This article is taken from the April 2023 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.

Should the government increase taxation on British companies in order to pay large sums to foreign companies? 

The question may seem silly. Of course the government should not increase taxation in this way, not least because in many cases the British and foreign companies are competitors. 

However, discussion of these matters is not in the least silly. All too often in modern Britain, politicians and civil servants lose the plot and do things that are against the national interest. 

In his March Budget, Jeremy Hunt, the Chancellor of the Exchequer, upset many people in the business world by raising the standard rate of corporation tax from 19 per cent to 25 per cent. But he had to do something about the public finances. 

The budget deficit is forecast to have exceeded £160 billion in the 2022/23 tax year and has been running at almost 7 per cent of gross domestic product. The shortfall is causing the national debt — and the interest paid to service it — to rise at a rapid rate. Any slippage would endanger the UK’s fiscal sustainability.

Hunt became Chancellor last year only because Kwasi Kwarteng’s September Budget was a fiasco. The unfunded tax cuts in that Budget were so big as to risk a slide into ever-increasing deficits. Financial markets were not fooled by Kwarteng’s supply-sider rhetoric. Investors sold off gilt-edged securities and pushed up their yields. The increase in yields meant an explosion in the UK’s future debt interest bills. 

Kwarteng did such damage to the UK’s credit-worthiness that he had to be sacked after a mere 38 days. In his first few weeks as Kwarteng’s successor, Hunt reminded his Cabinet colleagues that two and two do not make five. He had both to take immediate action to curb the deficit, and to commit to a viable future path for deficits and debt. That was why he restored the increase in corporation tax, originally announced by Sunak in the spring 2022 Budget and cancelled by Kwarteng. 

The extra revenue from corporation tax will reduce the deficit by about one per cent of GDP, while other planned tax measures cut it by another one per cent of GDP. These may sound like insignificant amounts in the life of a great nation, but the arithmetic here is vicious. 

Net public debt stands at about £2,500 billion and is roughly equal to GDP. An increase of one per cent (100 basis points) in the interest rate on the debt therefore implies extra public expenditure also of one per cent of GDP. Keeping the trust of potential investors in British government debt is critical to long-run fiscal sustainability. 

Many Conservative backbenchers will nevertheless protest that the greater tax burden on companies will deter foreign investment. This may be true to some extent, but it does not justify handing money to overseas investors to expand their British operations. 

According to recent newspaper stories, Tata Motors — the owner of the Land Rover car business — has “demanded” £500 million of government funds for locating an electric vehicle battery factory in the UK. Tata has apparently been offered financial support by Spain if it were to build the factory there. 

One report spoke of the Indian firm delivering an “ultimatum” at an allegedly “pivotal moment” for the UK car industry. It seems that last year Tata had almost committed to a battery factory in Somerset, in association with its Chinese production partner Envision, but had deferred a final decision until the government had also given the green light for a subsidy to its steel plants. 

Separately, Orsted — a Danish company, with the Danish government a major shareholder — has threatened to shelve a £8 billion project for the world’s biggest offshore wind farm, unless it receives newly generous tax treatment for its investment. 

Orsted’s complaint is that construction costs have risen sharply in the last year, while financing costs have jumped because of the increase in interest rates. Without a special tax break, the project cannot make a profit. 

If the tax break is not granted, presumably meaning a loss to the government of several hundred millions of pounds, the turbines will not be erected 75 miles off the Norfolk coast. 

Tata and Orsted may not receive all the money they are demanding from the British state, but the signs are that they will pick up enough to make a dent in the 2023/24 budget numbers. 

Further, if Tata and Orsted are viewed as deserving supplicants, what is to stop other foreign companies knocking on the government’s door to help with their loss-makers? 

Boris Johnson was once described by Nigel Lawson as suffering from “economic illiteracy”, when Johnson succumbed to the ridiculous argument that a particular scheme deserved state money because it would “create jobs”. Will Sunak and Hunt be any better than Johnson? 

Can they see that the larger the handouts they give to foreign companies, the more revenue they will have to raise from British taxpayers, including the British companies now confronted by a 25 per cent corporation tax rate? 

Chucking money at foreign companies is not a sensible “industrial strategy”.