Boris Johnson has postponed Conservative party plans to cut UK corporation tax to 17 per cent next year in order to prioritise public spending.
The prime minister told the annual conference of the CBI business lobby group in east London on Monday that the move would free up £6bn a year of money for extra public spending on the National Health Service and other priorities.
The move demonstrates the lack of any war chest available to the Tories for tax cuts and public spending promises since they committed to balancing the government’s books excluding capital investment this month.
Projections of the current balance show it to be barely in the black in 2022-23, leaving very limited room for giveaways in this election.
Against this unfavourable public finances backdrop, Mr Johnson pointed out that corporation tax had already fallen from 28p to 19p in the pound since 2010, when the Conservatives went into coalition with the Liberal Democrats. The Tories had announced in 2016 that they would reduce the level further to 17p in 2020.
“The alternative is [Labour leader] Jeremy Corbyn who would whack it back up to the highest levels in Europe,” Mr Johnson said.
The opposition Labour party publishes its manifesto on Thursday. But its last manifesto, ahead of the 2017 general election, promised several tax rises, including higher income tax for those earning more than £80,000, a new “excessive pay levy”, a £5bn-a-year financial transactions tax and a jump in corporation tax from 19p to 26p in the pound.
The Conservative party has often used “Laffer curve” rhetoric, suggesting cutting corporation tax will lead to larger tax receipts because it encourages more activity, but Tory chancellors have always accepted in Budget documentation that corporation tax cuts cost money.
Mr Johnson’s latest comments fly in the face of his previous comments in the Conservative party leadership contest and appear to be designed to neutralise attacks from Labour that the Tories are too close to big business.
The Institute for Fiscal Studies, a think-tank, said corporation tax revenues increased between 2010 and 2019 even as the rate fell partly because of a recovery in profitability since the crisis and partly due to stealth increases in the “effective rate” of tax even as the headline rate was cut.
Stuart Adam, a senior research economist at the IFS, said “the headline rate is not all that matters”, dismissing the idea that there was a Laffer effect in raising tax revenues as the main rate was cut.
Mr Johnson’s plan to reverse the corporation tax cut was originally scheduled to be in the November Budget that was cancelled, according to the prime minister’s advisers.
One Tory aide said the policy might still be resurrected, for example if the economy needed urgent stimulation after a no-deal Brexit, but pointed to the muted response from business as justification for it.
“The cut was not something that business particularly wanted, not a business priority and it was not featuring very highly as a determining factor in business planning,” he said.
Carolyn Fairbairn, CBI director-general, said: “Postponing further cuts to corporation tax to invest in public services could work for the country if it is backed by further efforts to [address] the costs of doing business and promote growth.”
Dan Neidle, tax partner at law firm Clifford Chance, said: “I have come across literally nobody in business who was calling for the corporation tax rate to drop to 17 per cent.”
But Kate Andrews, associate director at the Institute of Economic Affairs, a free market think-tank, called the announcement a “mistake”.
“Corporation tax is a stealth tax on workers,” she said. “Not to mention bad for competition, innovation and attracting business and investment from all over the world.”
Mr Johnson said the Tories were “not averse” to reducing taxes on business but said that postponing the reduction was the most “fiscally responsible” thing to do at present.
The current rate of corporation tax was already the lowest “of any major economy”, he claimed. “Before you storm the stage, let me remind you that this saves £6bn that we can put into the priorities of the British people, including the NHS.”
Mr Corbyn, meanwhile, defended his plan to lift corporation tax back to 2011 levels when he answered questions at the same CBI event.
“I want us to rebalance the way that we do things, that doesn’t mean massive change for everybody, it does mean some taxes at the very top . . . as we have a much better qualified workforce, a much better trained workforce in the future,” he said, speaking shortly after Mr Johnson. “It does mean we’ll create a more productive society.”