George Osborne’s corporation tax cut has utterly failed


10:55 am - April 16th 2012

by Richard Murphy    


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In last month’s budget George Osborne made a 2% cut in the large company corporation tax rate, introduced for this current financial year.

Perhaps of all the budget measures this though was the most unnecessary and economically incompetent.

As the Observer pointed out yesterday morning, the Ernst & Young Item Club now estimate that Britain’s large companies are sitting on a cash pile that between them that amounts to £750 billion.

To put that enormous number in context, it is enough to fund the budget deficit from 2008-09 to 2014-15 inclusive. Rather than invest large companies are simply lending their cash to the government.

This represents a lack of condidence in George Osborne’s economic strategy. Businesses are not investing here because they have no faith in the prospect of economic growth which he said he can deliver, but which they do not believe.

More importantly, when large businesses are sitting on this amount of cash, they’re not short of money to fund any investment they want to undertake. They are simply refusing to undertake it.

So a cut in the corporation tax rate to encourage investment will achieve no such goal. It is not the current tax rate that is stopping big business investing in the UK, it is the lack of confidence big business has in George Osborne that is stopping that.

The corporation tax cut will have three consequences:

1. It will simply add to the cash pile of large companies, giving them more than £400 million (page 50) this year to tuck away, and much bigger sums in years to come. This increases the wealth gap in the UK by giving away a wholly unnecessary tax cut to big business which is largely owned by the top few percent in society.

2. It also denies the government essential revenue that is needed to close the deficit.

3. It increases the savings gap in our economy: where the massive growth in corporate savings (especially since 2008) without a matching increase in investment is one of the major causes of the rise in unemployment and the despair that most people face.

It’s another massive Osborne error.

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About the author
Richard is an occasional contributor. He is a chartered accountant and founder of the Tax Justice Network. He blogs at Tax Research UK
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Reader comments


That those who have cash would rather invest it in reasonably secure government bonds than in risky commercial purposes is an example of the widely accepted adage that government borrowing crowds out private investment.

The easiest way to force companies/investors to put their money into more risky corporate instruments is to cut off the supply of government bonds.

…in other words, less government borrowing.

Except comapnies the world over are sitting on huge piles of cash at the moment…UK, all over Europe and Especially the US. It’s a global issue regarding confidence, not a specific Uk issue.

And regarding your comments saying that this cash would pay fro 6 years of budget deficit….are you suggesting it should be simply taken away from these companies? As it is, that cash is most likely invested in government bonds, so is actually financing the budget deficit as it is.

Oh come one, Richard. You’re letting the Tories win by responding reasonably to Osborne’s professed motives. We all know the Tories are bent as pubic hair and honest as a parasite. Because that’s what they are: parasites. Osborne’s got his eye on some fat directorships from these big companies and he doesn’t give a fuck what happens to the the broader economy. Face up to that and your analysis will be much more convincing.

“the Ernst & Young Item Club now estimate that Britain’s large companies are sitting on a cash pile that between them that amounts to £750 billion.

To put that enormous number in context, it is enough to fund the budget deficit from 2008-09 to 2014-15 inclusive. Rather than invest large companies are simply lending their cash to the government.”

Gosh, that’s amazing Richard.

Because, do you know, there’s some idiot out there on the internet who says that non financial corporate holdings of gilts are somewhere around zero.

You can see it here:

http://www.taxresearch.org.uk/Blog/2010/05/18/who-owns-our-debt/

You’d really better go and straighten him out. It just wouldn’t do to allow someone to remain in such error, would it?

Tim, did you actually read the acrticle you posted? It is consistent with and adds weight to Richard’s argument (as one might expect given that he actually wrote it). Fly back to Nevernever Land on your neo-liberal unicorn and stop bothering your intellectual betters.

“stop bothering your intellectual betters”

Left wing snobbery front and centre! which reminds me.

http://www.youtube.com/watch?v=AHo2pXO_XAI

7. ex-Labour voter

Good to see somebody challenging the idea of cuts in Corporation Tax
This problem started under Labour. I can well remember a Labour leaflet coming through my door some years ago and boasting about how it had been cut.
It never mentioned how much that cost in terms of inferior public services.

8. DisgustedOfTunbridgeWells

This represents a lack of condidence in George Osborne’s economic strategy. Businesses are not investing here because they have no faith in the prospect of economic growth which he said he can deliver, but which they do not believe.

It’s a more of case the state introducing an unprecedented amount of structural inefficiency into the economy and now the people sat on the resources have absolutely no idea how to allocate them.

9. Robin Levett

This increases the wealth gap in the UK by giving away a wholly unnecessary tax cut to big business which is largely owned by the top few percent in society.

Is this true?

