UK tax cut would ‘offset’ Brexit effect

UK Chancellor George Osborne’s plans to slash corporation tax, in the battle for overseas investment, would wipe out the effects of Brexit and boost FDI by more than 10%, a think-tank claims.

The London-based Centre for Economics and Business Research (Cebr) says the UK’s decision to leave the EU will “hit inward investment”, until there is clarity about the country’s position in Europe and measures to counter the effects of Brexit.

Mr Osborne’s reaction to the Brexit fallout was to lower the UK’s corporation tax rate from 20% to 15% to show the British economy is “still open for business”.

But no timeline for the move has been given.

The signalled cut was criticised by EU leaders as a “race to the bottom”, while EU Commissioner for Economic Affairs, Pierre Moscovici, warned it would cause “a considerable loss of receipts” for the UK economy.

Cebr president, Douglas McWilliams, who describes Cebr’s analysis as “fascinating” and says cutting corporation tax is “a great idea” that needs to be done soon, says if the change is made in April, 2017, government borrowing will have fallen £5.2bn by 2026.

Investment will climb 10.7% higher and GDP 1.5% higher, over the medium term, he says. “Both are in line with the medium-term calculation of initial loss caused by Brexit. So, in practice, lower corporate taxes would offset the losses from Brexit, though the timings are different,” Mr McWilliams says.

Cebr is one of the UK’s most prominent economic think-tanks and akin to the ESRI in Ireland, and McWilliams also advocates a greater reduction in corporation tax.

“Indeed, there is an argument for moving to a system where corporates are taxed at an ultra-low rate and taxes only charged on distributions through dividends and corporate pay.

"A 10% corporate-tax rate could, according to the model, boost GDP by nearly 5% additionally and would pay for itself in five years.”

The cut has increased concern in Ireland about the impact here on foreign direct investment.

Economist Jim Power says the planned corporate tax cut “was always a threat to Ireland and it is a massive challenge to us. Steady as she goes is no longer a viable policy”.

In response, government agencies here are preparing to step up their marketing campaigns to attract foreign investment and compete for companies that may choose to leave the UK in the aftermath of the vote.

It is understood those agencies may discreetly approach UK companies and sell Ireland as a potential base, rather than mount a public campaign to woo them to these shores.

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