UK business needs to brace itself for much higher taxes

Christmas may end with a rather unpleasant epiphany for business this year. Not just because it has been a season of strikes and disruption, but also because the government’s inability to wring more out of state budgets is becoming abundantly clear. Business leaders need to start talking about the fact that big tax rises, beyond the ones already in the pipeline, are quite likely.

The brutal truth is that public services have tipped over. Take the NHS; the ambulance service is crippled. This winter, the number of patients dealt with within four hours at big emergency departments (so-called “Type I” departments) is already below 70 per cent across England — and the cold has not hit the figures yet. The target level is 95 per cent.

Returning to the old benchmarks will cost a fortune, especially as the NHS now has too few managers. But even maintaining this current dire level of service will cost a lot. Demand for healthcare will keep rising. The existing public estate will need to be expanded and renovated — the education department this week noted the risk of school building collapse. And public sector pay is going to have to rise relative to private salaries to retain staff.

These costs are impossible to evade. For all the “is it time to rethink the NHS?” think-pieces, every attempt to change the borders of the post-Attlee state has been intensely politically painful: think university funding and benefit reform. And how exactly do you redraw the state to escape paying for new schools and hospitals one way or another?

The Ghost of Christmas Yet To Come could yet spare us. If interest rates fall rapidly, that could free up cash that would otherwise go into servicing debt. Growth might rebound. But, equally, we might bodge our way through and face massive bills for tens of billions a year to fix services. Very big medium-term tax rises, well beyond the planned increases, are entirely possible.

The forces driving these rises are bigger than the capacity of the business lobby groups to resist them. Given that, they need to start talking more about how taxes ought to rise.

The prospect of higher taxes should focus minds on life after the so-called “super-deduction”, a pandemic allowance that provides tax relief on 130 per cent of the cost of qualifying investments. The scheme runs out in April of the coming year. It matters because rising tax rates will make tax reliefs more important and powerful.

Furthermore the CBI, the business lobby group, is right on the big picture: the solution to a rising tax burden is a bigger economy. And Britain’s long-running growth problems have, particularly since the Brexit referendum, been tied up with the country’s lack of business investment. And what are the main levers we use to target business investment? Tax reliefs.

The CBI, along with Britain Remade, a new pro-growth campaign, has been pushing so-called “full expensing”, which aims to improve the tax treatment of investment.

To recap this hoary old issue: at the moment, buying a ream of paper is treated more favourably for tax than buying a printer to put it in. The cost of paper can be written off immediately while the investment in the printer is only recovered over years. Full expensing would let businesses claim for the printer on the same terms as the paper.

There is danger here. A speedy relief system will create opportunities for Britain’s world-leading spiv sectors to find innovative new frauds and wheezes; keep your eye out for bargains on second-hand printers!

The Treasury has also warned that full expensing “risks incentivising inefficient, low-return debt-financed investment”. But the super-deduction did not do that. To be honest, right now over-investment seems a nice problem to have.

It certainly will not fix everything on its own: the planning system is a conspiracy against prosperity. The settlement with the EU is lousy. The skills training system is topsy-turvy. But it seems to be worth a go as part of a drive for growth and to prevent tax rises numbing investment. What we are doing now is clearly not working.