George Osborne has made headlines over the weekend after devising a quick plan to reinvigorate business confidence in the midst of the most tumultuous period for the United Kingdom in decades.
The chancellor of the exchequer has announced a plan to cut corporate tax rates to less than 15 per cent. Speaking to the Financial Times, Osborne said: “We must focus on the horizon and the journey ahead and make the most of the hand we’ve been dealt.”
Britain open for business: lower business taxes, support for bank lending, infrastructure investment, more trade with China + rest of world
— George Osborne (@George_Osborne) July 4, 2016
The “super competitive economy” plan of the United Kingdom’s current Chancellor of the Exchequer is to lure in investors with one of the lowest tax rates in Europe.
Opening a Rift with the European Union on Tax Rates
If Osborne’s plan to cut taxes to 15 per cent or even lower goes through, this will make the United Kingdom the country with the lowest business tax rates amongst major economies. But this move comes at a price – the discontent of European finance ministers.
With such rates already being a problem for the rather small economy of Ireland, where the rate is 12.5 per cent, the move by the United Kingdom in a similar direction could be seen by European counterparts as the beginning of the establishment of a new tax haven.
The decision is also likely to be very unpopular with the voters, as current corporate tax rates in the U.K. are already at all time lows. Since the introduction of the corporate tax rate in the country in 1965, the rate has never been lower than the current level of 20 per cent.
Financial Industry Could Suffer from EU Backlash over Passporting
The decrease came in in the aftermath of the global financial crisis in 2008, which triggered a set of business-friendly measures aiming to stabilize the economy. The drop of the rates to current levels however didn’t result in an expected boost to incomes, which was set forth in the budget calculations of the Chancellor of the Exchequer.
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Before the Autumn Statement, when Osborne is due to present his revised opinions about the budget in light of a set of updated economic forecasts, Osborne is completely reversing his pre-referendum position which was threatening tax increases.
The financial industry is likely to be affected materially by the move, and the universal financial regulation framework across the European Union and the United Kingdom is likely to be threatened. A 15 per cent corporate tax rate is likely to hamper the chances of the U.K. to strike a free trade deal with the European Union.
The Shadow Chancellor of the Exchequer immediately rebuked the strategy chosen by Osborne.
— BBC Breakfast (@BBCBreakfast) July 4, 2016
While the exposure of several major European economies to the U.K. goods and services market is substantial, the aggressive policy stance of European and U.K. politicians against each other is likely to jeopardize the process of reaching an agreement.
In any case, the words of George Osborne when he was giving his March 2016 budget speech – “Today I report on an economy set to grow faster than any other major advanced economy in the world,” – seem to be looking deep into the past now.
Today’s construction activity purchasing managers index, which reflects the status of the construction sector in the United Kingdom, has dipped deep below fifty points, signifying that contraction has already begun.
In fact, his whole speech seems rather out of date only three months later: