There’s an old saying that if you laid all the economists in the world end to end, they still wouldn’t reach a conclusion.
But even so, most of them would agree that Britain’s economy doesn’t invest enough. We’re wedded to short-term consumer demand rather than investing in long-term growth like those sensible Germans.
And the difference matters a lot. If British companies don’t invest as much in new ideas or the latest technologies as their foreign rivals, we’ll always be on the back foot – condemned to trail along in the wake of more modern, go-ahead firms.
We’ll be the awkward provincial cousins trying to keep up with more accomplished and capable relatives.
It’s deeply embedded too: critics have been highlighting the problem for at least 50 years. So what’s the answer? How do we cure ourselves of such a long-term illness?
We could start with the tax system. Nobody much likes taxes, but company taxes are the ugliest sister in an unattractive family.
The OECD says that corporation tax is the most damaging and distortive, stopping investment flowing to wherever in the economy it is needed most. Reforming it would make UK plc more efficient, with faster growth and higher productivity too. But how do we achieve this?
At the moment, we’ve only ourselves to blame, because our company tax system rewards firms which borrow much more than ones that invest.
We lavish huge taxpayer subsidies on bankers and hedge fund managers who load up British firms with debts. But we’re meaner with virtuous management teams that do lots of growth-promoting, long-term capital investment instead.
So why not reverse the incentives? Stop rewarding borrowing so lavishly, and encourage investment instead? It would be fairly simple to do: we could make capital expenditures fully tax deductible as soon as it is spent, and stop company debt interest being tax deductible instead.
The effects would be startling. We’d see much higher business investment in both digital and traditional industries, leading to stronger economic growth and better productivity across the entire economy.
Pretty soon, lower borrowings would produce a less leveraged, more counter-cyclical economy, which would be stronger, less brittle, and better able to withstand economic shocks like the next recession. And we’d have a fairer and more robust tax system, where multinationals wouldn’t be able to use intercompany borrowings to move their profits offshore.
Best of all, the change would pay for itself, with money left over for a tax cut too. The current subsidy for company borrowing is so enormous that we could have loads more growth-promoting long-term investment and there’d still be money left over for lower company tax rates.
We’d have to phase it in, of course, to give firms time to change their borrowings. And we’d need to tread carefully with financial and real estate investment firms, for whom borrowing and lending is their core.
But in the end, we’d have transformed the country’s economy dramatically for the better. Post-Brexit Britain would have its wealth-creating mojo back, and would be the best place in both the G20 and Europe to invest and do business.
Why shouldn’t we be the leaders of the fourth Industrial Revolution, just as we were for the first?