Businesses need a carrot and stick to make them invest – let them write off that investment against the punishing tax
How can public policy get the UK economy moving again without the government increasing its borrowing? That is the question that many are asking before this week's GDP figures, and to which George Osborne has no convincing answer. Encouraging sub-prime borrowing to buy overpriced housing, his main budget wheeze, is not a promising approach.
Consider why the government is running an intractable deficit. It is because all other sectors of the economy are determined to run a surplus. Any borrowing is someone else's lending. If you wish to lend and I refuse to borrow, the money goes under the metaphorical bed and economic activity runs down.
The household sector is right to want to save. It did the opposite in the pre-crisis years and ran debt up to some 170% of its annual income. Even now, after some years of thrift, debt is 140% of annual income. It is folly to base a recovery on households borrowing more. We'd like to get foreigners to borrow more from us by running a trade surplus with them. That is also government policy: the main point of "quantitative easing" is to devalue the pound, make our exports cheap, and grow by running a trade surplus.
This would work in usual circumstances, though it takes longer than people think and usually implies some tolerance of a bit of inflation. Now, however, with Europe in a state of depression and everyone else, even Japan, trying to have a competitive currency, devaluation is not working well.
If households and foreigners won't borrow and the government does not wish to borrow more, that leaves the business sector. That looks altogether more promising. Profit margins are good and profits are at a record share of GDP. The sector has plenty of cash but does not want to spend it. With the future so uncertain and the economy flatlining, there is no hurry to invest in new plant, equipment or software.
From an individual company point of view it makes little sense to invest in those circumstances but if other companies were investing then there would be more business and it would make sense to join them. The individually rational approach based on caution and rational pessimism leads to a poor outcome for the economy as a whole. This is where the government should step in and give companies a compelling reason to invest now.
Modern governments are rather afraid of business and used to the idea of handing out incentives. Current circumstances require a combination of carrot and stick. The government should announce a temporary increase in corporation tax, putting it up to a punishing 50% for a strictly limited period, say three years. Then it should announce that 150% of all investment within those three years can be written off against tax.
That is not a tax regime you would want to maintain for the long-term, but as a short-term measure it is failsafe. If companies don't invest they pay a lot more tax and the government deficit is reduced by tens of billions of pounds. If they step up or bring forward investment the economy gets a boost and other tax receipts rise. Foreign investors in the UK would also have an incentive to get on with it to acquire tax credits. Would companies try and disguise profits or register them outside the UK? Of course, but they are presumably doing that anyway to the extent possible. Would they move business elsewhere? Not for a three-year temporary measure: it does not make sense to incur the costs involved.
And politically this approach is a winner. Labour, for example, has found it impossible to convince the public of the Keynesian case for more borrowing. It is too complicated and counter-intuitive – borrow more to borrow less. Yet everyone can understand that the folks with the money currently don't want to use it, so it makes sense to bribe and badger them into doing so – for their own good and the general good too. Reported by guardian.co.uk 13 hours ago.
How can public policy get the UK economy moving again without the government increasing its borrowing? That is the question that many are asking before this week's GDP figures, and to which George Osborne has no convincing answer. Encouraging sub-prime borrowing to buy overpriced housing, his main budget wheeze, is not a promising approach.
Consider why the government is running an intractable deficit. It is because all other sectors of the economy are determined to run a surplus. Any borrowing is someone else's lending. If you wish to lend and I refuse to borrow, the money goes under the metaphorical bed and economic activity runs down.
The household sector is right to want to save. It did the opposite in the pre-crisis years and ran debt up to some 170% of its annual income. Even now, after some years of thrift, debt is 140% of annual income. It is folly to base a recovery on households borrowing more. We'd like to get foreigners to borrow more from us by running a trade surplus with them. That is also government policy: the main point of "quantitative easing" is to devalue the pound, make our exports cheap, and grow by running a trade surplus.
This would work in usual circumstances, though it takes longer than people think and usually implies some tolerance of a bit of inflation. Now, however, with Europe in a state of depression and everyone else, even Japan, trying to have a competitive currency, devaluation is not working well.
If households and foreigners won't borrow and the government does not wish to borrow more, that leaves the business sector. That looks altogether more promising. Profit margins are good and profits are at a record share of GDP. The sector has plenty of cash but does not want to spend it. With the future so uncertain and the economy flatlining, there is no hurry to invest in new plant, equipment or software.
From an individual company point of view it makes little sense to invest in those circumstances but if other companies were investing then there would be more business and it would make sense to join them. The individually rational approach based on caution and rational pessimism leads to a poor outcome for the economy as a whole. This is where the government should step in and give companies a compelling reason to invest now.
Modern governments are rather afraid of business and used to the idea of handing out incentives. Current circumstances require a combination of carrot and stick. The government should announce a temporary increase in corporation tax, putting it up to a punishing 50% for a strictly limited period, say three years. Then it should announce that 150% of all investment within those three years can be written off against tax.
That is not a tax regime you would want to maintain for the long-term, but as a short-term measure it is failsafe. If companies don't invest they pay a lot more tax and the government deficit is reduced by tens of billions of pounds. If they step up or bring forward investment the economy gets a boost and other tax receipts rise. Foreign investors in the UK would also have an incentive to get on with it to acquire tax credits. Would companies try and disguise profits or register them outside the UK? Of course, but they are presumably doing that anyway to the extent possible. Would they move business elsewhere? Not for a three-year temporary measure: it does not make sense to incur the costs involved.
And politically this approach is a winner. Labour, for example, has found it impossible to convince the public of the Keynesian case for more borrowing. It is too complicated and counter-intuitive – borrow more to borrow less. Yet everyone can understand that the folks with the money currently don't want to use it, so it makes sense to bribe and badger them into doing so – for their own good and the general good too. Reported by guardian.co.uk 13 hours ago.