this week’s Budget was in broad terms another theatrical performance which portrayed a tale of Tory economic success that many would surely put in the not-based-on-a-true-story category, the admission on corporation tax seemed surprisingly frank.
Mr Hunt this week announced measures aimed at targeting corporation tax breaks in a way that encouraged investment.
He unveiled a new policy of “full expensing” for the next three years, “with an intention to make it permanent as soon as we can responsibly do so”, adding: “That means that every single pound a company invests in IT (information technology) equipment, plant or machinery can be deducted in full and immediately from taxable profits.”
Mr Hunt said this was a corporation tax cut “worth an average of £9 billion a year for every year it is in place”.
It remains to be seen how this latest measure works out, given the UK’s dismal performance on business investment in recent years.
Among the factors weighing on business investment is of course Brexit, something noted again by the OBR on Wednesday.
The OBR said: “Consistent with our initial Brexit assumptions, business investment growth stalled in the years after the EU referendum, which will have partly been due to increased uncertainty about our future trading relationships, as well as diversion of resources from more productive uses towards Brexit preparations.
“Business investment has stagnated in real terms for much of the period since 2016, such that on the eve of the pandemic it stood 16.2% below our pre-referendum expectations.”
Mr Hunt meanwhile declined to mention that, even with the OBR having revised its forecast of how much it expects the UK economy to shrink by this year from 1.4% to 0.2%, the UK is still on track to be the weakest-performing G7 economy of 2023. That is what the International Monetary Fund’s forecasts would indicate.
As for the number of grandstanding fiscal events, whether these are badged as Budgets, mini-Budgets, Spring Statements or Autumn Statements, less might turn out to be more in terms of stability.
There seems way too much talk, and far too little effective action from the Conservatives when it comes to the UK economy. And plenty of big mistakes, like the Cameron-Osborne administration’s corporation tax cut.
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