Business

Can and should the chancellor cut business taxes?

BBC business editor Robert Peston on the budget

In the run-up to today's Budget, ministers have been banging on that their priority is to promote growth.

So today the Treasury and Business Department will publish a paper alongside the Budget red book that will be their prescription for rebalancing the UK away from a consumer-driven, debt fuelled, City-focussed economy to one where advanced manufacturing, the creative industries, tourism, pharmaceuticals, business services other than finance, inter alia, all have a bigger role.

The impossible-to-ignore background is that recovery from the 2008-9 great recession has been insipid, and that the record burden of household, bank and government debt is weighing heavily on the UK economy's ability to grow.

To remind you what you all know (sorry), public expenditure is being cut to shrink a deficit perceived as unsustainable. And consumer spending is under intense pressure from a squeeze in disposable income and a growing recognition in households that their indebtedness - still at unprecedented levels - needs to be reduced.

Which means that the heavy lifting in the economy has to be done by private-sector companies.

Unless they invest more, export more and employ more, the three-year squeeze in living standards suffered by the vast majority of us may continue for many more years. Without growth generated by private sector companies, unemployment may not fall to any significant extent, wages won't start to rise to offset the effects of inflation and the government won't receive incremental tax revenues that would allow future tax cuts or improvements in public services.

Without growth, the coming years look bleak for the UK.

But what on earth can the chancellor do to promote growth - to encourage more investment by companies, to stimulate exports - if he has no money to give away?

At the weekend, George Osborne said that the Budget would be fiscally neutral - which means that any tax cuts in one area would be matched by increases in other taxes or new spending reductions.

If for example he were to decide it is an imperative to reduce the financial burden on companies by cutting corporation tax faster or by more than he has already said he would do, savings would have to be found elsewhere.

Which means that some of us would feel the victims of the government's determination to help the private sector, bringing political risks for the coalition government.

For business, it is not just the rate of corporation tax that matters. Multinationals have been banging on for years that rules on how their profits outside the UK is taxed means that the advantages of having a head office or domicile in the UK are no longer what they were. Some international companies, such as the advertising group WPP and the pharmaceuticals company Shire, have already packed their bags and relocated to Dublin.

In response, the government has been carrying on with work initiated by its predecessor on possible reforms to so-called Controlled Foreign Company rules, which determine how much tax multinationals pay on cash sitting in non-trading entities abroad, and on what tax should be payable on dividends remitted to the UK from multinationals' branches.

Almost any reforms that the chancellor could announce to meet the government's aims of making the UK as attractive as possible for multinationals would be expensive - at a time, obviously, when every scrap of tax revenue is precious.

To state the obvious, reducing the tax burden on multinationals - including big banks - would not be universally popular.

Apart from tax, companies are also deeply concerned about whether Britons have the skills necessary to equip the UK for the global commercial war against India, China, Korea, Germany and so on.

Some have questioned whether at a time when it would presumably enhance the UK's growth potential for its workforce to become smarter, it was sensible to raise the personal cost of obtaining university education to a maximum of £9,000 a year. If the increased private cost of education deters younger people from investing in their skills, that would not lift the UK's productivity.

Any moves by the government to boost apprenticeships, work experience and vocational training (and it's clear from weekend media leaks that there will be a fair bit of all this) will be perceived to be important. But, again, there are limits on what government can do because of budgetary constraints.

That said, not all possible measures to stimulate growth costs money.

Last week, the Business Secretary Vince Cable announced a war on red tape: there is bound to be more detail today on individual regulations that will be abandoned and on his plan to harness popular pressure via the internet to force a loosening of regulatory shackles imposed by Whitehall departments.

There is one area of commercial activity where businesses feels particularly fettered, that of development - or the building of offices, supermarkets, factories, houses and infrastructure. Companies have been shouting loudly for years that the UK's growth prospects have been inhibited by an officially sanctioned nimbyism, by the long delays and massive restrictions placed on any ambitious development.

That said, if there is the kind of sweeping liberalisation of planning and construction that businesses would want, if the powers of local authorities to curb development are reined in, there may be elation felt by housebuilders and developers - but homeowners may feel anxious and miffed, only weeks before important local elections.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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