Business investment in the UK has fallen to the lowest rate in the group of wealthy G7 countries despite corporate tax cuts, the government has warned, as ministers prepare £30billion in giveaways for businesses and high-income workers.
The Institute for Public Policy Research (IPPR) says a ‘race to the bottom’ on the headline tax rate on corporate profits has failed to boost investment and economic growth in Britain over the past 15 years.
Liz Truss, the Prime Minister, and her Chancellor, Kwasi Kwarteng, say lower corporate tax rates could trigger an investment boom in Britain to help boost economic growth towards a target rate of 2.5 % per year. Kwarteng will confirm more details of the tax cuts on Friday at a scheduled “tax event” or mini-budget.
However, the IPPR said the reduction in the headline rate from 30% in 2007 to 19% in 2019, orchestrated by former Chancellor George Osborne, did not spur increased private investment or faster economic growth. .
Despite repeated tax cuts to the lowest rate in a century, the UK has fallen behind Italy and Canada to rank with the lowest private sector investment in the G7 as a percentage of national income.
The following year, the UK ranked 28th in business investment out of 31 members of a wider group of developed OECD countries.
Studies have shown that the corporate tax cuts used by successive Conservative governments have had little impact on business investment and economic growth, undermining the argument of free-market conservatives that these tax breaks profitable.
Corporate tax cuts resulted in a net cost to the public purse of nearly £73billion between 2010 and 2018, according to research by the Social Market Foundation. In a single year, increased business investment offset the cost.
Business investment has stagnated in recent years amid concerns over Brexit, then Covid, and a difficult economic outlook. Official figures show the level of investment remains 5.7% below its pre-pandemic level, while economists warn that rising energy costs and skyrocketing inflation will dampen spending.
Governments around the world pledged last year to end a corporate tax race to the bottom, saying it had starved national treasuries of revenue to fund vital public services, while benefiting mobile multinational corporations. Nearly 140 countries, including the UK, have agreed to set a minimum rate of 15%.
The IPPR report will raise new questions about Kwarteng’s willingness to drop a planned corporate tax rise to 25%, from April, which had been put in place by the former chancellor, Rishi Sunak.
Urging the government to consider other ways to increase investment and economic growth, the left-wing think tank said targeted tax cuts for businesses and a commitment to an industrial strategy would have an impact most important.
George Dibb, director of IPPR’s Center for Economic Justice, said: “The corporate tax cut is just the continuation of a failed race to the bottom which has not been good for the British economy. Tax cuts are not a magic bullet to increase investment and growth.
Reductions in the headline corporate tax rate are not seen as a priority for many business leaders, who have pushed for capital investment relief to encourage spending to boost productivity.
“If the government really wanted to stimulate investment, it would listen to companies that want a serious economic strategy to support growth, stimulate innovation and increase our low productivity. Instead, he thinks he can cut taxes and deregulate his way to growth, which has failed before,” Dibb added.