German politicians and business leaders reacted with a mix of irritation and skepticism to plans by British Finance Minister George Osborne to cut corporation tax to less than 15 percent to absorb the impact of leaving the European Union.
“One shouldn’t make the already difficult negotiations about the withdrawal of the U.K. even harder by announcing tax dumping,” said Ralph Brinkhaus, a lawmaker from Chancellor Angela Merkel’s conservative Christian Democrats.
Carsten Schneider, a lawmaker from the center-left Social Democratic Party, said: “The British are evidently grasping at every straw to be able to get to grips with the consequences of Brexit. To do that they’re even prepared to re-introduce flawed recipes of the past.”
The Federation of German Industries (BDI) also criticized the move.
“It’s questionable whether it makes sense to discuss tax cuts even before Brexit has happened,” its managing director, Markus Kerber, told Handelsblatt.
I fear that Mr. Osborne’s proposal won’t have much impact. The disadvantages of Brexit are far more severe. Christoph Spengel, economist, Center for European Economic Research
Christoph Spengel, an economist at the Center for European Economic Research (ZEW), a German think tank, said tax cuts would fail to offset the trade barriers caused by a British withdrawal from the E.U.
“If I’m a Japanese automaker I’m not going to stay in Great Britain because of a slightly lower tax rate if I’m cut off from the big E.U. market,” he told Handelsblatt. “The real economy is about markets. In the financial industry a lot will likely relocate out of London, in the advisory business too: to Dublin because of the language, or to Frankfurt or Paris.”
Unless Britain manages to negotiate membership of the European Economic Area, which would give it the same economic relationship with the E.U. as Norway has, it would face greater tax costs and bureaucracy in its trade with the bloc, Mr. Spengel added.
He said he didn’t expect Britain to evolve into a tax haven on the periphery of the E.U. The country had agreed in negotiations at the Organization for Economic Co-operation and Development to the automatic exchange of information and to fight corporate tax dumping.
“Great Britain was always among the first to implement these agreements quickly. I don’t think anything will change there,” said Mr. Spengel.
Asked if Mr. Osborne’s tax cut pledge would help Britain, he said: “I fear that Mr. Osborne’s proposal won’t have much impact. The disadvantages of Brexit are far more severe.”
Mr. Osborne told the Financial Times on Monday he wanted to build a "super competitive economy" with low business taxes and a global focus.
He did not give a time for the new rate. He previously planned to cut corporation tax to 17 percent by 2020.
The average rate among the world's most developed countries is 25 percent.
Mr. Osborne said the tax cut was part of a five-point plan to boost the British economy. Other measures include support for bank lending to ensure credit does not dry up, more efforts to channel investment to northern England, greater fiscal credibility and boosting economic ties with China.
His plan is a response to criticism from the Confederation of British Industry which demanded last week that the Conservative government should end its internal power struggle in the wake of the June 23 vote and develop a plan for life outside the European Union.
A tax rate of less than 15 percent would be the lowest among the top economies and would be close to the the 12.5 percent rate of Ireland, which has the lowest rate in the European Union and has attracted investors including Pfizer and Apple.
Britain has long sought closer ties with China. London, Europe’s largest foreign exchange trading hub, is one of the biggest clearing centers for the Chinese currency outside China. Mr. Osborne wants to deepen those links, which could help London-based banks worried about the impact of Brexit.
But it’s unclear when he will implement his plans or whether he will keep his job long enough to do so. Prime Minister David Cameron announced his resignation the day after the referendum and the Conservatives will choose a successor by September 9. There are five contenders for the job, including Interior Minister Theresa May and Justice Minister Michael Gove, and it’s seen as unlikely that Mr. Osborne will remain finance minister under a new prime minister.
Kallum Pickering, an economist at Berenberg Bank, said Mr. Osborne should first resort to other measures to cushion the economic impact of Brexit. He could increase public spending by investing in the construction of power stations and roads, for example.
Parts of Mr. Osborne’s plans could prove difficult to implement because there’s little appetite in the British population for cutting corporate tax following recent controversy over big businesses paying little or no tax in Britain.
Boosting ties with China may not be easy either. The uncertainty triggered by Brexit definitely won’t help to attract Chinese investors, said Mikko Huotari, an analyst at the Mercator Institute for China Studies. “It’s likely that the Chinese will hold back on investments for now. That’s also due to China’s own turmoil,” Mr. Huotari told Handelsblatt.
Pascal Lamy, a former World Trade Organisation head, urged Mr. Osborne to think of the impact of the tax cut on continental Europe.
"If you want a proper, balanced, win-win relationship in the future, starting with tax competition is not the right way psychologically to prepare this negotiation,” he said.
The Bank of England last week signaled a possible easing of monetary policy to avert a recession. Further announcements could follow today when it releases its half-yearly Financial Stability Report. Analysts expect Bank of England Governor Mark Carney to announce new instruments to boost investment and bank lending in Britain.
Katharina Slodczyk is Handelsblatt's London correspondent. Donata Riedel covers economic policy for Handelsblatt. Kerstin Leitel covers banks and insurance companies. To contact the authors: mailto:[email protected] [email protected] and mailto:[email protected]