Tax reforms may revive UK productivity
2023.01.09 07:11
Tax reforms may revive UK productivity
By Ray Johnson
Budrigannews.com – According to the Bank of England, Britain is about to enter a recession that will last until 2024. However, the country’s problems go far beyond a cyclical contraction. The United Kingdom has experienced a significant productivity decline since 2008. Prime Minister Rishi Sunak will have to take unpopular measures to fix that.
Britain’s low productivity, or output per hour worked, discourages investment and slows growth, which in turn lowers wages. Since 2008, UK productivity has increased by 0.3 percent annually, compared to other developed nations for decades.
According to data from the Organization for Economic Co-operation and Development, that rate is significantly lower than the 1.2% recorded by the United States and is a third of the 0.9% averaged by members of the G7. UK workers produced 20% less output in 2021 than their American counterparts.
Better workforce training and education are required to close the gap. Additionally, the nation must increase investment in cutting-edge technologies like manufacturing automation.
According to the World Bank, UK gross fixed capital formation, a measure of investment, was 17% of GDP in 2021, while it was 24% in France and 21% in the United States. Britain would require an additional 115 billion pounds in annual investment to reach the average level of other G7 nations.
In accordance with peers, the government already intends to maintain public sector net investment at around 2.5% of GDP for the next five years. The problem lies in convincing businesses to invest more. A straightforward reduction in the corporation tax would be less effective than allowing businesses to deduct new investment from taxes.
The United Kingdom already provides such incentives, but it must be more daring. According to a study conducted by Cambridge University, British businesses still contribute only 55% of total R&D spending, compared to 63% in the United States.
A wider range of intellectual property and capital expenditures could benefit from tax credits. Extending a “super-deduction” from the Covid era, which enables businesses to deduct 130 percent of their investment from their taxable income, beyond its April expiration date would be another straightforward step.
Sunak could tax wealth to pay for these incentives. The Resolution Foundation says that while private wealth has increased from three times GDP to nearly eight times since 1965, state taxes on property, capital gains, inheritances, and financial transactions have remained roughly the same at 2% of GDP. 45 billion pounds would be raised by doubling them.
Voters may not appreciate that. However, Britain’s economic gloom will persist if Sunak or his likely successor, Labour leader Keir Starmer, do not take bold actions.
On January 4, UK Prime Minister Rishi Sunak pledged to address Britain’s most pressing issues, including reducing inflation and putting an end to illegal migration.
When Sunak became premier in October 2022, he said that he would “grow the economy, create better-paying jobs and opportunity right across the country.”
The Bank of England says that the UK is about to enter a recession that will last all of 2023. But it also has a problem with productivity.
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According to the Organization for Economic Co-operation and Development, since the financial crisis of 2008, there has been a growing disparity between the output produced by UK workers and that of workers in other major economies like the United States, France, and Germany.
