Business investment in the UK fell to the lowest rate in the G7 group of wealthy nations despite corporation tax cuts, the government has been warned, as ministers prepare £30bn of giveaways targeted at companies and higher-income workers.
The Institute for Public Policy Research (IPPR) said a “race to the bottom” on the headline tax rate on company profits had failed to boost investment and economic growth in Britain over the past 15 years.
Liz Truss, the prime minister, and her chancellor, Kwasi Kwarteng, argue that lower rates of corporation tax could unleash an investment boom in Britain to help drive up economic growth towards a target rate of 2.5% a year. Kwarteng will confirm more detail around the tax cuts on Friday at a planned “fiscal event” or mini-budget.
However, the IPPR said slashing the headline rate from 30% in 2007 to 19% in 2019, orchestrated by the former chancellor, George Osborne, did not spur higher private investment or faster economic growth.
Despite the repeated tax cuts to the lowest rate in a century, the UK fell behind Italy and Canada to rank with the lowest private sector investment in the G7 as a share of national income.
The following year, the UK ranked 28th for business investment out of 31 members of a wider group of developed countries in the OECD.
Studies have shown corporation tax cuts used by successive Conservative governments have had little bearing on business investment and economic growth, undermining the argument of free-market Tories that such tax breaks pay for themselves.
Cuts to corporation tax came with a net cost to the exchequer of almost £73bn between 2010 and 2018, according to research by the Social Market Foundation. In only one year did an increase in business investment outweigh the cost.
Business investment has flatlined in recent years amid concern over Brexit, then Covid, and a challenging economic outlook. Official figures show the level of investment remains 5.7% below where it was before the pandemic, while economists warn rising energy costs and sky-high inflation will put a dampener on spending.
Governments around the world have committed last year to ending a race to the bottom on corporation tax, saying it had deprived national exchequers of revenue for funding vital public services, while benefiting footloose multinational corporations. Almost 140 nations, including the UK, agreed to set a 15% minimum rate.
The IPPR report will raise fresh questions over Kwarteng’s desire to scrap a planned increase in corporation tax to 25%, starting in April, that had been set in motion by the former chancellor, Rishi Sunak.
Urging the government to consider alternative ways to increase investment and economic growth, the leftwing thinktank said targeted tax cuts for companies and a commitment to an industrial strategy would have a bigger impact.
George Dibb, the head of the Centre for Economic Justice at the IPPR, said: “Slashing corporation tax is just a continuation of a failed race to the bottom that hasn’t delivered for the UK economy. Tax cuts are not a magic bullet to increase investment and growth.”
Cuts to the headline rate of corporation tax are not seen as a priority for many business leaders, who have been pushing for relief on capital investment to help encourage productivity-boosting spending.
“If the government were serious about boosting investment, it would be listening to businesses who want a serious economic strategy to support growth, boost innovation, and increase our low productivity. Instead, it thinks it can cut tax and deregulate its way to growth, which has failed before,” Dibb added.
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