Make it profitable for businesses to move out of London
Joe Wright, 30 July 2014
Looking to Germany as an economic model for the UK has its pitfalls. Policy is not as transferable between nations as is sometimes proffered by comparative reports, because businesses and people work within a culture – a culture cultivated over centuries. It is the reason there is so much resistance to making the UK economy a more ‘co-ordinated’ or Scandinavian model despite the severity of the recession. Liberalism is deeply ingrained in the British psyche, welded into place during Thatcher’s reign, and it limits the tools politicians have to change the way Britain makes its money, particularly when trying to relocate where so much of that money is made: anywhere but London. Because of this economic history, however, there is one thing that Brits understand well and that is competition.
Germany provides a good model for how competition can drive more widely distributed growth. In Germany businesses pay an average corporation tax of around 30 per cent. This is comprised of a flat rate corporation tax constituting 15 per cent of profits collected by the federal government, a solidarity tax (to help fund German reunification) c. 0.825 per cent, and a trade tax. The 30 per cent figure is an average because the last tax they pay, the local trade tax, is set region by region and ranges from 7 to 17 per cent. It is this element of control for regional government which creates the competition: the tax allows the regions to compete for business. Comparatively, businesses in the UK pay the same tax they would pay regardless of where they are located.
There are many reasons that so many companies decide to locate in London and the South East. London has increasing appeal, meaning a lot of talent migrates to the capital – talent that businesses need to compete for. Being near other businesses is also useful for most sectors: industrial hubs foster innovation as Silicon Roundabout and Canary Wharf can attest to. Brand is important: London has very successfully marketed itself as a ‘global city’ and businesses want that image to rub off on them. These are very strong incentives to be in the capital and there are plenty of others depending on the sector.
But in the end, profit trumps all. A variable tax regime which favours parts of the country in need of more economic activity (the Welsh valleys, the North East, Glasgow and the Western Isles of Scotland to name a few), will be enough of an incentive to draw some businesses away from the South East. At the same time, existing businesses in those areas will enjoy a tax break, meaning more money to invest and expand.
Whether this was a devolved power or centrally controlled is another matter. If devolved it would heavily depend on the regions using new powers over corporate taxes wisely, resisting the temptation to play politics or begin a race to the bottom – a small variation in tax would suffice. Centrally, these problems could be more easily avoided, but decisions would lack the better knowledge of regional economies available at a local level. Either way, giving regions the means to compete with the capital is the only way to make Britain a more balanced country.