@9 Robin Levitt

No, it is decidely not true. Big business is overwhelmingly owned by pension funds. Which means pensioners and pension investors, which means you and me.

There are a few large individual shareholders, and directors and CEOs can and do get large pay packets, but even huge payouts are actually tiny in comparison to what these companies are actually worth. It’s the common misconception touted around by many on the left that the company is aactually owned by its directors….this is rarely if ever the case.

Everything osbourne does is incompetent, he`s a waste of space.

@1, @2: The EY Item Club report reads:

“Non-financial companies increased their holdings of currency and bank deposits by £48 billion in 2010 and a further £82 billion last year, taking the total to £754 billion, a staggering 50% of GDP.”

I don’t get the impression from that this includes government bonds, though I guess that depends on the definition of “bank deposits”.

I’d certainly like to be clear on what the £754 billion actually includes, certainly.

13. Frances_coppola

“To put that enormous number in context, it is enough to fund the budget deficit from 2008-09 to 2014-15 inclusive. Rather than invest large companies are simply lending their cash to the government.”

That’s impossible. If the cash is already being lent to the government then it clearly isn’t enough to fund the deficit, is it?

14. Luis Enrique

Frances,

I think following your logic, it’s not such much that the cash isn’t “enough” to fund the deficit, it’s that if the money has already been lent to the government it has funded the deficit and cannot do so again.

15. Frances_coppola

14 Luis

Yes, that’s what I meant. Sorry, I should have made it clearer.

16. Frances_coppola

Tims (both of you)

Indirectly, corporations are lending their cash balances to the government, of course, because of gilt investments by banks and other financial institutions with whom they have placed that cash.

Mr Murphy – have you heard of a body called the Financial Services Authority?
It requires the firms that it supervises to hold vast amounts of capital in cash or near-cash, usually three or six months running costs. That runs into the hundreds of billions of pounds. Gordon Brown’s creation is the second-largest factor causing this mountain of uninvested cash
Even without it, most insurance companies hold cash in order to pay claims. Do you want a householder to wait for ten years after a fire before his insurance company’s investment matures or before he can replace a car that breaks down or skids off the road? Lloyd’s of London alone holds over £50 billion in cash-near cash even after paying £12 billion in claims and the big composite insurers – Aviva, Royal Sun Alliance, Zurich, Allianz, Axa etc etc hold (and need to hold) more.
But the BIG amount is the amount of capital that Alastair Darling demanded the banks hold in “safe” sovereign debt or cash.
The vote of no confidence is not in George Osborne’s budget but in Gordon Brown’s management of the banking sector.
As someone has already mentioned, rich private investors own a very small percentage of large companies (although the “mass affluent” – people with more than one-tenth but less than half of your wealth – own a chunk via Unit Trusts etc).
Economically incompetent describes Gordon Brown whose policies led to a mass exodus of medium-sized companies with overseas earnings: Osborne is attempting to woo a few to return and to stem a further exodus by reducing corporation tax – if you think you can persuade Eire, The Netherlands, Bermuda, Luxembourg etc to increase their corporation tax rates to push companies back to the UK, go ahead and the best of luck.

@17: To be clear: the £754bn referred to is the cash and deposits held by non-financial companies.

19. Frances_coppola

John77, Paul

The relevant page from the Ernst & Young Item Club, which is the source of Richard’s figures, is here: http://www.ey.com/UK/en/Issues/Business-environment/Financial-markets-and-economy/ITEM—Background

As you will see, it gives a total figure of £754bn for currency and deposits held by NON-financial institutions, which it unhelpfully compares to GDP. This is of course comparing apples and oranges – the cash balance has been accumulated over several years whereas GDP is an annual figure. They should know better.

It would also help if Ernst & Young gave their sources. The Bank of England’s statistics don’t seem to agree – they give a figure of £745bn for financial institutions’ M4 sterling liabilities to each other and £251bn for non-financial. Something’s very adrift somewhere. If non-financial balances are as high as Ernst & Young say, where the heck are they being held?

Indirectly, corporations are lending their cash balances to the government, of course, because of gilt investments by banks and other financial institutions with whom they have placed that cash.

And it’s happening all over Europe.

The states prop up the financial institutions by not allowing other states to default on sovereign debt then the financial institutions buy more bonds to prop up the nation states.

All this process requires is the continual printing of more money.

But only the wilfully blind could believe it can last forever and that there will not be tears in the end.

http://papermoneycollapse.com/2012/04/please-dont-call-this-capitalism/

Frances

Yes, I’ve seen that – it’s what I was referring to in my response to John77,

I agree that there’s something not hanging together here – at first I thought it was me not getting understanding something, but if you too feel a bit in the dark….

