I have a lot of respect for the Institute of Fiscal Studies (IFS) and Paul Johnson, a director, in particular. They always seem meticulously independent as well as highly authoritative. What they say about the public finances matters, usually cutting through all the political rhetoric to get to the facts. Mr Johnson and a colleague have strayed into party politics and published an article on the Tory leadership contest, looking at the tax pledges that Truss and Sunak are making in their bid to become the next prime minister. It's a good article, well worth a read.
I was interested in this bit:
"Economic growth in the UK has been feeble for a good 15 years. We have underperformed most other major European nations, including France, Germany and the Netherlands, which have all grown more quickly than we have since 2007 (and in particular since 2015). Our tax burden is substantially lower than theirs. On the eve of the pandemic, general government revenues as a fraction of GDP (one measure of the tax burden, used and published by the OECD) stood at 38.8 per cent in the UK, versus 43.7 per cent in the Netherlands, 46.7 per cent in Germany and 52.5 per cent in France."
It isn’t the first time Paul Johnson has raised this question of tax levels. He mentioned it on Radio 4 a few weeks ago but he’s now set it down clearly in writing. He’s not a man to make claims which aren’t true so I take it all as gospel.
And it poses a big question. If the governments of countries like Germany and France and Holland can grow their economies faster than Britain with much higher levels of taxation, the entire Conservative philosophy looks to be a mistake.
Germany, (we don’t even need to go as far as France's 52.5%) has a tax take nearly 8 percentage points higher than ours. If Britain had a similar level, it would provide about £200 billion EXTRA every year to spend on health, education and physical infrastructure.
Those countries may not get as much foreign direct investment (FDI) - although Holland does as this IMF blog post makes clear - but since they are investing far more than we are in their businesses themselves, they probably don’t need it. Lower rates of corporate taxes probably help a bit, but most foreign companies are adept at avoiding that sort of tax anyway, so I’m not sure it makes much difference. Britain comes in about fifth in the world for FDI, Germany is still in the top ten. Holland is second only to the USA.
Far more important is the size of the market. Imagine you’re in the US or Japan and you can choose where to locate a new plant. The EU allows you to invest simultaneously in 27 different countries with a common set of rules and legal structure and a total population of close to 500 million consumers. I am not sure a few per cent on corporate tax, which you can avoid anyway by booking more profit in other tax jurisdictions, makes that much difference.
I am far from convinced that FDI in the UK comes from new investment. A lot is simply buying up British companies (often saddling them with debt from the money used to buy them) and either repatriating profits elsewhere or, in the case of hedge funds, simply selling them on later for a much higher price. Does it add to productivity? No, or not very much. If anything the opposite.
Paradoxically, by exiting the single market we are now forced to offer ever lower business taxes as an incentive to attract foreign companies to invest here, thus reducing tax revenues even more.
Not only that, those very same EU states are also weighed down by all the terrible regulations we are desperate to scrap - although after a decade of looking and at least 20 different initiatives we seem unable to identify even a shortlist of what they are!
The impact of creating your own regulations can be seen in the chemical industry where the FT report that the plan for Britain to have its own Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) data base will cost the industry £2 billion and in most cases will simply duplicate the original EU system. In the future companies on both sides of the border will face two sets of regulatory compliance costs.
Remember also that this is £2 billion that won't go into investment.
It seems to me that the present Tory party, full of ex bankers, lawyers and army officers, has no idea how businesses in this country actually work.
They have been in power for about 48 of the last 77 years and have pursued this low tax philosophy most if not all of the time. We have gradually declined while Europe and Germany in particularly, spending what was needed and raising enough tax to pay for it, have caught us up and overtaken us. They are now moving further ahead.
We watch this and instead of learning and adopting their practices we do the opposite with - surprise, surprise - the opposite effect, our economy stagnates and we (or at least the working people of this country) get poorer. Crazy or what?
