Business tax breaks and industrial strategy

Easing the cost of living crisis through business tax cuts? Chancellor Rishi Sunak addressed business leaders at the CBI’s annual dinner last week, giving a speech that affirmed the role of businesses in the government's plan to ease the cost of living crisis. (Transcript here and video here.) A central part of the governments’ strategy is to use tax cuts to stimulate business investment: “higher productivity is the only way to raise living standards”, the Chancellor proclaimed.

Philosophy: ‘New culture of enterprise’. The Chancellor outlined his vision to stimulate a ‘new culture of enterprise’ in his Mais lecture, which rejected a role for the state in boosting or guiding investment. Instead tax cuts hope to stimulate business investment, innovation and productivity, eventually feeding through into higher living standards through wage growth. (The PM also stressed ‘work’ as the fix for the cost of living crisis on Monday, despite the TUC’s latest forecasts predicting a 17 year pay squeeze with wages remaining lower than their 2008 levels until 2026.)
Conservative support for tax cuts. Tax cuts are supported by large swathes of the Conservative party and have growing support in the Cabinet. Conservative grandee David Davis called them a ‘fundamental tenet of Conservativism’ in his piece expressing opposition to the windfall tax proposal. Similarly, No.10 advisors David Canzini, Guto Harri, Steve Barclay and Andrew Griffith have resisted calls for a windfall tax on grounds of it being ‘unconservative’. Backbench MPs such as the Chair of the Northern Research Group Jake Berry, have been lobbying for tax cuts on business to ease cost pressures in Red Wall constituencies.
How did business respond? Politico’s analysis details the “muted reception” from business leaders, with some calling the address “very bland and uninspiring” and “lacking anything new” despite growing pressure on the Chancellor to introduce an immediate package of support.

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The 'Super-Deduction' tax break. The Sun’s Harry Cole reports that the Chancellor may increase R&D tax allowances and extend tax breaks for investments in the Autumn Budget. The 130% ‘Super-Deduction’ on corporation tax, introduced in the 2021 Spring Budget, was pitched as a way of incentivising businesses to invest in more capital machinery, boosting innovation and productivity - branded “the biggest business tax cut in British history” by its supporters and the ‘Amazon tax cut’ by its critics.

What does the evidence say? The Treasury’s own analysis found that the government pays far more in R&D tax reliefs than businesses spend on investment, and that the UK continues to have one of the lowest investment levels in the OECD, despite the generous relief structure. A survey by Deloitte found that only 26% of CFOs expected the super-deduction to have a positive effect on their investment plans over the next year. The CBI’s survey found that, of the 56% of businesses planning to claim for the tax cut, only 19% said this brought forward existing investment plans. Tax Watch’s George Turner explains how the super-deduction benefits companies who have already made large windfalls during the pandemic and “who were planning to make capital expenditure regardless of the incentives available” anyway, such as Amazon and energy firms.
Broad spectrum of criticism. Ex-PM Theresa May called increasing capital allowances “Treasury orthodoxy” in her critique of the super-deduction and instead called for “increasing investment and support investment in areas which encourage growth and innovation, and that means R&D”. IPPR’s George Dibb noted that the eligibility for the super-deduction was expanded to include landlords “to prop up the UK’s rentier economy”, despite being framed as a policy to increase investment and create a high-wage, high innovation economy. Industrialist Juergen Maier notes that business investment is 35% below pre-Brexit trend and called for businesses to “speak up” and call for “a more pragmatic version of Brexit”.

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Alternative industrial strategies to ease the cost of living crisis. Given that business investment actually fell by 0.5% in the first quarter of this year, there are growing calls from both Left and Right for alternative economic strategies to be considered both to address the immediate crisis and to put the economy on a path to higher wages and productivity.

Short term packages of support. Martin McTague, the new national chairman of the Federation of Small Businesses, says the Chancellor should ignore calls to extend the super-deduction and provide more help for small firms with rising energy costs. The British Chambers of Commerce have called for a variety of measures to ease the costs of doing business and prevent firms passing on further price rises, including a temporary energy price cap for small businesses and widening eligibility for the Energy Bill Rebate to include small firms. NEF’s Alfie Stirling noted that the ~£13bn forecast to be spent on the super deduction this year is only ~£2bn shy of the cost of protecting Universal Credit claimants from their benefits being eroded by inflation. ‍
Longer term industrial strategy. Theresa May’s former adviser Nick Timothy recently called for a “radical change to this economic model” which is overly dependent on consumption despite too many low-income people being trapped in “low-productivity, low-skill, low-paid jobs”. Sunak’s speech differs starkly from the one CBI Director-General Tony Danker gave last year, dubbed as a “damning critique of free-market capitalism”. This exemplified the new consensus (though not in the Government) around the importance of state intervention and industrial strategy to boost investment, productivity and pay. Danker noted that “we’ve had five decades where the free market has palpably failed” and called for a “partnership with government.” For a wealth of resources on industrial strategy, visit our resource bank page, Reshaping the Economy, and read chapters from The Political Economy of Industrial Strategy in the UK, edited by academics Craig Berry, Julie Froud and Tom Barker.

Weekly Updates

Energy and tax

Windfall tax U-turn? The FT reports that the Chancellor has ordered Treasury officials to “draw up plans for a possible windfall tax on more than £10bn of excess profits by electricity generators, including wind farm operators, on top of a hit on North Sea oil and gas producers.” This would go “well beyond Labour’s original windfall tax plan” but the government is yet to decide whether it will follow through or not. The development comes as pressure mounts from all sides for a windfall tax. Conservative MP and ex-Financial Secretary to the Treasury Jesse Norman is the latest to call for a levy, arguing that there are several precedents to a windfall tax and that it would not impact upon companies’ incentive to invest.

