Business Weekly - Cambridge, UK

With a number of companies having relocated from the UK and others considering doing so, this would be the signal that the business community has been waiting for.

Constraining real terms public spending growth to 2.3 per cent rather than 2.7 per cent in 2007/8 and 1.6 per cent rather than 1.9 per cent thereafter would permit a significant across-the-board cut in one or more major business tax rates by 2010/11, the CBI says.

It praised the Chancellor’s recent decision on public sector pay as a positive sign that he is taking a firm grip on spending.

John Cridland, Deputy Director-General of the CBI, said: “Government spending has risen substantially over the past decade, and borrowing has doubled that predicted by the Treasury in 2001. We now need to see restraint on both counts, and the Chancellor’s decision last week to hold down public sector pay growth was a positive start.

“As the UK’s tax competitiveness continues to slide, companies are waiting for a signal from Government that it is prepared to act and will create the necessary financial headroom.”

Ian McCafferty, the CBI’s chief economic adviser, added: “A cut in business taxes would also benefit individuals through lower consumer prices, higher affordable wages and greater returns for shareholders. In addition, the immediate improvement in business competitiveness would protect jobs, with long-term earnings also boosted by the added incentive for firms to invest in capital and skills here in the UK.”

The CBI’s submission repeats its warning that the UK’s increasingly uncompetitive tax regime is holding back the economy and leading to companies relocating overseas.

In the November 2006 CBI/MORI tax survey, 22 per cent of companies had already relocated one or more activities abroad and a further 17 per cent were considering relocation for the first time. Almost all of these firms cited the tax regime as a key factor in their decisions.

Since then, more companies from a range of sectors have announced decisions to relocate. The submission says that, “while the majority of these decisions have not led to immediate heavy job losses in the UK, the shift to re-domicile headquarters overseas could see firms less inclined to continue their existing operations here, or expand them in future.

“And regardless of the effect on employment, the impact of firms re-domiciling is unambiguously negative for the public finances.”

The CBI document confirms that while many other countries have cut their corporation tax rate in recent years, the UK’s has remained unchanged at 30 per cent since 2000.

Within the EU-15 the UK rate was the 3rd lowest in 1997; it is now the sixth highest. On a wider view, our overall business tax burden – at 10.2 per cent of GDP – is higher than four of our top five trading partners, including Germany.

The business tax reduction the CBI proposes must not be funded simply by raising other taxes, it says, as the overall tax burden is already high by historical and global standards.

The UK’s tax-to-GDP ratio increased from 34.6 per cent in 1996 to 37.2 per cent in 2005, above the OECD average, moving from 12th to 18th (of 30) in the OECD tax ‘league table’. Key competitors including Germany have been moving in the opposite direction.

On current plans the UK burden would rise further, to 38.1 per cent of GDP - the highest on record aside from 1981/82-84/85. To fund business tax reductions the CBI proposes that the total tax burden should be constrained to 37.6 per cent by 2010/11, £9bn lower than planned but still higher than today (37.3 per cent).

The Government must also ensure that its spending continues to grow more slowly than GDP beyond 2010/11, to shift the UK back up the OECD tax ‘league table’. The document also says that personal tax disincentives which impact on economic performance need to be tackled in the medium term.

The CBI warns that there must be no further loosening in the targets for public borrowing. During the period 2002/03-2006/07, borrowing will have come in at over £100bn higher than predicted in the autumn 2001 PBR, pushing interest rates higher than would otherwise have been necessary, and adding an annual £5bn of interest payments to the public accounts.

The submission to the Treasury also cautions against any back-door increases in the tax burden on business, such as a Planning Gain Supplement on property development or the return of business rates to local authority control.

It also urges the Government to cushion the impact on smaller firms of compulsory pensions contributions from 2012 and says it must also push forward the Better Regulation Agenda, and improve both the reporting and delivery of the promised £21bn ‘Gershon’ efficiency improvements.