There’s just one cut that can save us: Only a reduction in tax on business will revive the economy

In the debate on our economic strategy, one thing should be more obvious than it appears to be. The sheer, uniquely awful scale of the United Kingdom’s problem means that no single solution offers any hope of success.

Public expenditure control alone will not do it. The public sector deficit amounts to about a quarter of total public spending. Not even the most draconian cost-cutter pretends they can achieve that. One of the most successful governments at cutting public expenditure, in Canada, managed less than half that in four years, and it had advantages we do not enjoy.

What do we need to do beyond cost control? The majority of the fiscal deficit, some £90 billion a year, is caused by the crash in the growth rate of the economy. Falling tax yields and soaring welfare costs are the inevitable consequence of a slump in the economy, and this is doubly true in Britain, both because of our tax and welfare structure, and because of the sheer magnitude of our crash.

What this implies is that one of the principal policies for fiscal recovery must be a strategy for growth in the private sector. In order of magnitude terms, every increase in the growth rate of 1% improves the recurrent fiscal balance by between £10 billion and £20 billion.

This growth strategy cannot simply be an exercise in Keynesian demand management. This is what the government is relying on and, as the Organisation for Economic Co-operation and Development showed, it is so ineffective that the UK is at the bottom of the growth league table. Neither will short-term demand management correct the worst decline in business investment since records began. What is necessary is a strategy that attracts investment, encourages innovation, enhances productivity, and thereby improves both competitiveness and job creation.

Such an effective growth strategy would inevitably depend on cuts in taxes and regulations, both apparently contrary to the spirit of the age. Tax increases, rather than cuts, are in fashion. Some tax increases are going to be necessary, but some are harmful and counterproductive. By the economic equivalent of Murphy’s law, the politically easy tax increases are the most harmful, and the most economically advantageous tax cuts are the most politically unpopular.

Take the 50p top rate of income tax on people earning more than £150,000. This is the most politically motivated and economically illiterate tax of modern times. The least deleterious consequence will be a sharp rise in expenditure on accountants hired to find avoidance methods. Expect to see a sharp increase in income being arbitraged into tax-free pensions and capital gains.

Worse, we will see people leaving the country to friendlier tax regimes, of which there are now many. So instead of increasing the tax take from a particularly talented and well-paid individual, we will lose the entire tax revenue — and with it all the benefits of having that talent in the UK. Once our most productive talent has fled these shores, they will not come back for a mere return to 40p. Moving house, moving schools, moving office is too irksome to do twice. The 50p top rate is only one of the economic barnacles slowing down our ship of state. Corporation tax is another.

Over the years the level of corporate tax that maximises tax yields has declined, as countries adjusted their own rates downwards. For the vast majority of those countries, corporate tax revenues increased after a short lag.

The gain is not confined to corporate tax revenues. One study of a prospective halving of Britain’s rate showed significant increases in employment, wages, savings, GDP and fixed investment over a decade. Increases in corporation tax, income tax and Vat receipts would lead to a nearly £30 billion improvement by 2021.

These gains arise from increasing entrepreneurship, greater inward investment and reduced tax avoidance. The benefits are not just about balancing the books; they are about creating more opportunity and more wealth.

We should be planning a future reduction in corporate taxes as an explicit growth strategy. Investment planning is by definition forward-looking, so if a British government announced a significant reduction two years in advance, we would be likely to avoid the short-term shortfall, and benefit from immediate investment growth. The more clearly we committed to this as a central economic strategy, the more beneficial the impact would be.

Finally we should cancel the pending increase in employers’ National Insurance contributions, and start to cut it. This contribution is an explicit tax on jobs. Once we have attracted business to the UK and encouraged its growth, we should encourage it to employ people. “British jobs for British workers” was just irresponsible rhetoric; but “real jobs for British residents” is an achievable reality.