BREWIN DOLPHIN 22 April 2015
Guy Foster, Head of Research at Brewin Dolphin
The UK is a generally strong and competitive economy with just a few, rather high profile, shortcomings. Many of these are being addressed but the deficiencies of the UK as an economy all revolve around its failure to earn as much as it spends. The country needs a plan to address this which transcends the normal electoral cycle. The evidence of the UK's reliance on borrowing runs through the disconcertingly large budget deficit and debt to GDP ratios; its pitiful aggregate savings; and its yawning trade deficit. The UK is a country which is already very attractive to financial investment but seems less so for corporate investors.
• The UK should target the effective, rather than headline rate of corporation tax. While the lower rate of headline corporation tax has made the UK more competitive, the total corporate tax rate in the UK was calculated at 34% - the 54th lowest rate out of the countries covered by the World Economic Forum's Global Competitiveness Report.
• Cuts to the headline corporation tax rate have been partly financed by cuts to capital allowances which disproportionately impact those businesses investing in plant and machinery.
• In order to prevent corporate tax rates from widening the gap between the service and industrial sectors of the economy cross-party support should be sought to build and protect capital allowances for investment in plant and machinery.
• The current corporation tax system also provides an allowance for debt financing (through the deductibility of interest) which distorts company capital structures. The government should commission a study of potential applicability of the Belgian and Italian systems in the future for the UK (which provide an allowance for corporate equity).
• An independent body should be established with the remit to report on the aggregate impact of each subsequent finance bill on the national trade balance.
• Investment in long term skills development should be directed at increasing the UK's lacklustre performance in maths and science education (or more broadly the STEM subjects). With commodity prices and interest rates at very attractive historic levels now would be an excellent time to invest in an educational infrastructure that will accommodate the forecast growth in pupil numbers over the coming decade.
• The Regulatory Policy Committee should have a broader role to look at all costs of regulation with a view to making it easier for businesses to serve the community and drive forward living standards.
• The hot topic of immigration policy must be framed by the skills deficit currently being suffered by manufacturers and other potential exporters. Any immigration policy which restricts the ability of UK businesses to expand and help the country to fund its expenditure must be resisted.
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