- Chancellor aims to keep U.K. corporation tax lowest in G-20
- Sticks with warnings of economic harm from leaving EU
Chancellor of the Exchequer George Osborne set a goal of lowering the corporate tax rate to 15 percent in an effort to keep businesses investing in the U.K. as it prepares to leave the European Union.
Britain Votes for Brexit: Full Coverage
Osborne, who campaigned to remain in the EU, said in an interview with the Financial Times that he accepted the result of the June 23 referendum and now wants to mitigate the economic impact. Britain currently has a 20 percent tax rate for business that’s scheduled to fall to 19 percent in April and to 17 percent in 2020.
“We have now got to be part of a supreme national effort to make it work for the British people,” Osborne said in the interview, which was published in Monday’s edition. Osborne said he stands by the warnings he’s made about the possible impact of Brexit -- “including a recession.”
The planned tax cut illustrates the risks ahead for Britain after its historic decision to break with the EU after more than four decades, becoming the first major economy to strike out alone. The pound has lost 11 percent since the referendum, other EU nations are lining up to take business from the City of London, and the ratings agency Standard & Poor’s on Monday said Britain will “barely” escape a recession because of Brexit.
Moreover, the U.K. is riddled with political uncertainty amid a bitter contest to replace David Cameron and turmoil in the opposition Labour Party. Osborne’s inclusion in the next cabinet is also far from certain.
“I see no realistic way back” from Brexit, and investors are underestimating the risk of a U.K. government being installed that tears up any residual relations with the EU, said Erik Nielsen, chief economist at UniCredit Bank AG. “This means that U.K. growth is indeed most likely to head towards recession in the coming quarters, and possibly severely so.”
The pound was little changed on Monday. The price of an ounce of silver exceeded $20 for the first time in almost two years and gold advanced for a fourth day, as investors sought precious metals as safe haven assets.
Osborne has cut the main rate of corporation tax from 28 percent since taking office in 2010. In the fiscal year that ended March 31, the tax generated about 45 billion pounds ($60 billion), or 7 percent of total government income. The amount collected tends to fluctuate with the fortunes of financial-services companies, which contributed almost a fifth of all corporation-tax revenue last year.
Osborne’s proposal would bring the U.K. corporation tax down to a level closer to Ireland’s 12.5 percent, angering Germany and others in the process. In 2015, the average corporation-tax rate in the Group of 20 leading economies was 28.7 percent, according to the Oxford University Center For Business Taxation.
“Cutting taxes in this way will mean that the burden will fall on others and that means basically middle and lower earners,” the opposition Labour Party’s finance spokesman, John McDonnell, said Monday in a Sky News interview. With this proposal, “we’re sending out a message that Britain is becoming a tax haven.”
Before the referendum, Osborne had warned that a vote to leave the EU would force him to announce an emergency budget of spending cuts and tax rises. That’s been dropped for now, although the Treasury’s position is that downgraded forecasts at the end of the year may mean it comes back onto the agenda. Osborne has also dropped his target of delivering a U.K. budget surplus by 2020, saying that the likely impact of a Brexit on the economy made that impossible.
In the FT interview, confirmed by the Treasury, Osborne urged whoever succeeds Cameron as prime minister to seek as much access as possible to the EU’s single market, though he conceded that the pressure to restrict migration might make that impossible. EU leaders have said that freedom of movement is a prerequisite for accessing the single market and that no “cherry picking” will be allowed in talks with the U.K.
That view was backed up by Foreign Secretary Philip Hammond, who told BBC Radio on Monday that freedom of movement can’t operate as in the past. As a result, some access will be lost to the single market, and the terms of trade will change, he said.
“We need to retain as much of that access as we possibly can, thus minimizing any damage to our economy from leaving the European Union,” Hammond said. He conceded that a phrase he deployed in a commentary for the Telegraph was a “not very heavily coded” way of saying that Tory leadership contender Michael Gove is making promises he can’t deliver. Hammond also told the BBC he favors bilateral negotiations with EU nations, rather than talks with the European Commission.
Osborne told the FT that Cameron’s successor should maintain the government’s commitment to contentious transportation projects such as the high-speed rail line from London to the north of England and a new airport runway for the capital. Both could be under threat with the future direction of the government uncertain.
One of the candidates, Work and Pensions Secretary Stephen Crabb, has proposed the government issue 100 billion pounds ($133 billion) of long-dated gilts over the next five years to fund infrastructure investment.
According to the Conservative Home blog, Home Secretary Theresa May May has the support of 104 of the party’s 330 lawmakers. Michael Gove has the backing of 25 lawmakers, as does Andrea Leadsom, who bookmakers rate as May’s closest contender. Crabb has 21 and Liam Fox has 8.
Conservative lawmakers vote in the first round of balloting Tuesday, and will eventually whittle the field down to two. Assuming that both candidates stand, the winner will be chosen by the party rank-and-file by Sept. 9.