Slash Government Spending and Civil Service to Fund Corporation Tax Cut

Slash Government Spending and Civil Service to Fund Corporation Tax Cut

Slash Government Spending and Civil Service to Fund Corporation Tax Cut

The political party of ambition, low-tax, and homegrown business seems to be its own worst enemy. Nothing proves this more than the increase in corporation tax to 25% – a move that goes against the ideology of the governing party and is actively harming both the UK economy and its taxpayers. At FD Capital, we’re calling on the government to urgently chart a path back to 19% and below before further damage can be caused to the country’s economic prospects.

A corporation tax cut can be funded by a slash in government spending and a reduction in the civil service, two measures that the government have already put forward in different contexts ahead of this election year.

How We Got to 25% Corporation Tax

Looking back at 2010, it’s difficult to imagine a world where a Conservative government would have corporation tax set almost as high as its Labour predecessors.

George Osborne became the first Conservative chancellor in over 10 years when David Cameron took office with a coalition government in 2010. One of his priorities was significantly cutting the highest rate of corporation tax from 28% to 20% – a move that was achieved by 2016. The following year, under a Conservative government, the corporation tax rate was cut to 19%.

The 19% high-level rate of corporation tax now feels like a distant memory.

In 2021, then Chancellor Rishi Sunak announced that the main corporation tax rate would jump to 25% from April 2023. Liz Truss took the office of Prime Minister with a reassurance to cancel the corporate tax increase, but her government was infamously short-lived. Jeremy Hunt, as Chancellor under Rishi Sunak, implemented the planned increase in 2023.

Corporation tax is the type of tax with the most harmful outcomes. It’s usually the company’s employees and the wider public that deal with the burden of the tax. Slashing corporation tax benefits every aspect of the economy, from increasing salaries to encouraging new investment from international partners.

Why Does Corporation Tax Matter?

Neoclassical economic philosophy proposes the concept that economic outputs rely on the willingness of the public to work harder and for companies to spend their capital willingly on infrastructure and products like equipment and factories. Tax plays a crucial role in the decision-making process for these companies and individuals when deciding how much capital they’re willing to invest and in what areas.

Economic research shows that corporation tax is the most harmful tax for economic growth. The mobility of capital is why it is sensitive to higher rates of taxation. If a company finds itself falling victim to higher corporation tax, many of them will choose to move operations to a jurisdiction with a lower tax or not invest further in that area. While a company can move to another area, its employees often do not have the same flexibility. Capital is responsive to changes in taxation, with lower corporation tax rates reducing the economic harm caused.

It’s a misconception that corporations are at the forefront of the economic harm caused by higher corporation rates. Recent research and literature agree that the burden of this harm is split between corporation owners and low-wage workers. When corporation tax increases, capital and corporations move to lower tax jurisdictions, negatively impacting the wages and productivity of workers. While empirical research suggests workers bar over 50% of the corporation tax burden, it is evenly split in the long term.

Corporation tax impacts economic decision-making. When a company is deciding whether to invest new capital, such as in purchasing new equipment, it has to consider all the associated costs – including taxes – and balance this against the revenue that this investment should be able to generate.

When corporate tax is high, the cost of capital becomes higher. Long-term high levels of corporation tax reduce capital value and negatively impact the size of the economy. Alternatively, lower corporation taxes increase the value of capital and incentivise companies to further invest in the jurisdiction.

Corporation Tax Going Up, Up, Up

In October 2022, the UK government announced plans to increase corporation tax to 25% from the 1st of April 2o23. This unexpected increase was initially explained as being a consequence of revenue loss incurred by the government during the pandemic. However, during the short period of Liz Truss’ time in office, both she and her Chancellor announced they would reverse the planned increase – citing that it went against the economic philosophy of the Conservative party.

Current Corporation Tax Rates:

The new corporation tax rate rules came into force on the 1st of April 2023. The rules for companies with no associates include:

  • 19% rate of corporation tax for companies with augmented profits of less than £50,000.
  • 25% rate of corporation tax for companies with augmented profits of more than £250,000.
  • Companies with profits between £50,000 and £250,000 would have their corporation tax calculated at 25% with a tapered approach calculated using marginal relief.

These profit limits are calculated pro-rated on a daily basis for companies with a shorter accounting period.

Augmented profits are the company’s taxable total profits for the taxation period with any exempt dividends from non-group companies. By comparison, group companies are those that receive a dividend from their 51% subsidiary, including trading or holding companies owned by a consortium.

UK companies have experienced four significant changes in corporation tax since the start of the decade:

  • Permanent increase of the headline corporation tax rate from 19 to 25% announced in the March 2021 budget for companies, with profits over £250,000. This increase came into effect in April 2023 with smaller companies (an estimated 18.5% of total receipts) maintaining the 19% tax rate.
  • The March 2021 budget also included a temporary 130% super-deduction for qualifying plant and machinery investments from April 2021 to March 2023.
  • The March 2023 budget included a temporary full expensing policy with a 100% tax deduction for qualifying plant and machinery investments made from April 2023 to March 2026.
  • The 2023 Autumn Statement included the announcement of a permanent full expensing of qualifying plant and machinery investments.

