The spectre of a "brain drain" reminiscent of the exodus of top British scientists and engineers to the US in the 1970s looms over the UK economy if taxes continue to rise in Britain. That is the view not only of City bankers after the new one-off bonus tax, but also of business leaders heading both large and small enterprises after the pre-Budget report (PBR) outlined by the Chancellor Alistair Darling last week.
The advertising guru Sir Martin Sorrell said: "We have already seen some of our people move to the Far East where the tax regimes are far more benign and the opportunities are greater." Sir Martin relocated the parent company of his WPP advertising group to Dublin last year.
Top scientist, Sir Richard Sykes, the former head of GlaxoSmithKline who now chairs the London Strategic Health Authority, was part of the original brain drain when he left England to join the Squibb Institute for Medical Research, the US pharmaceutical group, in the mid 1970s. "In the 1970s the whole climate in the UK was depressing and awful. The US was totally different; it was like night and day." Luckily, the forthright Sir Richard returned to the UK nine years later to build what was then Glaxo into a world-class pharmaceuticals group.
Sir Richard believes those dark days could return, although this time round the talent is moving to the Far East. He points to the opportunities for scientists in Singapore where the government has helped fund Biopolis, a vast business park devoted to bio-science. "A lot of top scientists have gone to work there," he says "If you can't compete with overseas economies on brains, you are done for because you can't send people down the mines or to the mill anymore."
Another senior industrialist points out that Britain also lost many engineers to the US in the 1970s. "That is one of the reasons we have no decent car industry in this country," he says.
It is not just scientists and bankers who are looking to move East to more business-friendly countries. Paul Russell who runs the London-based Happy Hands cleaning agency has been worn down by both high taxation and an increasing burden of regulation. "We are incredibly over-taxed and heavily regulated here," he complains. Within the next five years, he and his Sri Lankan-born wife plan to move to Sri Lanka where tax and regulation are less burdensome. He plans to start a cleaning business in Colombo, the capital, and, if all goes well, move into other big cities. "They are building luxury apartments all over the Far East and those apartments will need professional cleaning."
Small professional practises which cannot move are also suffering. Ferhan Azman, who runs the architectural and design practice Azman Associates, has had to let most of her staff go. "I do not understand why the Government treats small enterprises like us the same way as big corporations. It does not make sense," she says.
At the British Private Equity & Venture Capital Association, the chief executive, Simon Walker warns that London is losing its pre-eminence.
"The PBR continues the erosion of our competitiveness as a financial centre," he says, "and it is not that difficult for people to find jobs," he adds, citing a senior lawyer based in Paris who does not even speak French. He not only fears people will leave, but that fewer people from abroad will want to work here. "Overall, there is a profound disincentive for people to come here to work. Countries with lower tax regimes who beat us in standards of education and health care are more attractive to talented people."
The most benign tax regimes in Western-style economies are Hong Kong with a flat 16 per cent income tax for everyone and Singapore at 20 per cent. In France, another popular destination, the top rate is 40 per cent although there is an annual net wealth tax which penalises those with assets of more than €1m (£900,000). Ireland's top tax rate it is 41 per cent, while Spain and Italy have top rates of 43 per cent. By the time the new National Insurance increases come into effect in 2011, the UK will have an effective rate of 52 per cent, along with Holland, which currently has the highest rate.
For those who cannot escape these shores – and as Patricia Mock a director at Deloitte points out, unless you move lock stock and barrel, establishing non-residency with the Inland Revenue is becoming more difficult – there was a general feeling of disappointment at missed opportunities in the PBR.
"You have to generate wealth in the economy and it has been shown in the past that increasing taxes reduces the tax take because people are not incentivised," says Sir Geoff Mulcahy, formerly head of the retail group, Kingfisher. "Putting taxes up will hit retail sales, which is bad news for the economy, as retail sales is a driver of economic growth. Once again, the Government thinks that it can spend our money better than us."
Smaller manufacturing businesses found little to cheer about despite the deferral of a rise in corporation tax above 21 per cent. Stephen Falder, who runs his 80-year-old family business HMG Paints, with plants in Manchester and North Wales, feels the PBR did nothing to put things right. "To me, this was not a serious Budget statement; it will hurt, but it will not cure," he says. "My reaction to the PBR is one of disappointment and resignation. If you tax people more heavily and tax me for employing them, there is a double whammy. There is also the mood of the nation, which feels that there is nothing being done to put things right."
There was also disappointment that not enough has been done to curb government spending. While the Chancellor spoke of the need not to choke off economic recovery, most see the deferment of spending cuts until 2011 as purely political. As for the headline- grabbing 50 per cent tax on bank cash bonuses above £25,000 to be paid by the banks and not the employee, most see it as mere political posturing.
"It is frankly ludicrous and only lasts until 5 April next year, by which time we will be close to having another government," says Simon Walker. Few believe the move will do anything to dent the big bonus culture in the long run. The banks may trim bonuses this year, but there will be an implicit promise of paying more the following year. Alternatively, they may go the Goldman Sachs route and pay bonuses in shares or options. Sir Martin agrees. "The tax on bankers' bonuses does not move the needle much. It will discourage large cash bonuses for a year – so they will probably be deferred."
Most business leaders are concerned that the Government is hindering enterprise in order to be seen to be punishing the rich – particularly investment bankers, who have once again, taken on pariah status with the public.
Sir Martin says: "I do believe that the rich should contribute more; the better-off have to exercise more corporate and social responsibility. But the problem is that by imposing higher taxation, you discourage the people further down who want to become wealthy."
For those with transferable skills and a sense of adventure, heading for the vibrant economies of the East looks like an increasingly attractive option.Reuse content