The big surprise of the Budget was the raising of corporation tax from 19% to 25% for larger companies in 2023. Most commentators had pencilled in some sort of rise but on a gradual basis.
So why is this being done? I think there are four reasons for this.
- Although Corporation Tax is ultimately borne by shareholders and employees and customers, it is deemed to have a less politically negative effect as opposed to raising income tax or VAT.
- It sends a very strong signal to those who questioned whether the Government was committed to fiscal responsibility, that there is a price to be paid for the record-breaking Government expenditure over the last year.
- The Government has decided that it would be better for the economy to give a generous tax relief for capital spending rather than low tax rates. This reverses the Osborne doctrine which saw the rate of CT reduce from the rate of 28% to 20% during his Chancellorship.
- IF things go well for the Government, it could create a “war chest” to be used for other government priorities, notably long-term business rates relief and the social care crisis.
Many commentators have pointed out the downsides which could overtake the Chancellor’s calculations; such as a rise in interest rates and additional Covid related spending. However, baked into these figures are relatively pessimistic economic forecasts by the OBR for 2023 and 2024 with growth returning to a trend rate of less than 2%.
The record of the OBR, since its creation in 2010, has generally been on the pessimistic side in terms of both the economy and public finances. If the economy comes back faster and if companies invest to create greater capacity then the public finances may repair themselves quicker than is projected. This does not mean that any of the Covid related debts will be repaid anytime soon but it does mean that the Government could return to a balanced budget; where current spending is covered by current income.
Of course, if this does not work then the Chancellor will need once again to look at some of the more unpopular taxes to raise in the next few years.