It’s not often I find myself violently agreeing with a trade unionist, but these are strange times. According to the BBC, Sally Hunt of the University and College Union will “accuse ministers of prioritising billions of pounds in tax breaks for business as they triple the cost of university and axe funding for college students and help for the unemployed” at an anti-cuts protest today.
My instinct is that she’s right – but my reason for thinking that is quite different to hers. I’m not too interested in whether this is fair or just, because at the end of the day we will only create jobs for the young and the unemployed if we have strong businesses. It’s one of those perverse laws of the economy: the fate of business and worker, of rich and poor, are inextricably bound up with one another.
My problem is that giving tax breaks to businesses just isn’t a very effective way to create jobs. To see what I mean, you need to put yourself in the place of a business owner. The corporate tax rate only applies to a firm’s profits (assuming your business makes a profit). That’s all very well, but there are a lot of obstacles to actually making a profit: Can I afford the rent on my office? Will the VAT rise make my products too expensive? Where can I find the skilled workers I need? All of these problems – problems which the government can do something about instead of cutting tax – come with a huge risk. Now ask yourself: if you are thinking of starting a business, are you more likely to worry about a marginal amount of tax on your profit, or the myriad of risks and obstacles you need to overcome to make a profit in the first place? Would you want the government to be helping create an environment for you to make a profit, or giving you a marginal tax break on whatever profit you do make?
One of the lesser known features of this recession is that UK businesses are, in fact, sitting on vast piles of cash – and it’s not just me saying that, it’s the Chancellor, no less. Why should they be hoarding cash rather than investing it, and creating jobs? The answer is complicated – it involves many things, including risk, uncertainty, structural problems with the UK economy – but I find it hard to believe that corporate tax rates are an important consideration. Of course, the government deficit does play a role in creating an uncertain environment, but remember: cutting taxes makes the deficit worse. Surely Osborne needs some better ideas than cutting taxes for business and cutting spending on everything else?
The London Evening Standard revealed yesterday that Osborne and Vince Cable were also planning to bring back Enterprise Zones to help stimulate deprived areas by offering temporary tax breaks to businesses. This policy from the 1980s looks like a great idea on the surface, but it was generally seen as a failure (with the exception of Canary Wharf). That’s because there is one very big problem with Enterprise Zones – the tax break is temporary. Businesses might come into the area to take advantage of the tax breaks and new office space while they’re available, but there’s nothing to stop them moving away again once the offer expires. The logic is the same as that used by Ireland, which cut its corporation tax to attract foreign companies. It worked brilliantly while things were going well, but as soon as the economy took a turn for the worse, many of the companies fled. It looks as if Osborne hasn’t learnt this lesson.
But what of Canary Wharf? It was an Enterprise Zone in the 1980s, and today is still a thriving economic hub, long after the tax breaks expired. The main reason that Canary Wharf took off is that it is a great place to do business: affordable, swanky offices, close to the centre of London, with access to world class skills. What it needed was new buildings and infrastructure to replace the decay of the docklands – not so much a tax break. When the tax break ended, Canary Wharf was still a great place to do business, unlike all the other Enterprise Zones. The FT tells us that office space costs more in Birmingham than in San Francisco, a problem that a temporary tax break will do little to solve. It would be much better to spend the money on new infrastructure, to provide a lasting legacy for businesses.
That is the fundamental problem: the government is offering short term bribes to businesses, while ignoring the underlying weaknesses in the UK economy. If you don’t tackle the real problems – skill shortages, bad infrastructure, deep uncertainty – you won’t get any growth at all, let alone balanced, sustainable and equitable growth.
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