The chancellor has few options in his upcoming budget but easing the burdens on business is the best route back to growth
In just over two weeks, the chancellor will stand at the despatch box to give his fourth budget speech. He, like the British economy, faces a challenging task. Growth remains slow as the economy struggles to pay off the debt from the boom years, imported inflation remains high and our main trading partners are suffering their own difficulties.
At the same time, the government’s underlying deficit still stands at around 7% of GDP, or over £100bn. This severely limits the chancellor’s options. Even if the government could afford to directly stimulate the economy, this would be at best a short-term palliative. It will have to be the private rather the public sector that restarts growth.
This morning, I and other members of the Free Enterprise Group gave our views on some of the ways the chancellor could increase growth. This group of MPs was set up shortly after the last general election. It is our belief that Britain’s long-term success has been built on the back of free enterprise. Similarly, it is free enterprise that we need now to heal the economy.
The chancellor’s priority, then, should be to ease the burdens on business. Of course, we would all like our own individual taxes to be cut. However, international evidence suggests the tax that does the most damage to an economy is corporation tax. It acts as a tax on profit, investment and saving, and at the same time encourages companies to lever up with ever greater amounts of tax-free debt.
The chancellor has set a long strategy to reduce the main rate of corporation tax to 20%. In the current circumstances, it is worth looking at going further and faster. Many commentators have suggested that we could earn the attention of international investors by a “big bang” drop to 15%, or even 10%. We could even offset much of the short-term cost of this policy by eliminating many of the allowances that now exist for capital or debt interest.
We also need to do more to support the global corporations of tomorrow. Starting a company during an economic downturn is not necessarily a bad idea. Bill Gates, Walt Disney and James Dyson all started their renowned firms during a recession. Even so, it remains very risky. According to the Office for National Statistics, around half of new companies fail within the first five years. It is no surprise that so few are prepared to take the risk of creating their own firm. To help and support our backing for entrepreneurs, we should give new companies a five-year holiday from paying corporation tax altogether.
Finally, we should do more to help domestic small firms. For many of these companies, the taxes they struggle most with are payroll taxes on jobs and local business rates. Property values for business rates were last valued in 2008, at the height of the boom. These taxes act, in effect, as a tax on the high street. We can’t stop the deep structural changes that have caused problems for the likes of HMV or Jessops. However, we can ease the pressure on smaller firms, and ensure that it isn’t business rates that send them out of business. We should freeze business rates for three years and use the time to look into a system that is fair for both traditional and internet companies.
There is no easy route back to growth. It would be nice if Britain’s problems could be solved by, as many suggest, a slightly higher deficit, a few percent more investment or greater inflation. Unfortunately, our problems run deeper than that. The continuing high inflation and low productivity figures suggest that Britain’s economy remains in deep convalescence. The best way to restore it to full health remains through supporting the dynamism and efficiency of business.