These significant changes occurred at the same time as the UK’s economic landscape underwent a dramatic overhaul, dealing with pain points like inflation rising, higher interest rates, and bottlenecks in the key stages of the supply chain.

High Corporation Tax Rates Damage the UK’s Economy

The UK’s post-Brexit prosperity relies on its ability to present itself as one of the best places in the world to do business. The UK’s corporation tax is not globally competitive – especially with the Republic of Ireland having a lower corporation tax rate of 12.5%, just across the Irish Sea. Companies looking to invest in the UK or Europe are more likely to choose a country with a competitive corporation tax rate. Continuing to keep the tax rate at 25% will only continue to do untold harm to the UK’s economic output in the long term and slow down growth.

Lower corporate tax has positive economic effects, both short and long-term. The UK government was incorrect in choosing to raise corporation tax to make up for the shortfall in revenue lost during the pandemic. Raising corporation tax rates is one of the most anti-growth policies a government can implement, negatively impacting the country’s competitiveness in the global market.

Announcing a reduction in corporation tax back down to 19% would drastically help the UK economy – including workers and corporations. This tax cut could be funded by slashing government spending and reducing the civil service headcount, two measures already announced by the government ahead of this year’s election

Reducing Civil Service Headcount

2024 is a general election year, with the UK expected to go to the polls in the autumn. The Conservative party are now attempting to backtrack on its high-tax policies of recent years by promising tax cuts as part of an election manifest, funded by reducing public and government spending. Sunak has made it clear that his priority is cutting taxes across the board but that “difficult decisions” would need to be made on government spending to fund these cuts. The Prime Minister has said that he wants to “keep cutting people’s taxes…no way we can do that unless we restrain the growth in the public sector and government spending”.

The dealings around these proposed tax cuts have not been announced. The Labour Party, who are 20 points ahead in the polls, are also said to be considering tax cuts as part of their election manifesto. These tax cuts should include corporation tax and be funded in part by a reduction in the civil service headcount.

Such a reduction is already under proposal as the Chancellor announced an immediate cap on the headcount in October 2023 to boost productivity and increase government efficiency. The civil service has steadily grown year on year since 2016 with an estimated headcount of 488,000 in June 2023.

The UK civil service has grown exceptionally by 25% since 2016 with a 10% growth alone from 2020 to 2021. The number of policy civil servants has doubled from 16,570 to 32,020 in the last six years with the Cabinet Office almost doubling in size, alongside the Department for Education. While half of this growth is due to permanent post-Brexit activities, the rest of this growth is largely due to the Brexit transition period and the pandemic. With the pandemic resolved and the UK moving beyond its transition period, there are clear opportunities to reduce the size of the expanded civil service.

Sustainable Ways to Cut the Civil Service Headcount

Corporation tax cuts can be funded by reducing the civil service headcount to its pre-pandemic and pre-Brexit levels. While these potential reductions are easy to identify, there are sustainable ways to cut the civil service headcount without negatively impacting public services.

  1. Long-term plans for the civil service

While it’s tempting to implement wide-ranging cuts to the civil service to make quick savings, the UK needs a long-term plan for its civil service to see it through the next decade as it finds its place in a post-Brexit world. While the civil service is large, it has limited experience and low capability, largely due to a continued cycle of recruitment and retrenchment with departments expanding and shrinking within short periods. DEFRA was reduced by one-third from 2010 to 2016, creating a skills shortage that was needed during Brexit – resulting in the department doubling in size and adding an additional 5,000 staff after reversing its earlier cuts.

Cutting the civil service headcount to fund corporation tax should be done with a long-term consideration of the UK’s needs.

  1. Investing to save

While the government should reduce the size of the civil service, it needs to invest to make long-term savings. Efficiency savings require the government to make up-front spending commitments to digital services and technology. While the government could make short-term savings by cutting project management budgets, it would become more expensive in the long term.  Investing in improved digital services, alongside cutting the size of the civil service, will result in genuine savings to support a reduction in corporation tax rates.

Cut Corporation Tax to Promote Economic Rejuvenation

The next government – whether it’s Conservative or Labour – urgently needs to address the unreasonably high rate of corporation tax and return it to 19% with plans for further reductions. The main rate of corporation tax in the UK has gradually fallen since 1982, reducing from 52% to 25%. The corporation tax is half what it used to be because of the increase in revenue it has generated.

Cutting corporation tax to 19% would promote economic rejuvenation by making the UK globally competitive to boost economic growth by improving business confidence and encouraging new investments.

The UK economy will only rebound from the pandemic when corporation tax is cut to encourage investment, capital expenditure, and productivity. It’s the only way to encourage long-term growth and to help the UK find its place in the global market. FD Capital is calling on the government to reduce the current rate of corporation tax to 19% and below, funding the reduction by curbing government spending and reducing the civil service headcount.