The Treasury's ridiculous attempt to stem the Taxodus without doing anything

February 23, 2010 3:26 PM

As the Telegraph reports, the Treasury's attempt to reassure business that they are going to make Britain's tax code more competitive has failed to convince anyone.  Their new tax framework promises "competitiveness, fairness, simplicity" and pledges a "commitment to lowering compliance costs".  But there are no details of how that will actually happen, as business leaders set out:

"Sir Martin Sorrell, chief executive of WPP, the advertising firm which has moved its headquarters to Ireland, told The Daily Telegraph: "The Government is moving in the right direction. But the devil will be in the detail. There weren't enough specific changes to encourage us."

A spokesman for Henderson Group, which was one of several companies to shift its headquarters to Dublin to avoid the increasingly onerous UK tax system, said: "There's been talk about these sorts of measures for a long time but the announcement today has not moved the debate on."

Barry Murphy, international business tax partner, PricewaterhouseCoopers, said: "You can't object to any of the principles, but stating them in this fairly non-committal way doesn't move things forward."


In lieu of concrete action, businesses can form their expectations of what they'll actually get from the Government in two ways: they can look at how the Government has behaved in the past, and they can ask what kind of pressures British politicians will be facing in the future.  They certainly won't be making investments just on the basis of empty promises from Gordon Brown.

Businesses won't take much confidence looking at the past actions of this Government.  Britain is falling behind in international corporate tax competition, we have a tax code that is one of the most complex in the world and the Government responded to the fiscal crisis with a hike National Insurance, a tax on jobs.

And, business leaders will be very aware that all of the money that the Government is borrowing right now will have to be paid back one day.  That will create pressure for new taxes on business.  Investors will be scared off the UK by the prospect of high taxes in
the future; if they invest in Britain, they run the risk that their returns will be raided to curb the deficit later on.

Looking at things that way sheds some light on the wider economic debate over fiscal policy.  Last Friday, economist David Smith wrote:

"This week's data have pointed both ways. The public finances were in a worse state in January than expected, while retail sales slumped by 1.2% last month (1.8% including petrol sales), giving succour to the double-dippers. The sales figures, of course, were hugely affected by the January snows so should be taken with a pinch of salt. As Mervyn King once said, the true meaning of Christmas is often not clear until Easter."


Essentially, people like us arguing that spending cuts need to happen sooner rather than later cite frightening borrowing statistics as evidence we need to take action to avoid a fiscal crisis.  Those arguing that we should delay cuts in spending cite other statistics showing weak economic growth and argue we need to keep borrowing to encourage economic growth.  Of course, it is no accident that we're seeing both anaemic growth and worse than expected borrowing at the same time: if the economy were growing faster then the borrowing figures would probably look better (because of  income and corporate tax - for example - yielding greater revenues as people and businesses earn more).

So, should we be cutting spending to deal with the horrific borrowing figures, or keeping on borrowing in order to try and jump start the economy?

The problem with that dilemma becomes clear when you think about business leaders trying to decide whether to invest in Britain or not.  As I set out earlier, they have to be worried that the returns on any investment they make will be raided by a future government desperate for more revenue to help pay today's borrowing back.  At the same time, families will be more cautious about spending if they think they'll soon be facing big tax hikes.  In that way, borrowing undermines people's confidence and makes them more cautious about investing and spending.

The Government's borrowing, combined with their record of tax hikes, is undermining people's confidence in the British economy's future.  If we want to start building a sustainable recovery now then we need to cut spending and get the fiscal crisis under control.

We'll set out how that can be achieved in an upcoming book.

As the Telegraph reports, the Treasury's attempt to reassure business that they are going to make Britain's tax code more competitive has failed to convince anyone.  Their new tax framework promises "competitiveness, fairness, simplicity" and pledges a "commitment to lowering compliance costs".  But there are no details of how that will actually happen, as business leaders set out:

"Sir Martin Sorrell, chief executive of WPP, the advertising firm which has moved its headquarters to Ireland, told The Daily Telegraph: "The Government is moving in the right direction. But the devil will be in the detail. There weren't enough specific changes to encourage us."

A spokesman for Henderson Group, which was one of several companies to shift its headquarters to Dublin to avoid the increasingly onerous UK tax system, said: "There's been talk about these sorts of measures for a long time but the announcement today has not moved the debate on."

Barry Murphy, international business tax partner, PricewaterhouseCoopers, said: "You can't object to any of the principles, but stating them in this fairly non-committal way doesn't move things forward."


In lieu of concrete action, businesses can form their expectations of what they'll actually get from the Government in two ways: they can look at how the Government has behaved in the past, and they can ask what kind of pressures British politicians will be facing in the future.  They certainly won't be making investments just on the basis of empty promises from Gordon Brown.

Businesses won't take much confidence looking at the past actions of this Government.  Britain is falling behind in international corporate tax competition, we have a tax code that is one of the most complex in the world and the Government responded to the fiscal crisis with a hike National Insurance, a tax on jobs.

And, business leaders will be very aware that all of the money that the Government is borrowing right now will have to be paid back one day.  That will create pressure for new taxes on business.  Investors will be scared off the UK by the prospect of high taxes in
the future; if they invest in Britain, they run the risk that their returns will be raided to curb the deficit later on.

Looking at things that way sheds some light on the wider economic debate over fiscal policy.  Last Friday, economist David Smith wrote:

"This week's data have pointed both ways. The public finances were in a worse state in January than expected, while retail sales slumped by 1.2% last month (1.8% including petrol sales), giving succour to the double-dippers. The sales figures, of course, were hugely affected by the January snows so should be taken with a pinch of salt. As Mervyn King once said, the true meaning of Christmas is often not clear until Easter."


Essentially, people like us arguing that spending cuts need to happen sooner rather than later cite frightening borrowing statistics as evidence we need to take action to avoid a fiscal crisis.  Those arguing that we should delay cuts in spending cite other statistics showing weak economic growth and argue we need to keep borrowing to encourage economic growth.  Of course, it is no accident that we're seeing both anaemic growth and worse than expected borrowing at the same time: if the economy were growing faster then the borrowing figures would probably look better (because of  income and corporate tax - for example - yielding greater revenues as people and businesses earn more).

So, should we be cutting spending to deal with the horrific borrowing figures, or keeping on borrowing in order to try and jump start the economy?

The problem with that dilemma becomes clear when you think about business leaders trying to decide whether to invest in Britain or not.  As I set out earlier, they have to be worried that the returns on any investment they make will be raided by a future government desperate for more revenue to help pay today's borrowing back.  At the same time, families will be more cautious about spending if they think they'll soon be facing big tax hikes.  In that way, borrowing undermines people's confidence and makes them more cautious about investing and spending.

The Government's borrowing, combined with their record of tax hikes, is undermining people's confidence in the British economy's future.  If we want to start building a sustainable recovery now then we need to cut spending and get the fiscal crisis under control.

We'll set out how that can be achieved in an upcoming book.

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