Cost of living solutions. The New Economics Foundation proposes that a windfall tax on oil and gas companies could be used to fund two solutions to the cost of living crisis: a ‘great homes upgrade’ to retrofit 19 million homes by 2030, and a ‘living income’, boosting benefits in order to create an income threshold beneath which nobody can fall.
Support for public ownership. Voters in the ‘Red Wall’ overwhelmingly back nationalised energy, according to a new Survation poll. 68% of those surveyed said that energy companies should be publicly owned, while 70% said the same for water and 68% for railways.

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The REPowerEU plan. The European Commission has published its REPowerEU plan with a threefold objective: reduce dependency on Russian fossil fuels, accelerate EU transition to a clean economy, and increase the resilience of the EU energy system. Lucie Mattera, E3G’s Head of EU Politics, said that this ambition must be matched by support from ‘capitals and the European Parliament’.

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Rate hikes a threat to energy transition. Green Central Banking’s Jamie Woolley argues that tighter monetary policy, as recently seen from the Bank of England and the Federal Reserve, is a threat to a green energy transition. He argues that higher rates will prevent investment in renewable energy, which are more capital intensive than fossil fuels and with much larger upfront costs.

Inequalities

Profiting from pain. As the global economic elite gather at Davos this week, Oxfam publishes its ‘Profiting from Pain’ briefing, highlighting how billionaires’ wealth increased more in the first two years of the Covid-19 pandemic than in 23 years combined. The charity states that a new billionaire is created every 30 hours, while nearly a million are pushed into poverty at the same rate. Oxfam’s Max Lawson has shared a graph demonstrating the steep rise in billionaire wealth and extreme poverty over the past two years.

The Rish List. Rishi Sunak has become the first UK politician to be featured in the Sunday Times Rich List. The List finds that the UK now contains a record 117 billionaires. A survey, commissioned by Patriotic Millionaires, finds that more than half of the public believe that extreme wealth is harmful to the country and a threat to democracy and that 72% of those polled believe that individuals can have too much wealth.
£205,000 richer. The High Pay Centre calculates that if total household wealth in the UK had increased at the same rate as the wealth of the top 20 entrants on the rich list over the past decade, the average household would now have £205,000 more than they currently do.

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Widening pay gap. The High Pay Centre has found that the CEO/worker pay ratio is now ‘increasing to new highs’ despite falling over the course of the pandemic. During the pandemic, the ratio between the median CEO and the median worker at FTSE 100 companies fell from 53:1 to 44:1 but is expected to rise over the course of 2022 with ratios the widest in the retail sector.

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Gender equality and a just transition. The Women’s Budget Group has published the latest policy paper in its Feminist Green New Deal series: Labour Market Changes for a Green, Caring Economy. The paper argues that the ‘greening’ of jobs needed for a just transition will have gendered impacts. Its recommendations include a shorter working week as well as a free, universal childcare service to ensure maximum accessibility to green jobs.

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‍‘Fiscally neutral’ UBI. Compass has published a report on a fiscally neutral model of Universal Basic Income that could “reverse the poverty and inequality rises of the last 45 years”. Authors Howard Reed, Stewart Lansley, Matthew Johnson, Elliott Johnson & Kate Pickett found that the cost of the extra payments could be exactly offset by the extra revenue from internal changes in tax rates and National Insurance Contributions (NICs).

Supply chains

Food insecurity. The ongoing invasion of Ukraine will exacerbate global food shortages and could leave 1.6 billion people without enough food. Russia and Ukraine supply 28% of globally traded wheat, 29% of the barley, 15% of the maize and 75% of the sunflower oil, but Ukraine already shipped much of last summer’s crop before the war and farmers have nowhere to store their next harvest. The Economist argues that countries must work together and keep markets open but also that substitutions can be made (huge amounts of exported grain is used to feed livestock).

Global hunger crisis. The ONE Campaign’s David McNair explains why the UN Security Council is worried about the global hunger crisis and why 25,000 people are dying of hunger every day. He highlights that Russia’s invasion of Ukraine has plunged a further 58 million people into hunger.
Monopoly power in the food industry. George Monbiot argues that the relatively recent factors of Russia’s war in Ukraine and the pandemic have simply exacerbated the existing problem of concentrated power in the food industry, with just four corporations controlling 90% of the world’s grain trade. Rob Booth outlined how to democratise ownership and control of the food system in a report for Common Wealth.

Ownership and housing

New Right to Buy policy. New Economics Foundation’s Simon Hill explains why Boris Johnson’s extension of Right to Buy to housing associations is not the answer to the housing crisis. It is estimated that the Right to Buy scheme has led to the loss of £75 billion to the public finances since 1980 through the sale of social housing at discount rates.

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Scottish community wealth building and just transition. Common Wealth’s Miriam Brett and IIPP’s Laurie Macfarlane explore the effects of community land and asset ownership in Scotland on achieving a just transition to net zero. Their paper recommends strengthening the Scottish Government’s stated Community Wealth Building ambitions by scaling up public acquisitions of land and exploring the possibility of a new National Wealth Fund.

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Co-ops in Bologna. Pietro Ghirlanda explores how Bologna may be set to become ‘the Italian co-op valley’ and explores how the city promotes the establishment of platform cooperatives and ‘a chance to rethink the social contract’. Ghirlanda argues that municipal institutions, such as that of Bologna, must act as ‘top-down catalytic developers or as backers of bottom-up grassroots movement’ to promote the cooperative movement.