London Eye: UK could lose more than it gains through new tax

Chancellor of the Exchequer Rishi Sunak has delivered another furlough scheme out of his hat. This time, two in fact. One over February to April and another to last until September. The money magic will end when Covid ends, as a life-threatening disease.

Government handouts of money through the Covid period already add up to 280 billion pounds. Over a two-year period, this is expected to total £407 billion. The inexorable question that everyone asks and every finance minister fears is of course where all this money will come from.

A classic and much hoped for answer is through just the spending of this. That the government and people can spend their way out of a crisis, avoiding the great mistake of the Great Depression of the 1930s when frugality and a short-term balancing of books was considered safe and prudent. That apparently sensible path only shrank the economy further.

But again no finance minister (or Chancellor of the Exchequer as the finance minister of Britain is called) can let the money roll out without planning an income. That now places Britain in a peculiarly difficult position given it’s just launching into its new-found freedom from the European Union through Brexit.

Corporation tax will be raised to 25 percent from the present 19 percent in 2023. That potentially upsets plans being pushed by hard Brexiters within the government to turn Britain into a low tax low regulation economy in order to attract money from around the world. To turn Britain in the language of the Brexiters, into a Singapore-on-Thames. Singapore levies practically no corporation tax, and for that reason is home to a disproportionately large number of companies from around the world.

The rise in taxation that companies must pay from 2023 could send companies—and their money—out of Britain rather than attracting more. He has offered tax breaks simultaneously to ease business and spur the economy. No doubt there will be more balancing moves along the way for Britain to hold on to its advantages, and build on them. It’s never been a more difficult time for a finance minister to approach what might be a perfect balance.

Fundamentally, this is a move to get big businesses to pay a substantial chunk of the costs the government took on over Covid. "The government is providing business with over £100bn of support to get through this pandemic, so it is fair and necessary to ask them to contribute to our recovery," Sunak said in the House of Commons Wednesday while presenting the Budget.

Not even the opposition Labour Party thought such a rise in taxation on companies is a good idea. Labour leader Keir Starmer resisted calls from his own party members to push the government to raise corporation tax. The supposedly more left-leaning Labour leadership took a more business-friendly approach than did the Conservative government.

The 25 percent corporation tax will be levied on companies with annual profits above £250,000. That means just about every big business that gives Britain competitive advantages. It is expected to earn the government £17 billion by 2025.

Paul Johnson, director of the Institute for Studies, a widely respected think-tank on financial policy issues tweeted: “Extraordinary reversal of longstanding policy. Risky.” Tony Danker, director-general of the Confederation of British Industry said: "Moving corporation tax to 25 percent in one leap will cause a sharp intake of breath for many businesses and sends a worrying signal to those planning to invest in the UK."

Britain’s existing corporation tax has been the lowest among the G7, the group of seven most industrialised nations. That is an advantage to companies that Britain has used to its advantage to attract capital. Britain’s business leaders fear the country may lose more than it gains through such a tax leap. Corporation tax earned the government £63.2 billion 2019-2020 from companies from around the world based in Britain.

The rise now will give companies based in Germany and the US effectively a lower corporation rate. The move comes at a time when a significant number of firms based in Britain have moved to Amsterdam fearing curbs on trading out of Britain post-Brexit. A number have moved also to Paris and Dublin.

The public sector net debt has already hit 100 percent equivalence to the GDP. Government expenditure is more than half of GDP. In the face of such figures, the corporation tax rise appears a band-aid that may only open up more wounds elsewhere.

—London Eye is a weekly column by CNBC-TV18’s Sanjay Suri, which gives a peek at business-as-unusual from London and around.