For someone who believes in the power of markets, UK prime minister Liz Truss took a long time to appreciate their most volatile elements. On Friday she capitulated, dismissing her chancellor Kwasi Kwarteng. Replacement Jeremy Hunt is a moderate, relatively speaking.
The decision, and the partial reversal of the recent “mini” Budget, marks the end of an ill-starred experiment in unorthodox economics.
With smoke still billowing out from the lab, markets will expect better chemistry from Truss and Hunt, himself a low tax advocate. They must buff up the government’s economic credibility. Yes, government bonds staged a recovery in anticipation of the U-turn on corporate tax. But reintroducing an £18bn increase reverses just two-fifths of the mini-Budget’s £43bn unfunded tax cuts.
Businesses crave stability. They should welcome efforts to get a grip on public finances. But some, including banks, should face a significantly higher burden after the reinstatement of the corporate tax rise in April next year from 19 per cent to 25 per cent. Nor is it just governments demanding a bigger share of profits. Workers too want more.
A relatively high headline rate will make Britain a less attractive place to do business. Ironically, the UK was the enthusiastic proponent of using tax as a lever to attract inward flows of capital. It led the global race to cut rates which have fallen 8.3 percentage points to 20 per cent in the 11 years to 2021, according to the OECD.
The final impact of a high headline corporate tax rate on investment decisions depends on the generosity of investment allowances. In the UK, these have historically lagged behind other countries.
Businesses should now demand more investment-friendly tax reliefs. That would soothe the burn of a significant rise in the headline rate. That percentage, although high internationally, is unlikely to drop again. The fallout from Trussonomics is likely to make corporate tax cuts a toxic topic in future election campaigns.
The Lex team is interested in hearing more from readers. Please tell us what you think of the UK government’s U-turn in the comments section below.