Theres an old saying that if you laid all the economists in the world end to end, they still wouldnt reach a conclusion.
But even so, most of them would agree that Britains economy doesnt invest enough. Were wedded to short-term consumer demand rather than investing in long-term growth like those sensible Germans.
And the difference matters a lot. If British companies dont invest as much in new ideas or the latest technologies as their foreign rivals, well always be on the back foot – condemned to trail along in the wake of more modern, go-ahead firms.
Well be the awkward provincial cousins trying to keep up with more accomplished and capable relatives.
Its deeply embedded too: critics have been highlighting the problem for at least 50 years. So whats the answer? How do we cure ourselves of such a long-term illness?
We could start with the tax system. Nobody much likes taxes, but company taxes are the ugliest sister in an unattractive family.
The OECD says that corporation tax is the most damaging and distortive, stopping investment flowing to wherever in the economy it is needed most. Reforming it would make UK plc more efficient, with faster growth and higher productivity too. But how do we achieve this?
At the moment, weve only ourselves to blame, because our company tax system rewards firms which borrow much more than ones that invest.
We lavish huge taxpayer subsidies on bankers and hedge fund managers who load up British firms with debts. But were meaner with virtuous management teams that do lots of growth-promoting, long-term capital investment instead.
So why not reverse the incentives? Stop rewarding borrowing so lavishly, and encourage investment instead? It would be fairly simple to do: we could make capital expenditures fully tax deductible as soon as it is spent, and stop company debt interest being tax deductible instead.
The effects would be startling. Wed see much higher business investment in both digital and traditional industries, leading to stronger economic growth and better productivity across the entire economy.
Pretty soon, lower borrowings would produce a less leveraged, more counter-cyclical economy, which would be stronger, less brittle, and better able to withstand economic shocks like the next recession. And wed have a fairer and more robust tax system, where multinationals wouldnt be able to use intercompany borrowings to move their profitRead More – Source