Corporate tax hike could depress economic activity and reduce tax rise revenue, says IFS
The corporation tax hike announced in today’s budget will lead firms to invest less in the UK in the medium term, the Institute for Fiscal Studies (IFS) has said.
Chancellor Rishi Sunak today announced corporation tax will rise from 19 per cent to 25 per cent by 2023 for UK companies with annual profits of £250,000 or higher.
Companies with profits of less than £50,000 will remain on the 19 per cent corporation tax rate, while there will be a sliding scale for companies with profits between £50,000 and £250,000.
Stuart Adam, a senior research economist at the IFS, was unconvinced by the policy.
“The UK’s headline rate will be in the middle of the international pack – and still the lowest in the G7 if USA state taxes are included,” he said.
“But the large rate increase will lead firms to invest less in the UK in the medium run, which will in turn depress economic activity and reduce the revenue generated by the tax rise.”
‘Significant risk’
As a result of the budget, borrowing is now forecast to again be over 10 per cent of national income in the coming financial year.
For IFS director Paul Johnson, the corporate tax hike represented a “significant risk”.
“Whether the big fiscal tightening planned for subsequent years will actually happen is less certain. It continues to depend on spending being lower than planned prior to the pandemic, and it also depends on a large increase in corporation tax actually being implemented without additional measures to at least ease its long-run impact,” he said.
“Make no mistake, this proposed increase in the main rate of corporation tax is a big reversal of decades of policy direction and a significant risk. For all the rhetoric about it leaving the headline rate here below that in other G7 countries, our effective tax rate will be relatively high.”
Under the OBR’s central scenario the biggest tax-raising budget since the first budget of 1993 is forecast to be sufficient to eliminate the current budget deficit in 2025-26.
According to the IFS, around half of this consolidation is achieved by the large increase in corporation tax, and around a quarter by the freezing of income tax thresholds, however the outlook for the economy – and with it the outlook for revenues – remains enormously uncertain.
Under the OBR’s downside scenario the current budget is forecast to still be running a deficit of around £85bn in 2025-26, in which case further tax rises would be likely if the Chancellor is to balance the current budget within this timeframe.