Osborne’s corporation tax isn’t working for the economy


by Duncan Weldon    
5:02 pm - July 12th 2011

Tweet       Share on Tumblr

Amid the ongoing News International fallout and the developing Eurocrisis, yesterday’s FT carried quite an important story on the likely failure of a key component of the government’s growth strategy.

Osborne has made boosting investment a core pillar of his economic strategy – something I entirely agree with. I have written at length on the need to boost business investment and also on the problem of the corporate surplus.

The problem is that Osborne’s preferred strategy is simply to cut corporation tax and hope for the best.

Something I feel is unlikely to work. Especially when it has been largely funded by slashing investment allowances.

Significantly the OBR appears to agree, writing that the most recent cut will have a ‘minimal impact’.

Yesterday’s FT reported on some new analysis by the Centre for Business Taxation at Oxford’s Said Business School. The story – entitled ‘Osborne corporate tax plan will fail’ – is well worth a read. As it notes:

The researchers said that the main problem for the UK was that allowances for capital expenditure were the lowest in the G20. Few countries had pursued the policy of cutting allowances to recover revenue losses caused by lowering the tax rate as aggressively asBritain, it said. So while theUKhad the fifth lowest tax rate in the G20, the rate was applied to a broad definition of profit, implying that the effective tax rate was much higher.

As the report itself says:

Reforms which reduce allowances as a way of paying for rate reductions mainly redistribute the tax burden between companies, rather than making the tax system as a whole more competitive.

This was a point repeatedly made by the manufacturing trade body, the EEF, in 2010.

Cutting corporation taxes but reducing investment allowances isn’t a tax cut for business – it’s a transfer from businesses that invest heavily (i.e. manufacturers) to those who don’t (i.e. financials/banks).

As such it is likely to be ineffective as a growth plan as it totally at odds with the talk of an investment led recovery and rebalancing.

A proper, business friendly growth plan, would focus on increasing investment allowances rather than going for headline grabbing moves like cutting corporation tax whilst hammering productive businesses in the small print.

   Tweet   Share on Tumblr   submit to reddit  


About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
· Other posts by


Story Filed Under: Blog ,Economy


Sorry, the comment form is closed at this time.


Reader comments


1. Richard W

Totally agree. I have said all along that their deficit phobia will end up tying them in knots as they come up with ever more idiotic schemes to raise revenue. Taking by one hand and giving by another is totally useless. That is why the banks’ are not too bothered about the bank levy because they are getting a good proportion back from cuts in corporation tax. A growth strategy by Mr Osborne is what is required. Get the economy growing and the corporate surplus will soon disappear. At the same time as if by magic the government deficit will decline because the corporate surplus and the government deficit are two sides of the same coin.

Moreover, if they want more firms to export maybe it would help if they expanded and made more firms aware of the Export Credits Guarantee Department (ECGD). The British Chamber of Commerce found that two-thirds of firms had never even heard of the agency never mind used it. A lot of small SME are reluctant to export because of fears over getting paid. Trade finance and credit insurance by a government agency would see them expand into overseas markets.

2. Richard W

Should also say the phobia to eliminate the deficit by the time of the next election will not even work because they will not achieve total manage expenditure balance before the next election. Growth is just simply too low to eliminate the deficit. Kinda makes the tax giveaway before the next election an unlikely prospect.

3. BenM

Well said.

4. Bob B

As reported in the FT on Tuesday, support for George Osborne’s nostrums is waning

Support for UK cuts plummets – FT poll
http://www.ft.com/cms/s/0/3d47b686-aa2a-11e0-94a6-00144feabdc0.html#axzz1Rv1HHVR3

City uneasy over FCA’s cost and effectiveness
http://www.ft.com/cms/s/0/98862066-aaf0-11e0-b4d8-00144feabdc0.html#axzz1Rv3TOHqd

FCA = Financial Conduct Authority, one of two new regulators being created to replace the Financial Services Authority. The other new regulator is the Prudential Regulatory Authority (PRA).

Remember those continuing calls by the Conservatives in opposition for “deregulation” and “cutting red tape”?

5. DisgustedOfTunbridgeWells

It wasn’t supposed to, next.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Osborne's corporation tax isn't working for the economy http://bit.ly/ozTFT9

  2. Daniel Sitkin

    Osborne’s corporation tax isn’t working for the economy | Liberal Conspiracy http://t.co/wIgUQCH via @libcon

  3. sunny hundal

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

  4. Chris Roberts

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

  5. Jill Hayward

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

  6. Maureen Czarnecki

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

  7. Watching You

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

  8. Captain SKA

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

  9. Sam Liu

    Osborne’s corporation tax isn’t working for the economy | Liberal Conspiracy http://t.co/TDZpISb via @libcon

  10. Martin Crozier

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

  11. Paul Abbott

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

  12. bankofcat

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

  13. Andy S

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

  14. Adam Corlett

    Osborne’s corporation tax isn’t working for the economy | Liberal Conspiracy http://t.co/Mnplh7n via @libcon

  15. Conservative Home dismisses the national interest « Though Cowards Flinch

    [...] As for tax reform, I suspect he does’nt mean maknig sure tax is collected from the rich. Maybe he means lowering Corporation Tax, but Duncan’s dealt with that one. [...]

  16. Colin Hall

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/JqC551n says @DuncanWeldon

  17. Will today be the day people start to question Osborne’s competence? | Liberal Conspiracy

    [...] Osborne’s focus is instead on helping big businesses and hoping for the best. But as Duncan Weldon pointed out recently, even the Corporation Tax cut isn’t working. [...]

  18. sunny hundal

    For a start the corp tax cut isn't working http://t.co/FtTrZB5 and cutting 50p tax would increase the deficit. + 'Green taxes' v exaggerated

  19. The Right's prescription of more of the same ignores the evidence | Left Foot Forward

    [...] Duncan Weldon argued: “Cutting corporation taxes but reducing investment allowances isn’t a tax cut for business - [...]

  20. sunny hundal

    @ActuarialChris but its not actually working in short term either: thats my point. see http://t.co/GS0SW08D and http://t.co/Dgltv7l4

  21. sunny hundal

    @make_trouble absurd to say or think all tax cuts are the same. The corporation tax cut didn't work http://t.co/GS0SW08D

  22. sunny hundal

    @ryancps @afneil OSborne's corporation tax didn't work at all http://t.co/GS0Ooq7J





Sorry, the comment form is closed at this time.