George Osborne's decision, within days of the UK's Brexit vote, to cut Corporation Tax signals a shift to a low tax, low spend economy. Such a move, says Brad MacKay, may well hit hardest those who voted Leave to send a message to the establishment and big business.
Two weeks ago I posed a question to a group of managers from a media company that I was conducting a workshop with. The question was, is there a scenario where the UK thrives outside the EU? After much discussion I argued that there was a future where the UK does very well indeed. That future is a very low-tax, and the corollary, low-spend UK.
The scenario that I painted stems from another question that I had asked based on research that I had conducted into business attitudes towards the Scottish referendum on independence in September 2014, and subsequently, the UK referendum on continuing EU membership a few weeks ago. That research showed that, in both referendums, business is generally opposed to ‘independence’, whether that’s Scottish businesses opposed to independence from the UK, or UK businesses opposed to independence from the EU, although this was by no means universal.
While my research shows that differences in business attitudes towards ‘independence’ is not simply a matter of large businesses versus small businesses (there is notable variation in how businesses see risks and opportunities from the referendum outcomes), it remains a fact that the vast majority of large businesses who have built their success on the current set of political and regulatory arrangements, favour continuing membership in the UK (for Scottish business) and the EU (for UK business).
And while the ‘leave’ campaign in the EU referendum argued that Brexit was also a vote for ‘taking back control’, and against ‘the elite and big business’, it remains a fact that while 99.9% of private sector businesses in the UK are small (0-49 employees) and medium-sized (50-249 employees), large businesses (250+ employees), which make up a tiny .1% of the overall stock of businesses, are responsible for a significant 40% of private-sector employment and whopping 53% of turnover/private sector income. They also pay the bulk of corporate tax to the UK exchequer.
How business, and particularly large businesses (both UK- and foreign-owned) respond to the referendum is, therefore, important for the future employment, innovation, growth and productivity prospects of the British economy.
An important reason why the UK is a leading country for business investment in the EU is access to the EU single market. If that access is disrupted, or accessing it becomes costlier, for the UK to thrive the UK government would have to take immediate action to ensure that the UK continues to be an attractive and competitive place for businesses to invest in. In all probability, this would mean becoming a low-tax, low-spend country.
The UK’s Chancellor of the Exchequer, George Osborne’s announcement that corporate tax will be cut from an already low 20% to 15% is exactly what one could expect under such a scenario. There is also the possibility that we will see income tax, which is as important as corporate tax for driving business behavior, cut in the future as well.
So what does this mean? Well, as the Danish proverb quips, ‘it’s dangerous to make predictions, especially about the future.’ However, normally when you cut taxes, unless revenues increase in inverse proportion to how much taxes are being cut, then public spending also has to be cut. Given that these tax cuts are to mitigate against the negative shock to the economy that the ‘leave’ vote has created, it’s unlikely that, in the short-term at least, we will see a surge in tax revenues for government spending. They will be ‘to steady the ship’.
Moreover, while the early signs from the EU are that EU countries appear to be dusting off invitations for large businesses to relocate economic activity (and jobs) to their countries rather than rolling over and giving the UK preferential access to the single market on UK terms, as the ‘leave’ campaign suggested they would, the logical extension of this is that in the medium term public spending in the UK will be cut, and big ticket spending items like the NHS will come under extreme pressure to be privatized as deficits and debts mount and tax revenues decline.
So to return to my initial question, is there a scenario where the UK thrives outside the EU? The answer is yes. But ‘thrive’ is also a relative term, and in a scenario where the negotiations between the EU and UK are acrimonious and protracted, the very reasons underpinning many people’s vote to ‘leave’ the UK – a feeling of alimentation from economic and political processes – is likely to be accentuated, not ameliorated.
The ‘leave’ vote therefore appears to be a pyrrhic victory for those who used it as an anti-establishment protest vote, and while triggering Article 50 of the EU Treaty to start the clock ticking on the UK’s withdrawal from the EU would be within the spirit of the marginal vote to ‘leave’ the EU, it is by no means chimes with the intentions of the ‘leave’ voters.