Business investment in the UK has fallen to the lowest level in the G7 group of rich nations, despite a cut in corporation tax, the government has been warned as ministers prepare a £30bn grant aimed at companies and high-income workers.
The Institute for Public Policy Research (IPPR) says “race to the bottom” on the headline tax rate on company profits has failed to boost investment and economic growth in Britain over the past 15 years.
Prime Minister Liz Truss and Chancellor Kwasi Kwarteng argue that a lower rate of corporation tax could spur investment growth in Britain to boost economic growth of around 2.5% a year. Quartet will confirm more details about the proposed “fiscal event,” or small budget, on Friday’s tax cuts.
However, he said that the headline reduction from 30% in 2007 to 19% in 2019, orchestrated by former chancellor George Osborne, had not led to higher private investment or faster economic growth.
Despite repeated tax cuts over a century, the UK has fallen behind Italy and Canada and has the lowest private sector investment as a share of national income in the G7.
The following year, the UK ranked 28th out of 31 for business investment in the wider group of developed countries in the OECD.
Studies have shown that the corporate tax cuts used by successive Conservative governments have had little effect on business investment and economic growth, suggesting that the free-market Tories will pay for such tax breaks themselves.
The reduction in corporation tax comes after research by the Social Markets Foundation saw almost £73bn of capital cut between 2010 and 2018. In just one year, business investment increased more than spending.
Business investment has weakened in recent years amid fears of Brexit, then a vivid and difficult economic outlook. Official data shows that the level of investment is 5.7% lower than before the outbreak, and economists warn that rising energy costs and high inflation will strain spending.
Governments around the world vowed last year to end a run on corporation tax that has drained national accounts of funding for vital public services and is benefiting multinational corporations. Around 140 countries, including the UK, have agreed to set a 15% minimum rate.
The IPPR report also raises new questions about Quartet’s proposed increase in corporation tax to 25%, drawn up by former chancellor Rishi Sunak.
Urging the government to consider alternative ways to boost investment and the economy, Grauing said the titanic tax cuts for companies and commitment to an industrial strategy would make a big contribution.
George Dibb, head of the Center for Economic Justice at the IPPR, said: “Slashing corporation tax is a continuation of the failed competition for the UK economy. Tax cuts are not a magic bullet to increase investment and growth.
A headline reduction in corporate tax is not seen as a priority for many business leaders, who have been pushing for relief on capital investment to encourage productivity-enhancing spending.
“If the government was serious about boosting investment, it would listen to businesses that want a serious economic strategy to support growth, boost innovation and boost our low productivity. Instead, it thinks it can fix the path to growth by cutting taxes, which has failed in the past,” Dib added.