Missed opportunities mean our standard of living will fall even further behind the US’S

On the eve of the 2008 financial crisis people in Britain were 23 per cent poorer than those in the United States. Since then, that gap in living standards has widened to 37 per cent. Whereas in 2021 the typical American household enjoyed an annual income, after inflation, equivalant to £51,500, the typical UK household earned just £34,000.

Moreover, despite earning higher wages, the average US household was paying a lower tax rate than the average UK one.

Over the past 15 years, the UK economy has fallen behind, the result of which has been lower wages, higher costs, lower tax revenues and demands for ever higher tax rates to fund public spending.

While the Jeremy Hunt’s Budget includes a few nods to achieving higher growth, there were numerous missed opportunities.

First and foremost, the Budget was a missed opportunity to incentivise increased business investment in the UK by keeping the corporate income tax rate at 19 per cent instead of raising it to 25 per cent.

Raising the rate by a whopping one-third brings the UK corporate tax rate above the average for other advanced economies (24 per cent) and well above the EU average (21 per cent). By my estimates the rise will also reduce the size of the UK economy by almost 1 per cent. More importantly, it will ultimately lower average household wages by £2,500.

Recent research reveals that workers bear at least half the cost of business taxation, which lowers investment in new plant and equipment and thus lowers labour productivity.

Additionally, because corporate investment and income are highly mobile, the Treasury is unlikely to raise substantial revenue from the rise. I estimate that 70 per cent of the projected revenue gain from higher corporation tax will be offset by revenue cuts through lower growth.

Other studies suggest that figure could be as high as 100 per cent.

In addition, while the Treasury’s decision to allow businesses to continue to fully deduct the cost of investment in qualifying equipment from their tax bill was welcome, the provision is temporary, which means it simply pulls investment from the future and does little to change the long-run capital stock and potential output of the UK economy.

It was also a missed opportunity to extend full expensing to other types of investment. In particular, businesses in the UK can only deduct 39 per cent of the cost of new investments in buildings – which includes structures such as factories, oil rigs and mine shafts – and 83 per cent of the cost of investment in intellectual property. These compare with averages from the Organisation for Economic Cooperation and Development (OECD) of 51 per cent and 78 per cent, respectively.

There were other missed chances, too. The burden of taxes on British workers is still too high. A person earning just over £50,000 in the UK faces a tax rate (42 per cent) that a US worker doesn’t face until they’re earning £190,000. Similarly, in the midst of the worst energy crisis in the past four decades, the Government missed a chance to diversify its portfolio towards the sort of shale gas revolution which has driven US energy supply up and emissions down, or to address the restrictive planning system that chokes British growth.

Sceptics of the effects of pro-growth economic policy can draw inspiration from America’s recent experience.

In the 2017 Tax Cuts and Jobs Act, the US lowered its corporate tax rate from 35 per cent to 21 per cent, and allowed businesses to fully deduct the cost of new equipment investment for five years.

We also reduced various tax giveaways and ploughed those savings into across-the-board reductions in personal income tax rates.

Though business investment in the US, as in the UK, had been sluggish in the years after the financial crisis, after the 2017 tax reform investment surged to a level that was almost 10 per cent above its pre-2017 trend on the eve of the pandemic.

By 2021, even though the US economy was only slightly larger than the official US budget scorekeeper had predicted in the wake of the 2017 tax changes, corporate tax revenue as a share of the US economy was actually higher than projected, at 1.7 per cent versus 1.4 per cent.

Labour force participation, which had been declining during the eight years since the financial crisis, rose by almost a full percentage point.

Meanwhile, in 2018 and 2019 median household income in the US rose by $5,000 after inflation. This constituted a bigger increase in two years than in the entire 20 preceding years combined.

Tyler Goodspeed chaired the White House council of economic advisers, 2020-21. He is now a Kleinheinz Fellow at the Hoover Institution at Stanford University, Senior Fellow of the Adam Smith Institute, and Chief Economist at Greenmantle LLC