Conservatives are running out of patience with business
The increase in Corporation Tax from 19% to 25% was heavily trailed but there was still a collective gasp when the Chancellor announced it from businesses and the commentariat. After decades of Conservatives priding themselves on low taxes for business the sight of a Conservative Chancellor, even after an unprecedented pandemic, raising the tax rate was a shock to the system.
The tax increase is not due to kick in for two years and maybe it will never happen. But it is important to understand why the Chancellor felt that he could make this announcement in the first place.
When George Osborne announced major cuts in corporation tax in 2012, he laid out a clear logic. The Government would ease the burden of taxation and “in return, you, British businesses, have the self-confidence to: invest, expand, hire, innovate and be the best.” The belief was that once the tax burden fell, a new dynamism would enter the British economy.
Nearly a decade later, that bargain was not kept. Business investment never took off, as the Chancellor told the broadcasters yesterday morning. Wages were stagnant during most of the past decade, only by 2020 had we seen wages rise above the levels seen before the financial crisis. Productivity growth was anaemic. We did see a jobs boom, but that was as much to do with welfare reforms which pushed people back into the labour market. At the same time, share buy backs and cash piles within UK corporations grew. Although some would pin the blame on the legacy of the financial crisis and political instability, this doesn’t stack up. The UK has had lower levels of investment and productivity than our competitors for decades, well before the financial crisis and Brexit.
Conservative Prime Ministers and Chancellors are simply running out of options.
Conservative Prime Ministers and Chancellors are simply running out of options. Some on the right have criticised the Prime Minister and his predecessor because they are borrowing and taxing more, to spend more on infrastructure and skills. But they fail to see that this as Conservatives trying to “back business”, just as much as George’s tax cuts. The problem, whether high taxes or a lack of infrastructure, rests with the state in their mind, not business. The hope is that there must be something that can be done by the state to unleash British business. Anything to avoid acknowledging that there are structural, cultural weaknesses in UK plc.
The truth has always been that whilst you can take British businesses to water, you can’t make them drink. A relatively unremarked, but philosophically important, policy announcement in the Budget was the Chancellor’s Help to Grow programme. Discounted MBAs for SMEs was a recognition that the management and vision of British business is part of what is holding us back. This realisation will only grow in the years ahead if the UK’s economic performance does not substantially improve.
Business leaders need to recognise that the biggest issues are related to the governance and decision making of businesses themselves, not the state. Review after review has found too much short-termism in the board room. This manifests itself in a relative unwillingness to commit to investment in people, plant and new technologies compared to our peers.
How we solve this issue of short-termism is the economic challenge of our time. This isn’t just about tackling climate change, important as that is. We won’t raise living standards, pay for world-class public services or balance the books if we fail to boost our productivity. This requires greater investment in people, plant and processes. Businesses need to commit.
The good news for Conservatives is that there are models of business, social enterprises and cooperatives, which exhibit the qualities in business that they are looking for.
The good news for Conservatives is that there are models of business, social enterprises and cooperatives, which exhibit the qualities in business that they are looking for. But this would mean turning attention away from endless debates about the state towards the structure, purpose and performance of companies. It will be hard psychologically to do this, but essential.
Politicians are ultimately accountable to the electorate, and Conservatives are running out of patience with business. Business groups should think about this, before they start criticising the Chancellor’s tax rises.