It’s business that requires tax cuts, not consumers

The instant gratification of soothing the cost of living shock won’t solve Britain’s underlying deficiencies

Up goes the call. In his Spring Statement in a couple of weeks, Rishi Sunak, the Chancellor, is being urged to cut taxes to help ease the cost-of-living squeeze. Indeed he should, but beyond special assistance for the poorest in society, not in the manner widely proposed.

In a rare public intervention, even former prime minister David Cameron has emerged from post-greensill exile to join the growing chorus of calls for something to be done.

Sunak had hoped for a low-key Statement that merely aired the Office for Budget Responsibility’s latest economic and fiscal forecasts and did little more than rubber stamp already announced tax and spending plans.

In the event, the OBR’S analysis is likely to be out of date before it is even published, such is the speed with which the outlook is changing. Meanwhile, the pressures to turn the Statement into a fully fledged “emergency Budget” that meets the challenge of an increasingly likely European recession are growing by the day.

The easy thing to do politically would be to give in, and let the weight of opinion have its way, citing the force majeure of war. Nevermind that scrapping the planned increase in National Insurance would cost around £14billion a year; nevermind also that giving public sector workers an inflation-matching pay increase would set the public purse back a further £10billion, according to calculations by the Institute for Fiscal Studies, and that raising the state pension by the current rate of inflation, rather than the “paltry” 3.8 per cent announced, would cost something similar. And nevermind also that the Chancellor would need to find an additional £12billion on top of the £9billion already committed to provide households with the degree of protection against rising energy prices intended when the relief package was first announced just a month ago.

It would, indeed, be nice to have all these things and more, yet the unpalatable truth is that they would be precisely the wrong things to be doing – instant but all too brief gratification for an economy desperately in need of more enduring fixes.

Understandably, the Chancellor’s Mais lecture a couple of weeks ago, setting out his aims and philosophy for the rest of the parliament, drew little attention. This was a shame, because it dealt with the two big connected deficits at the heart of Britain’s relative underperformance as a major economy – business investment and productivity.

We don’t need to worry too much in the UK about consumption; British households are among the most spendthrift in the world, which is partly why we feel the present inflationary squeeze on real incomes so acutely.

The problem lies rather in endemically low levels of public and business investment. This, in turn, feeds into poor levels of productivity; and without improvements in productivity, we won’t enjoy the sustained increases in living standards everybody wants.

Recent spending commitments should partially reverse the shortfall in public investment, such that by the end of the parliament, Government fixed capital investment ought to be nearer the OECD average, and actually higher than some directly comparable peers such as Germany. But on private sector business investment, Britain languishes at the bottom of the pile, with little sign of improvement, even as the economy recovers from Covid. Business investment in the UK accounts for just 10 per cent of GDP, against an OECD average of 14 per cent.

Taking public and private sectors together, in the two decades up until 2017, Britain had the lowest overall rate of gross fixed capital formation as a percentage of GDP of all 38 OECD member nations. Things have only slightly improved since.

First Brexit, then Covid, and now the most serious war on European soil in 80 years – it’s hardly a conducive backdrop. But the UK shortfall has been persistent over decades. Even the massive incentive introduced a year ago of “super-deductions” has so far failed significantly to shift the dial.

Until this changes, we won’t see the improvements in productivity needed to justify the sort of cost-of-living reliefs that are currently being demanded.

Sunak is hardly the first to have noticed. Virtually every chancellor of the post-war period has set himself the task of reversing these deficiencies. And there have indeed been brief periods of improvement. Yet they never last.

The Chancellor is nevertheless surely on to something in highlighting an obvious inadequacy in our tax system. Despite the UK’S apparently low headline rate of corporation tax, the tax treatment provided for capital investment is much less generous than the OECD average, such that firms that invest heavily, even in high-tax jurisdictions such as Germany and France, often pay far less in business taxes overall than they do in the UK.

This is not the only, or even the main, cause of Britain’s productivity problem. But if there is cash to splash in the Spring Statement, it would be better spent on incentivising business investment than the ultimately futile endeavour of attempting to counter the cost-of-living shock, particularly given the ever more urgent need for increased energy and economic self-sufficiency.