Business investment in the UK fell to lowest rate in the G7 group of rich countries despite corporate tax cuts, the government has been warned as ministers prepare £30bn in giveaways targeting higher-income businesses and workers.
The Institute for Public Policy Research (IPPR) said a “race to the bottom” on the general tax rate on corporate profits had failed to boost investment and economic growth in Britain in the past 15 years.
Prime Minister Liz Truss and her chancellor, Kwasi Kwarteng, argue that lower corporate tax rates could spark an investment boom in Britain to push economic growth to a target of 2.5% a year. Kwarteng will confirm more details about the tax cuts on Friday at a planned “fiscal event” or mini-budget.
However, the IPPR said lowering the general rate from 30% in 2007 to 19% in 2019, orchestrated by the former chancellor, George Osborne, did not lead to higher private investment or faster economic growth.
Despite repeated tax cuts to its lowest rate in a century, the UK fell behind Italy and Canada and was among the lowest private sector investment in the G7 as a share of national income.
The following year, the UK was ranked 28th for business investment out of 31 members of a larger group of developed countries in the OECD.
Studies have shown that the corporate tax cuts used by successive conservative governments have had little impact on business investment and economic growth, undermining the Tories’ free-market argument that such tax breaks pay for themselves.
Corporate tax cuts cost the Treasury nearly £73 billion net between 2010 and 2018, according to research by the Social Market Foundation. In just one year, an increase in business investment outweighed the cost.
Business investment has leveled off in recent years due to concerns over Brexit, then Covid and challenging economic prospects. Official figures show that investment levels remain 5.7% below pre-pandemic levels, as economists warn that rising energy costs and skyrocketing inflation will weigh on spending.
Governments around the world committed to ending a race to the bottom on corporate taxes last year, saying it had robbed the national treasury of revenue to fund essential public services while benefiting multinational corporations. companies that had a foothold. Nearly 140 countries, including the UK, agreed to set a minimum rate of 15%.
The IPPR report raises new questions about Kwarteng’s desire to cut a planned corporate tax hike, initiated by former Chancellor Rishi Sunak, to 25% from April.
The left-wing think tank urged the government to consider alternative ways to increase investment and economic growth and said targeted tax cuts for businesses and a commitment to industrial strategy would have a greater impact.
George Dibb, head of the Center for Economic Justice at the IPPR, said: “Cutting corporate taxes is just a continuation of a failed race to the bottom that the UK economy has failed to deliver. Tax cuts are not a panacea for boosting investment and growth.”
Reductions in the nominal corporate tax rate are not seen as a priority by many business leaders, who have pushed for easing of capital investment to stimulate productivity-boosting spending.
“If the government were serious about boosting investment, it would listen to companies that want a serious economic strategy to support growth, boost innovation and increase our low productivity. Instead, it thinks it can cut taxes and deregulate its path to growth, which it failed before,” Dibb added.