Growth Commission uncovers Budget hit to business equivalent to 1.5% hike in Corporation Tax

Although today’s Budget consists of a large range of smallish measures, The Growth Commission has calculated that its net impact on the UK business economy is a tax increase of £6,475 million a year by 2031-32 on the government’s own costings – equivalent to a 1.5 percentage point Corporation Tax increase.

Our models suggest this will reduce GDP in twenty years’ time by around 0.8%. 

The higher taxes using the government’s own costings (in £million) are shown in this table:

The Budget sets out a plan for an additional £10 billion of public borrowing over the next two years, offset by a theoretical £22 billion of budgetary tightening over the following three years. But there are proposals for additional £15 billion of off balance sheet borrowing for government investments of various kinds over the next five years. Since the past track record of such investments is not encouraging, it is probably appropriate to consider them likely to prove non-performing.

The higher taxes are largely planned to be spent on energy subsidies and a wide range of handouts, many to selected businesses.

We have modelled the impact of a £6.5 billion increase in business taxes. This is estimated to reduce GDP compared with what it would otherwise have been by 0.5% in ten years’ time and 0.8% in twenty years’ time. While this damage is small compared with that from the two previous budgets, it will still reduce GDP per capita in twenty years’ time by £340 for every person in the country at today’s prices.

Moreover, the Budget announced a 4% rise in the minimum wage. Based on our earlier research where a 10% rise would reduce GDP by 0.8%, we estimate that this 4% rise will reduce GDP by a further 0.3% in addition to the reduction caused by the stealth tax rise.

Growth Commissioner Douglas McWilliams observed:

“While the scale of the movement in the wrong direction in this Budget is more limited than in the past, it remains damaging. More importantly, the damage from previous budgets has not been offset by mistaken policies being repealed.

“This is not a good Budget. And the combination of stealth taxes and off balance sheet funding looks dodgy. I suspect that after an initial sanguine reaction, the markets will not be very happy.”