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March 21, 2012 7:46 pm
Business has proved easily the noisiest non-political passenger as George Osborne drives grimly down his one true road to recovery. The time-honoured solution of parents – adopted by the chancellor on Wednesday – is to stuff the whingers’ mouths with treats. Of these, an extra one percentage point cut in corporation tax to 24 per cent, was best calculated to induce a sugar rush.
Mr Osborne’s direction of travel on business tax was well established. But the change will cut the levy to 22 per cent by 2014-15 at an additional cost to government of £1bn that year, all things being equal. That should give the UK one of the most attractive tax regimes for business among large developed nations. Competitiveness slipped in Labour’s latter years, though less than implied by the CBI, which focused on the high headline rate rather than the low total burden.
Mr Osborne singled out the banking sector as the bad kid that did not deserve a sweet. A special levy created as a kind of financial naughty step will increase to 0.105 per cent of balance sheets next year to stop banks benefiting from the corporation tax cut. That will raise £410m in 2014-15, albeit that the government is a big shareholder in UK banks and thus stands to receive lower dividends too.
Sticking it to industries that are unpopular with voters can have unfortunate consequences, as Mr Osborne already knows. His disgraceful £2bn tax raid on North Sea oil producers last year choked off production and left rigs mothballed. On Wednesday he offered pre-agreed tax relief for rig decommissioning and tax breaks on the development of new fields to slow the rundown of the UK’s hydrocarbons. These gifts under-atoned for the original offence, like a bouquet of flowers from a wife beater.
It is clear which businesses have the chancellor’s wholehearted support. Drug development start-ups for one. These will be able to claim cash in lieu of tax breaks against their research spending if they are making losses. Games developers are another favourite, despite their products’ enfeebling effect on young men who ought to be hiking or exercising with Swedish clubs. The pixel pedlars will get reliefs equivalent to those received by old-hat movie makers. This looks like a catch-up with rival locations such as Canada. Millions of micro-businesses can meanwhile stop keeping accounts and pay tax on net cash flow instead. Begone scruffy box files, stuffed with yellowing receipts!
As the bank levy hike attested, the coalition’s attitude to the City is less indulgent. No one expects to make a fortune from the National Loans Guarantee Scheme, Mr Osborne’s pet credit-easing project, which may simply displace commercial refinancing. Nor do perpetual gilts look like a bonanza for bond dealers. The securities presuppose blinding ignorance of inflationary history among investors.
But, whisper it if you dare, more of the 300,000 set to benefit from a 5p reduction in higher rate tax work in the Square Mile, Mayfair and Canary Wharf than anywhere else. It will be nice for the higher paid to feel slightly less hated. As Chris Sanger of Ernst & Young says, workers who took £16bn in income early to dodge the 50p rate have an equivalent incentive to delay until 2013-14, when the cut comes in.
A crackdown on avoidance is among the trade-offs. The government airily expects this to succeed where efforts to collect an extra 5p in income tax failed. Perhaps it helps to have the backing of the chancellor of the day. A new 7 per cent tier of stamp duty on homes costing over £2m will also fund the reduction. Posh estate agents envisage tumbleweed bowling through the ghost town that Chelsea may become. But the upshot of the change is to penalise wealth rather than income, a lesser evil in its impact on aspiration. And the appeal of London property as a status symbol to foreign tycoons should increase in parallel with its cost.
This Budget made nary a ripple in the markets. Mr Osborne gave big companies little reason to invest a slice of their £700bn cash mountain in the UK to help stimulate growth. But it is hard to imagine what incentives would work. The historic weakness of business has been to plan for an economic future unblemished by crises such as market crashes and wars. Now strategists have veered to the opposite extreme. The chancellor is powerless to support Chinese property prices or avert war in Iran. Fear of such “bad stuff” has retarded recovery. Mr Osborne is driving skilfully in bad conditions. Are we nearly there yet? No chance.
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