As you say, if the “currencies and bank deposits” are really just that, some must be flowing through into government bonds held by the banks with whom they have deposits, but only some – but this doesn’t then seem to tally with the net borrowing/net lending tables on the same page (not the figures, but the method of presentation). I admit to being confused.

@ Frances (and Paul)
Thank you
I made a fundamental error in assuming that Murphy meant large companies when he said “large companies”
I should have started from the assumption that he does not know what he is talking about and when he says something he actually means something else.

@ Paul & Frances
Since a majority of the profits of the FTSE-100 companies come from overseas subsidiaries, it is quite possible that the difference between the Bank of England’s £250 billion cash for non-financial institutions and Ernst & Young’s £750 billion is down to overseas cash holdings by overseas subsidiaries. The article doesn’t say (and most balance sheets for non-financial companies don’t unless, often even if, you go through them with a toothpick) whether the cash is held in the UK or overseas: IFRS asks them to report currency risk but you can hold $ in the UK, Euros in the USA and £sterling in Germany.

24. Frances_coppola

23 John77

I admit, I was wondering if the numpties at Ernst & Young had failed to eliminate overseas cash balances. I can’t think of anything else that would create so large a difference.

25. Paul Newman

This is a mess , its seems almost random?

Whenever Mr Murphy posts an article here, in stream the fusspots and nitpickers and derail the discussion from whatever point Richard was making.

It’s a fair point too. We know corporate surplus is equal to the government’s deficit.

So why promote policies that are only going to promote the hoarding of more cash by the corporate sector?

If the so called private sector “risk takers” won’t take any risks and the so called private sector “innovators” can’t innovate, then much better to tax that corporate profit and put it to better use via government.

@ Ben M
“The point that Richard was making” ?
George Osborne’s corporation tax cut relates to profits earned between April 6th 2012 and April 5th 2013. So Murphy announces on April 16th 2012 that “George Osborne’s corporation tax cut has utterly failed” – before it has taken effect.
Murphy even admits that he is talking about a tax cut for the current financial year that started 10 days prior to his post.
So he is pronouncing judgement on something that has not yet happened. I leave you to draw your own conclusions. If he truly can see the future why did he not warn Gordon Brown about the Lehman Brothers crash?
“We know corporate surplus is equal to the government’s deficit.” No, that is not correct – pardon me for nitpicking but there is the personal sector and overseas. You are probably too young to remember Lend-Lease (I am) but the overwhelming majority of the government deficit in the two World Wars was financed by (i) borrowing from the private sector (ii) selling off overseas investments to pay foreign governments and suppliers and (iii) borrowing from the US government.
“If the so called private sector “risk takers” won’t take any risks and the so called private sector “innovators” can’t innovate” – a big IF. I take financial risks several times a week on average, expecting that a majority won’t pay off but that the minority will leave an overall modest profit. Meanwhile “put it to better use via government” I see appalling waste and misuse of funds in the public sector – forget the Daily Mail diatribes about “equality and diversity tsars” (although paying union officials out of public funds does annoy me) – the last time I read the accounts for my town council the central administration costs to supervise its services cost more than actually running the services! Don’t believe the figure that HMRC gets 30% of its tax calculations wrong – that’s only the ones that are spotted and most people cannot check their assessment properly because they don’t have relevant knowledge.

28. Frances_coppola

BenM

No, I’m afraid the figures DO matter. If the £500bn difference between Ernst & Young’s figures and the Bank of England’s for non-financial corporate cash balances is accounted for by overseas cash balances, then that cash may not belong to the UK at all. Mr Murphy is very keen on profits being taxed where they are earned. If this cash relates to activities by overseas subsidiaries of UK-based multinationals, then by Mr Murphy’s own standards it should not be taxed in the UK, and there is no particular reason why it should be invested in the UK either.

29. Frances_coppola

26 BenM

No, I’m afraid the figures DO matter. If the £500bn difference between Ernst & Young’s figures and the Bank of England’s is due to overseas cash balances, then that money may not belong to the UK at all. Mr Murphy is very keen on profits being taxed where they are earned. If the cash is generated by overseas activities of UK-based multinationals, then according to him it should not be taxed here – and there is no reason for it to be invested here either.

However, I accept your point that Mr Murphy was actually criticising the Chancellor’s decision to cut large corporation tax, on the grounds that corporations already have high cash balances so cutting corporation tax is unlikely to make them invest any more. I made exactly this point in this post I wrote last year : http://coppolacomment.blogspot.co.uk/2011/06/what-to-do-with-corporate-surplus.html

My guess is that the Chancellor did not intend the corporation tax cut as a short-term economic stimulus, but as a medium-term structural reform aimed at making the UK’s tax regime more attractive to foreign businesses. Attacking its effectiveness as an economic stimulus therefore doesn’t address the real issue, which is whether we approve of an economic and industrial strategy that rests on competing with other countries on corporation tax rates. I’m quite surprised that Mr Murphy missed this, because I believe he would be completely opposed to such a strategy.

