Whacking up corporation tax for larger companies from 19pc to 25pc doesn’t obviously help in this regard. Even at 25pc, the headline rate is still the lowest in the G7, but the international messaging of such a big increase is nonetheless appalling.
Full expensing, which builds on the “super-deductions” tax break Rishi Sunak announced when chancellor, offsets these negatives, at least partially.
Early signs are encouraging. Since super-deductions were introduced, Britain has enjoyed the fastest business investment growth in the G7, albeit from a very low base. Full expensing, which allows companies to save £250k in tax for every £1m invested, gives Britain the joint-most competitive capital allowances regime in the OECD. Prior to its introduction, the UK was a lowly 32nd.
Bigger capital allowances might also help tip the balance of tax advantage in the UK away from the likes of Goldman Sachs and other big financial and professional services firms towards more traditional areas of economic activity.
Tax policy should ideally aim for as broad a base as possible, but with low headline rates that are sectorally agnostic and don’t favour one set of economic players over another.
When you see levels of business investment as poor as Britain’s, however, there is a good case for extra incentives, or eventually we won’t have much of an economy left to tax in the first place.
When Hunt originally announced full expensing in this year’s spring Budget, he time-limited it to three years. Had he made it permanent, he would, in the judgment of the Office of Budget Responsibility (OBR), have broken his own fiscal rules.
But that was then. Things have since changed. The National Institute of Economic and Social Research this week estimated that thanks to the effect of high inflation on tax revenues, the fiscal headroom is far higher than OBR forecasts suggested last March.
