Amid the ongoing News International fallout and the developing Eurocrisis, yesterday’s FT carried quite an important story on the likely failure of a key component of the government’s growth strategy.

Osborne has made boosting investment a core pillar of his economic strategy – something I entirely agree with. I have written at length on the need to boost business investment and also on the problem of the corporate surplus.

The problem is that Osborne’s preferred strategy is simply to cut corporation tax and hope for the best.

Something I feel is unlikely to work. Especially when it has been largely funded by slashing investment allowances.

Significantly the OBR appears to agree, writing that the most recent cut will have a ‘minimal impact’.

Yesterday’s FT reported on some new analysis by the Centre for Business Taxation at Oxford’s Said Business School. The story – entitled ‘Osborne corporate tax plan will fail’ – is well worth a read. As it notes:

The researchers said that the main problem for the UK was that allowances for capital expenditure were the lowest in the G20. Few countries had pursued the policy of cutting allowances to recover revenue losses caused by lowering the tax rate as aggressively asBritain, it said. So while theUKhad the fifth lowest tax rate in the G20, the rate was applied to a broad definition of profit, implying that the effective tax rate was much higher.

As the report itself says:

Reforms which reduce allowances as a way of paying for rate reductions mainly redistribute the tax burden between companies, rather than making the tax system as a whole more competitive.

This was a point repeatedly made by the manufacturing trade body, the EEF, in 2010.

Cutting corporation taxes but reducing investment allowances isn’t a tax cut for business – it’s a transfer from businesses that invest heavily (i.e. manufacturers) to those who don’t (i.e. financials/banks).

As such it is likely to be ineffective as a growth plan as it totally at odds with the talk of an investment led recovery and rebalancing.

A proper, business friendly growth plan, would focus on increasing investment allowances rather than going for headline grabbing moves like cutting corporation tax whilst hammering productive businesses in the small print.

About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
· Other posts by Duncan Weldon
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Reactions: Twitter, blogs

1. Liberal Conspiracy

   Osborne's corporation tax isn't working for the economy http://bit.ly/ozTFT9

2. Daniel Sitkin

   Osborne’s corporation tax isn’t working for the economy | Liberal Conspiracy http://t.co/wIgUQCH via @libcon

3. sunny hundal

   Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

4. Chris Roberts

   Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

5. Jill Hayward

   Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

6. Maureen Czarnecki

   Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

7. Watching You

   Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

8. Captain SKA

   Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

9. Sam Liu

   Osborne’s corporation tax isn’t working for the economy | Liberal Conspiracy http://t.co/TDZpISb via @libcon

10. Martin Crozier

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

11. Paul Abbott

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

12. bankofcat

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

13. Andy S

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/FtTrZB5 says @DuncanWeldon

14. Adam Corlett

    Osborne’s corporation tax isn’t working for the economy | Liberal Conspiracy http://t.co/Mnplh7n via @libcon

15. Conservative Home dismisses the national interest « Though Cowards Flinch

    [...] As for tax reform, I suspect he does’nt mean maknig sure tax is collected from the rich. Maybe he means lowering Corporation Tax, but Duncan’s dealt with that one. [...]

16. Colin Hall

    Cutting corporation tax was George Osborne's big idea to kick-start economy. But it's not working http://t.co/JqC551n says @DuncanWeldon

17. Will today be the day people start to question Osborne’s competence? | Liberal Conspiracy

    [...] Osborne’s focus is instead on helping big businesses and hoping for the best. But as Duncan Weldon pointed out recently, even the Corporation Tax cut isn’t working. [...]

18. sunny hundal

    For a start the corp tax cut isn't working http://t.co/FtTrZB5 and cutting 50p tax would increase the deficit. + 'Green taxes' v exaggerated

19. The Right's prescription of more of the same ignores the evidence | Left Foot Forward

    [...] Duncan Weldon argued: “Cutting corporation taxes but reducing investment allowances isn’t a tax cut for business - [...]

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