Rishi Sunak and the Treasury must think big and plan for the long term | Budget

Imagine that the United Kingdom has created a fully functioning economics department. Imagine being run by a strong cabinet with the power to resist the Treasury’s desire to strangle the new ministry from its birth. Run with the idea for a moment that this new branch of state was tasked with addressing long-term challenges: low investment, low productivity, the north-south divide, and the transition to a net zero carbon economy.

Now stop dreaming and wake up to the real world. There have been attempts in the past to siphon off some power from the Treasury for the benefit of a new ministry – most notably the creation of the Department of Economics by Harold Wilson after the 1964 election. Wilson put George Brown on weight. heavy, at the controls, but he was still killed with relative ease by the Treasury.

Michael Heseltine’s stint as Chairman of the Board of Trade in the mid-1990s briefly opened up the prospect of a different approach, but the Treasury’s dominance over the entire domestic policy agenda (social protection, regional policy, employment and financial matters) became even more marked when Gordon Brown arrived there in 1997.

A similar takeover is happening today. Rishi Sunak is both Minister of Finance and Minister of Economy. Establishing a north branch of the Treasury at Darlington is one way of demonstrating its intention to oversee the government’s leveling program. Likewise, it appears that the chancellor – rather than the business secretary, Kwazi Kwarteng – will be responsible for industrial strategy.

In a way, this is a good thing because the Treasury wields the power that Kwarteng so obviously lacks. But that assumes that the Treasury can think strategically about how to solve Britain’s economic problems and – in past form – it can’t. Some of the decisions made in last week’s budget highlighted just how much short-term financial imperatives trump long-term economic planning each time.

There were two big announcements affecting businesses in the budget: the decision to raise the corporate tax from 19% to 25% in 2023 and the introduction of a 130% capital endowment for any investment that will take place in the next two years.

On the surface, this represents a real break with the past because, since Nigel Lawson in 1984, chancellors have considered that a corporate tax cut is a better way to encourage investment than capital allocations. As Sunak noted following his budget, there is little evidence that cutting corporate taxes from 28% to 19% since 2010 has had the desired effect. Investment as a percentage of GDP has stagnated over the past decade and has fallen sharply since the 1980s.

Granted, part of the decline may be due to underreporting of investments in human capital, but there is certainly an argument for trying a different approach. As Professor Peter Spencer of York University said in a recent article, the Lawson reform “has favored the service industry at the expense of capital-intensive manufacturing and thus added to the imbalances. of the economy caused by globalization ”.

Spencer says Chancellors have recognized the importance of providing incentives for R&D, but the lack of similar incentives to invest in new factories and machinery has meant that ideas developed in the UK are turned into products at home. foreign. The 130% tax break for investment – Sunak’s “super deduction” – has the potential to boost production capacity and – since northern regions are most dependent on manufacturing – change the economic geography from the United Kingdom. Spencer points out – and rightly so – that investing does not only benefit the individual business; there are spillovers because new ideas and practices are seeping into the economy.

There are, however, obvious design flaws in Sunak’s plan. The first is that there will be a high windfall cost – with the taxpayer subsidizing investments that would have happened anyway.

But the biggest problem with the super deduction is that it only lasts for two years and is therefore obviously a short-term solution to prevent companies from delaying their investments until 2023, when they would be able to compare a part of the cost to the highest cost. Corporate tax rate of 25% instead of the current rate of 19%. As wheezing to keep the recovery from being entirely consumer-driven, the super-deductor is just what it takes. As a response to leveling, this is a dud, as it will involve a culture shift rather than a tax break here today, gone tomorrow.

If the UK had a fully functioning Economics Department, it would make the following argument. Britain has invested too little for too long. The investments that have been made have tended to be in services rather than manufacturing. This has resulted in poor productivity, the proliferation of low-paid jobs, a permanent deterioration in the trade balance and a shift in the center of gravity of the economy from north to south. The current balance of corporate tax and allowances has failed to make a difference. These long-standing trends have now added the spice of de-globalization, Brexit and Covid-19, all of which point to the offshoring of production to argue for a stronger industrial policy. However, this means having a political horizon of the next two decades rather than the next two years. Britain is going to become a particularly unattractive place to invest in 2023 when the super deduction ends and corporate taxes are cut by six percentage points in one go. There will be nothing to deter innovators like James Dyson from building their next manufacturing plants in Asia, even if they do their R&D here.

To which the Treasury has an answer: The cost of the super deductor is £ 12.5 billion a year and cannot be paid indefinitely. This mentality – now as always – sums up the problem.