Corporate tax cut tempts City

Following murmurs in the City, Conservative leader David Cameron has confirmed that if elected his government would cut the rates of business tax.

Speaking at the CBI annual conference on 23 November, Cameron said: “We will be unashamedly pro-enterprise and pro-wealth creation. We’ll cut the small companies rate to 20p (from 21p) and the main rate of corporation tax to 25p (from 28p).”

Whether he can afford the measures and what they mean for businesses up and down the country, is open to question. The Tories insist the sums add up with the cuts paid for by scrapping complex reliefs and allowances elsewhere.

Going further, Cameron said he would abolish all tax on the first ten jobs new businesses create during the first two years of a Conservative government. In the absence of any concrete announcement at the same forum from Gordon Brown, bar a promise to hold an international investment summit next year, Cameron’s proposed cuts met with cautious optimism.

But Alan Clarke, UK economist at BNP Paribas, believes Cameron’s sums will only add up provided offsetting manoeuvres are as suggested.

“Essentially, if he follows up his corporate and small business tax cuts by getting rid of allowances elsewhere, then proposals are on a sound footing, despite the Tories not knowing (in-depth) what shape the Treasury would be in if they are elected,” he said.

It is a bold flirtation with supply-side tax cuts given that ONS data suggests government receipts fell 9.1% in October from a year earlier, while spending rose 10.3%.

Clarke said Team Cameron probably portrays cuts as a supply-side economic stimulus. “There is growing concern, backed by evidence, that companies might ditch the UK for low tax economies. Some already have. Cameron’s proposal entices businesses and leaves money in the hands of the private sector. That constitutes a stimulus, albeit a marginal one,” he added.

CBI delegates seemed suitably impressed. From a spot survey of 15 delegates, 12 felt Cameron’s announcement was a good start but some said further clarity was needed. “They are not massive cuts, but I think they would still do more to create jobs than Gordon Brown’s stand, which banks on monetary stimulus spending as far as I can see,” said one respondent.

Another said the proposed National Loan Guarantee Scheme, which would underwrite lending from banks to businesses, seems likely to increase the national debt. She felt question marks remained on whether Tories have the will to bring private calculations of risks and rewards of SME business lending into the public sector.

Government borrowing for October hit a record £11.4bn and IHS Global Insight forecasts that the UK deficit could cap £200bn for the year. In light of omnipresent charges that Tories have no way of funding tax cuts, CBI director general Richard Lambert also expressed cautious optimism, saying there were no right or wrong answers given the uncertain economic challenges the country faces.

The Federation of Small Businesses said they had been calling for the cuts for a while and the opposition party leader has listened. “Above all, apart from leaving more capital in the hands of SMEs, such cuts give them leverage to employ more staff,” a spokeswoman added.

Market commentators believe Brown should have responded to Cameron rather than waiting for the pre-Budget report. Stephen Herring, tax partner at BDO, believed the Tories had the will to carry out the cuts and felt credit should be given to Cameron for being the first to raise the subject.

“However, I am not convinced about the stimulus angle. Whoever is in power needs to address this issue, simply because corporate tax as a whole is going down globally. Cameron wants to make the UK corporate tax structure more globally competitive,” said Herring.

“If you take the hypothetical position that corporate tax cuts constitute a stimulus, then it is a marginal one. Any cuts here could be significantly outweighed by income tax, employees’ national insurance and VAT hikes.”

Herring also fails to see any short-term hopes for Tory party treasurer Michael Spencer’s belief that corporate tax cut would extend to 20p with his party in power. At a time where anti-capitalist rhetoric dominates public opinion, as well as pages of the tabloid press, proposing business tax cuts to restart the economy has its own risk.

But Cameron said: “Dealing with the deficit is not an alternative to economic growth – the two go hand in hand. A Conservative government will be one that knows when to get out of the private sector’s way.”

The City feels Cameron need not apologise for leaving a little more money in hands of the private sector via tax cuts. Public opinion is yet to deliver its verdict.