A cut in company tax will deliver little benefit, modelling suggests

A study by the Centre of Policy Studies (CoPS) and the National Institute of Economic and Social Research (NIESR) found that cutting company tax would deliver minimal benefits to the economy, with estimated increases in business investment, productivity, GDP, and before-tax wages ranging from 0.2% to 0.6%. Economists argue that these results are shockingly small and should not be taken seriously, as modelling is a primitive and oversimplified exercise that is often used to justify policy changes rather than improve understanding of what works and what doesn't.

According to a recent report from the National Institute of Economic and Social Research (Niesr), Chancellor Rachel Reeves will need to raise taxes in the autumn to meet her self-imposed borrowing rules. The government is currently on track to miss its target by £41.2 billion, prompting the think tank to recommend a "moderate but sustained increase in taxes" [1].

The report suggests several ways to raise revenue, including reforming the council tax system, altering the scope of VAT, adjusting pensions allowances, and prolonging the freeze in income tax thresholds, which is set to end in 2028. These measures aim to build a "buffer" that would reassure investors about the stability of the UK's public finances, potentially reducing borrowing costs [1].

Reeves, who has repeatedly stated that her borrowing rules are "non-negotiable," faces a "trilemma" over her spending commitments, manifesto promises to avoid tax rises on working people, and the limits she has set on borrowing. Stephen Millard, deputy director for macroeconomics at Niesr, told the BBC that raising taxes would be necessary to meet the £40 billion shortfall, which could break Labour's promise about raising taxes on working people [1].

The report also highlights the impact of weakening economic growth and the reversal of welfare cuts, which have contributed to the budget shortfall. Additionally, the rise in National Insurance Contributions for employers has been cited as a factor affecting business investment, with companies like Domino's Pizza reporting that it has impacted their profits [1].

Niesr recommends that the government focus on policies to promote growth and productivity to boost living standards across the UK. The report suggests that the economy will grow modestly at 1.3% in 2025 and 1.2% in 2026, placing the UK in the middle of the G7 economies [1].

The Treasury spokesperson emphasized that growing the economy is the best way to strengthen public finances, while shadow chancellor Sir Mel Stride accused Labour of not understanding the economy and warned that the nation's finances would need to be filled with more tax rises [1].

References:

[1] https://www.aol.com/taxes-must-rise-meet-target-233425846.html