This article was originally published by the New Economics Foundation.
Chancellor Philip Hammond has warned that the UK may be forced to change its economic model if it is locked out of the single market after Brexit, sparking fears that the government sees the UK’s future as “the tax haven of Europe”.
Meanwhile, Donald Trump has promised a quick trade deal between the US and the UK after he takes office on Friday, with the Transatlantic Trade and Investment Partnership being mooted as a starting point for negotiations.
With Prime Minister Theresa May expected to confirm today that the UK will be leaving the European single market, the UK now faces being locked into a low-tax, low-regulation standards path for decades to come.
As we warned back in November, a race to the bottom in terms of corporation tax, regulation and labour costs will only jeopardise the long-term social and economic health of the UK. Here’s why:
1. THE UK IS ALREADY A LOW-TAX, LOW-REGULATION ECONOMY
During the last Parliament the government cut the main rate of corporation tax from 28% to 20%. As part of last year’s Budget the government then announced that corporation tax will fall to 17% in 2020 – the lowest tax rate in the G20.
The government has also overseen a programme of mass deregulation under the guise of ‘Better Regulation’, with the departments responsible for climate change, the environment, work and pensions and health and safety being hit particularly hard.
This means that, even as a member of the European Union, the UK has already become a low-tax, low-regulation economy. It is simply not possible to cut further without seriously undermining environmental and safety standards and social cohesion.
It wasn’t so long ago that people regularly got ill from the food they ate, or got dismissed from work unfairly. That this is no longer the case is the legacy of hundreds of years’ of hard-fought progress on regulatory standards. It’s essential this isn’t reversed.
“THE REALITY IS THAT AGGRESSIVE TAX CUTS WOULD SPELL THE END OF THE UK’S MODEL OF PUBLIC SERVICE PROVISION”
2. FURTHER CUTS WILL MEAN FEWER PUBLIC SERVICES
According to the Institute of Fiscal Studies, the corporation tax cuts since 2010 have cost the government £10.8 billion a year in tax revenue. Cutting the rate of tax further to 10% would increase this to around £20 billion a year in lost revenue.
At a time when the NHS is facing a “humanitarian crisis” caused by lack of funding, slashing taxes further would be nothing more than an ideological move to fundamentally reshape the UK’s economic model and roll-back public services.
Despite the Chancellor saying that he hoped the UK would “remain in the mainstream of European economic and social thinking”, the reality is that aggressive tax cuts would spell the end of the UK’s model of public service provision.
3. IT WON’T LEAD TO HIGHER INVESTMENT AND GROWTH
Proponents of cutting corporation tax argue that it leads to higher business investment and economic growth. However, numerous studies have shown that this is not the case, and that it can even have the opposite effect.
This is because corporation tax cuts can result in businesses hoarding cash rather than investing – a phenomenon that Mark Carney has described as ‘dead money’. Given that tax cuts also suck revenue and spending power out of the government sector, this has the overall effect of depressing demand, investment and growth.
This is exactly what has happened in the UK. Despite the repeated cuts to corporation tax since 2010 business investment has stagnated, while the UK’s large corporations are sitting on a cash pile estimated to be in excess of £500 billion.
Slashing corporation tax even further amounts to nothing more than a handout to already cash rich corporations, many of whom are already avoiding paying the tax they already owe.
4. IT WON’T IMPROVE ‘COMPETITIVENESS’
There is little evidence to suggest that low corporation tax is related to the ‘competitiveness’ of an economy. While there is reason to be sceptical about the concept and definition of ‘competitiveness’, there is no discernible relationship between corporation tax rates and measures of competitiveness in international comparisons.
Every year the World Economic Forum assesses the competitiveness of various countries’ economies to produce a Global Competitiveness Index. The US has one of the highest corporate tax rates at 40%, but is deemed to have the third most competitive economy. Bosnia & Herzegovina, on the other hand, has a corporate tax rate of only 10% but ranks number 107 in the index.
“MANY FIRMS HAVE CHOSEN TO INVEST IN BRITAIN IN RECENT DECADES BECAUSE IT SERVED AS A GATEWAY INTO THE EU SINGLE MARKET”
The reality is that firms choose where to locate based on a variety of factors such as infrastructure, education, skills and, crucially, market access. Tax rates typically come lower down this list of priorities. Many firms have chosen to invest in Britain in recent decades because it served as a gateway into the EU single market. The impact of leaving this market will more than outweigh any marginal financial gain that may arise from a cut to corporation tax.
A race to the bottom is not the solution for communities that feel left behind by our economy. Far from addressing the flaws in our economic model – already low-tax, low-standards – it would double-down on those flaws.
A UK business model that reduces inequalities and makes sure no community gets left behind instead means stronger standards for our economy, fair taxation and investment in the public services we all depend on.
Brexit entails a once in a generation reshaping of our laws, relationships and economy. The future of the country hangs in the balance, and it is up to us to build it.