Raising taxes will be a calamity for UK investment
Judging by the prolific speculation about what the Chancellor is going to have to say in the Budget on Wednesday, there is a worrying risk that post-Brexit Britain is about to imitate the England cricket team in the Third Test in India: bound out on to the field full of confidence, only to misread the pitch, play the wrong strokes and lose by 10 wickets.
The first misreading is to exaggerate the economic risks of the crisis as the restrictions are lifted. Granted, the economy shrank by nearly 10 per cent last year, but both the economy and the public finances are in better shape than forecast and the loss of output was mostly because of lockdown. Output has been temporarily idled, not lost altogether.
This was not a classic turn in the business cycle, as happens in most recessions. There have been mercifully few bankruptcies. The scale of public spending has been on a par with a medium-sized war, like Korea in the Fifties, and the underlying deficit and absolute level of debt much lower than it was in, say, 1945. Households and business balance sheets are in remarkably good shape. As a consequence, when restrictions are lifted throughout the spring, we should expect the economy to bounce back strongly.
The second error is to misdiagnose the ailment which the economy does suffer from. There is no need to encourage consumption. Even the long-suffering hospitality sector should enjoy a record second half of the year. The issue the British economy faces is an acute and chronic lack of investment. The political and regulatory uncertainty around Brexit, and then the virus, caused investment, which had still not recovered properly from the financial crisis, to flatline before going off a cliff last year. Britain’s record on business investment is the worst among G7 advanced nations.
It therefore follows that we should be doing everything possible to encourage not just a recovery in business investment, but a fundamental, historic shift which will put the country on a different, more prosperous path from the one it has been on in the past decade.
Fortunately for us, our urgent need for domestic and international capital comes at a time of astonishing plenty, when the amount of money ready to deploy, either through our own savings or those of other nations, has never been more abundant. This is best represented by money supply data, which have been growing at record levels across the OECD. But you can also find evidence in the record levels of stock markets, a remarkably healthy banking sector and huge savings ratios.
Surveys show that business and investor confidence in Britain has recently been flickering back to life. This is confirmed by the recovery in the pound on foreign exchanges. But do not be fooled: we have a great deal of catching up to do. The evidence is everywhere to see: the official statistics, the lagging of the FTSE 100 relative to other world markets, the loss of quality company flotations, like Soho House to New York and Vodafone’s masts business to Frankfurt, and regional towns and cities left behind.
This leads us to corporation tax and capital gains tax. It is no use saying that President Biden is going to put these up in America, while also embarking on a public spending spree and consequently we should copy him. The US economy is in a different, privileged position, characterised by massive amounts of innovation and investment.
The competition for capital has, ironically, never been more intense. This leads us to the third error the Treasury and its allies in Left-wing think tanks are making: complacency. We are not entitled to other people’s capital, we have to earn it and win their confidence, something we used to do with grace and skill. That means having a competitive, low and stable corporate tax regime and a regulatory environment which is certain and encourages innovation. It is not too late for Boris Johnson to peer across the table at his Treasury team and say: you are playing the wrong strokes chaps, they won’t work on this pitch. We might all be surprised what a strong innings they can yet play.