What industrial strategy should look like

The prime minister, Theresa May, has unveiled the long-awaited details of her “industrial strategy”. As might be expected, these were mostly the kind of re-heated platitudes usually wheeled out on these occasions. She wants the state to take a more active role in creating industries that can succeed in the future. She managed to avoid naming any particular “national champions” she wanted to back, and she side-stepped putting any taxpayers’ money into them – usually a recipe for conmen and fraudsters to grow rich on the public purse.

Instead, the government will concentrate on upgrading skills, forging the right kind of trade agreements, investing in science, research and innovation, and supporting startups.

That sounds sensible – but it is hard to remember a time when the government was hostile to startups, and didn’t want to upgrade skills. The problem is the basic premise. After all, we have no idea what industries will do well in the post-Brexit 2020s. We might become world leaders in AI or robotics, or driverless cars, or home-delivery apps. We might re-invent ourselves as a tax-haven for the world’s super-rich, or as a shale-gas-driven energy intensive manufacturing hub. No one knows.

It would have been hard to predict two decades ago that the UK would become a centre for mobile telecoms operators, or for low-cost budget airlines. No government ministry “championed” those – but they still did well.

So what should the government be doing? First, make our corporation tax the lowest in the developed world. At 20%, and heading down to 17%, the UK already has a competitive rate compared with many of our major competitors. But keep in mind that rates are coming down all over the world. Donald Trump is planning to take the US rate down to 15%.

Switzerland is embarking on a reform which will see the rate in cantons such as Geneva come down to 13%. Why not take a big step and cut the rate to just 10%, making it even more competitive than Ireland? Or, heck, why not just abolish it completely? The UK might soon be outside the single market, but with very low taxes it could still be a magnet for entrepreneurs across Europe.

Second, why not exempt the first five employees from payroll taxes? The UK has seen a huge upsurge in new business creation over the last 15 years. There are now more than 5.5 million private companies in the UK, up by almost two million since 2000. But many of them are still micro-businesses, often with no employees.

Tax and regulation make the transition to employing just a single person a huge one – but without any staff, a business can never grow to any significant size. There would have to be safeguards to prevent FTSE companies from splitting themselves up into units of five staff. But this could be the single most important thing the government could do to help small businesses grow.

Finally, completely devolve power over business taxes to Scotland, Wales and Northern Ireland. Northern Ireland is already planning to match the 12.5% corporate tax rate on the other side of the border. But there are limits to the numbers of firms that will ever want to move to Belfast or Derry.

Now that Scotland and Wales have partial control over their own tax systems, why not go the whole hog and give them control over all business tax? They could lower rates, national insurance or corporation tax, or even VAT – the Severn Bridge might seem less of a barrier to companies if there was a lower rate of tax on the Welsh side. Tax competition works brilliantly in Switzerland and America – and it can work here as well.


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