U.K. Business Warns Tax Hikes Risk Strangling Economic Growth

(Bloomberg) -- U.K. Prime Minister Boris Johnson risks strangling growth with higher taxes on business to fix the public finances in the wake of the coronavirus pandemic, the country’s biggest business lobby said.

The blunt criticism comes less than a week after Johnson and Chancellor of the Exchequer Rishi Sunak raised payroll levies on workers and companies to help fund health spending. But at a time of ultra-low government borrowing costs and a recovery that’s starting to stumble, many have questioned the timing.

“I am deeply worried the government thinks that taxing business -- perhaps more politically palatable -- is without consequence to growth,” Confederation of British Industry Director General Tony Danker will say in a speech on Monday. “It’s not. Raising business taxes too far has always been self-defeating as it stymies further investment.”

Danker’s remarks, emailed in advance by his office, highlight the growing unease among corporate leaders about Johnson’s approach toward business. Companies are also concerned about labor shortages and supply chain delays in the wake of Brexit, and have long sought reforms to business rates levied on shops.

Johnson will attempt to reach out to business on Monday by announcing plans to support 425,000 jobs a year over the next four years, as part of a previously-announced 650 billion-pound ($900 billion) package of private and public investment in infrastructure projects over the next decade.

The Treasury will also publish a new jobs update, setting out how people and businesses have been supported through the pandemic. “Business confidence is growing and thanks to the action we’ve taken, we’re expected to see two million fewer people out of work,” Johnson said in an emailed statement.

‘Reward Investment’

Danker said Johnson and Sunak should “flip business taxation on its head” and reward investment. Otherwise, he warned, any positive economic story will be “short lived.”

Danker will urge the government to:

• use the immigration system to solve labor market shortages
• overhaul Solvency II regulations for the insurance industry to unlock institutional investment in new assets
• address the country’s “seismic” re-skilling needs
• push ahead with infrastructure projects such as the HS2 high-speed rail link, and the expansion of London’s Heathrow airport and regional airports

While Sunak introduced a special tax break on investment in March, it’s due to phase out at the end of the 2022-23 tax year, the same time as corporation tax rises to 25% from 19%.

Danker, pushing for more incentives, pointed to decline in business investment to about 10% of output in 2019 from 14.7% in 1989. 

“It’s a terrible time to be poor at investment,” he said. “All the prizes, from AI, fintech, genomics, renewables, are in industries where success requires new investment, and where other large economies are investing now.”

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