Chancellor of the Exchequer Jeremy Hunt must go beyond tax cuts to revive Britain’s anemic growth rates and significantly widen the scope of his new business investment stimulus, according to his new economic adviser Anna Valero.
(Bloomberg) — Chancellor of the Exchequer Jeremy Hunt must go beyond tax cuts to revive Britain’s anemic growth rates and significantly widen the scope of his new business investment stimulus, according to his new economic adviser Anna Valero.
Valero, a senior policy fellow at London School of Economics’s Centre for Economic Performance, warned that using tax cuts as a “quick fix” to boost growth wouldn’t work and called for more generous incentives to spur business investment.
The remarks underscore the competing demands Hunt faces if he finds money for giveaways ahead of the next general election, which is expected in 2024. He’s facing pressure from the ruling Conservative Party to reduce the tax burden, which is the highest it’s been in decades.
“If it was as easy as cutting taxes, then we would’ve seen that during the years that we had particularly low corporate tax,” Valero said in an interview on Bloomberg’s UK Politics Podcast. “The tax environment matters, but there are many other things we need to be doing for improving growth. Within the tax environment, we can be thinking about incentives for investment rather than the headline rate.”
Last month, Valero was added to Hunt’s Economic Advisory Council, which was established as the UK battled to restore its fiscal credibility in markets in the wake of the crisis triggered by Liz Truss when she was prime minister. The seven-member council also includes Karen Ward, JPMorgan Asset Management’s European chief market strategist, and former Bank of England Chief Economist Andy Haldane.
Valero said that using any extra fiscal headroom for tax cuts risked preventing much-needed spending and also backed calls to consolidate pension schemes to boost investment.
“Reducing the tax burden in order to try and achieve some quick fix on growth is unlikely to happen, but also would prevent our ability to invest in some of the things we need to be investing in so I would favor more targeted incentives,” she said.
The UK has suffered from particularly weak business investment since the financial crisis despite having the lowest headline corporation tax rate among the Group of Seven economies. It recently increased its headline corporation tax rate from 19% to 25% but unveiled new investment incentives.
Hunt announced in his budget in March that companies can benefit from full-expensing, which allows firms to deduct 100% of their investment cost from their taxable profits. The investment incentive only covers plant and machinery.
Valero said the Chancellor should significantly widen the scope of business investment incentives to include intangible assets and boost research and development.
“In the absence of the temporary full expense on plant and machinery,” Valero said. “We are quite ungenerous when it comes to investment incentives.”
“I would want to see a more generous regime for really incentivizing the types of investments we want for productivity and growth. Plant and machinery is one area, but there are many other assets we need to be investing in so intangible assets for example which are really important in the UK (as) we are a services based economy, and R&D.”
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