David Gauke is Financial Secretary to the Treasury and MP for South West Hertfordshire.
In the last parliament, the Government reduced the deficit by half as a proportion of GDP and in the course of the current parliament we will eliminate it entirely. But from the very first Osborne Budget of June 2010, we have recognised that deficit reduction is necessary but not sufficient.
If the UK is going to succeed as a high wage, high growth economy we need to ensure that we attract investment to these shores and help businesses already based here to grow. This means that we have to have a skilled and educated workforce, world-class infrastructure and a flourishing private sector in every part of the nation.
The Budget makes advances on all these fronts. It also takes a big step forward in pursuing a key policy for growth – cutting business taxes.
In 2010, our business tax regime was seen as deterring companies looking to invest in the UK. Since then, we have cut corporation tax rates to 20 per cent (the lowest in the G20), introduced a lower rate for profits relating to some forms of intellectual property (the ‘patent box’), reformed the Controlled Foreign Companies regime (making the UK an attractive location for headquarters) and helped smaller businesses by increasing the Annual Investment Allowance and introducing the Employment Allowance.
As a consequence, our tax system is now seen as an asset, with KPMG surveys showing us in the top two jurisdictions for tax competitiveness for three years running. This attractiveness has contributed to an outstanding performance in terms of attracting foreign direct investment – FDI stock has increased by 50 per cent since 2010.
Reforming corporation tax has been key. As the OECD has said, ‘corporate income taxes are the most harmful for growth as they discourage the activities of firms that are most important for growth: investment in capital and productivity improvements’.
For this reason, the Chancellor announced further reductions in the corporation tax rate to 18 per cent over the course of the Parliament. Cutting tax on corporate profits for over 1.1 million companies means improving their investment returns. Improving investment returns means you attract more investment. More investment will drive up productivity and this, in turn, results in higher wages.
Rightly, there is a debate about how we improve our productivity. Cutting this tax will play a crucial role and contrasts strongly with our political opponents who would have increased the rate had they won the General Election.
This is a long term reform that will have long term benefits. The progress we have already made since 2010 is feeding through into strong increases in business investment and the OBR’s positive forecasts that this will continue over the next few years.
It is not just corporation tax rates where we have made progress. The Annual Investment Allowance has been put on a permanent basis with at £200,000 – twice the level we inherited and enabling 99 per cent of companies to deduct all their capital investment for tax purposes. For smaller employers, the increase in the Employment Allowance will help reduce costs of hiring new staff and encourage expansion.
In a competitive world, a responsible government must ensure that we take the necessary measures for a thriving and productive business sector. In the last parliament, we cut business taxes whilst cutting the deficit. It is a formula that worked and helped deliver the fastest growing economy in the G7. As George Osborne has made clear in his Budget, we will continue that progress in this parliament.