@Frances
It’s not aimed so much at foreign businesses as at UK businesses which have overseas operations. the press have made a fuss about WPP which relocated to Eire and is talking about coming back: the problem is much greater than WPP. Under Gordon Brown’s “stewardship” of the UK economy a majority of Lloyd’s insurers relocated to Bermuda and/or set up a Bermudian subsidiary to create a level playing field – I thought the final straw was BRiT insurance that sponsors the England Test matches redomiciling itself to The Netherlands (yes, they do play cricket, but I think it was a tax decision).
If (yes, that’s a big if) Murphy understands the impact of tax on catastrophe insurers, he will want to avoid that topic. But for me it matters as an insurer that goes bust is worse than useless.

31. Frances_coppola

John77

Having now read HMRC’s Budget document – all of it! – I can confirm that the purpose of the corporation tax cut IS to make the UK a highly competitive tax regime. The aim is for the UK to have the lowest corporation tax in the G7 and nearly the lowest in the G20. I doubt if this is wholly for the purpose of persuading UK businesses not to relocate to Eire or the Netherlands. It must also be intended to entice overseas businesses to relocate to the UK. And as I suspected, no mention whatsoever is made of the tax cut as an economic stimulus. Gideon isn’t that stupid.

@ Frances
“Gideon isn’t that stupid.”
Despite the professional sneering from the left, stupid rich boys can’t get into Oxford. There are far more rich boys than places at Oxford and Cambridge.
As for your analysis, you may well be right; I am concerned by the number of UK companies that have redomiciled to avoid UK tax on foreign profits so I may have things out of proportion.
The aim is to encourage investment in the UK since, as Anglo-American pointed out forty years ago, what matters to the shareholder is the after-tax profit, so a lower tax rate will encourage investment and may (just may) increase net corporation tax revenue. What it is more likely to do is to increase employment and reduce the cost of out-of-work benefits.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    George Osborne's corporation tax cut has utterly failed http://t.co/IPjryEIE

  2. James

    George Osborne's corporation tax cut has utterly failed http://t.co/IPjryEIE

  3. Ken Rice

    George Osborne’s corporation tax cut has utterly failed | Liberal Conspiracy http://t.co/A1zSfG9f via @libcon

  4. Maureen Czarnecki

    George Osborne's corporation tax cut has utterly failed http://t.co/IPjryEIE

  5. Jason Brickley

    George Osborne’s corporation tax cut has utterly failed http://t.co/hbAeuwsH

  6. MalcolmWing

    Osborne’s corporation tax cut has utterly failed as companies sit on £750bn cash mountain they refuse to invest. http://t.co/H6LGJIHm

  7. Feral_britain

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  8. B0M3RC0MM4ND

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  9. Steve Akehurst

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  10. leftlinks

    Liberal Conspiracy – George Osborne’s corporation tax cut has utterly failed http://t.co/OanCmZ1V

  11. Alex Braithwaite

    George Osborne’s corporation tax cut has utterly failed | Liberal Conspiracy http://t.co/blHTYOMe via @libcon

  12. quit it

    George Osborne's corporation tax cut has utterly failed http://t.co/IPjryEIE

  13. Ritchie writes at Lib Con

    […] Gosh, that’s amazing Richard. […]

  14. SJ

    George Osborne's corporation tax cut has utterly failed http://t.co/IPjryEIE

  15. Agnes

    RT @Samanthaj494: RT @libcon: George Osborne's corporation tax cut has utterly failed http://t.co/p6zRTMKc

  16. Steve Elsey

    Osborne’s corporation tax cut has utterly failed as companies sit on £750bn cash mountain they refuse to invest. http://t.co/H6LGJIHm

  17. Russ Noble

    George Osborne's corporation tax cut has utterly failed | Liberal … http://t.co/6sfY5Ots

  18. BevR

    George Osborne’s corporation tax cut has utterly failed | Liberal Conspiracy http://t.co/RE4geDC3 via @libcon

  19. Towards a socialist MMT « Though Cowards Flinch

    […] that they’ve included overseas cash holdings in this figure, which is a bit thick),  but Frances’ estimate of £251bn (from BoE’s figure for M$ sterling liabilities for non-financial firms) is still […]

  20. sunny hundal

    @ActuarialChris but its not actually working in short term either: thats my point. see http://t.co/GS0SW08D and http://t.co/Dgltv7l4





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