David Prosser: The wrong kind of tax cuts if we want to rebalance the economy?

You might characterise Mr Osborne's policy as offering tax cuts for businesses such as banks paid for by tax rises for manufacturers we want to support
Click to follow

Outlook It is not difficult to understand why George Osborne is so keen to press ahead with his pre-election promise to cut corporation tax, courtesy of a reallocation of resources from myriad capital allowances and enterprise credits. Bringing down the headline rate of corporation tax provides an early signal of the new Chancellor's intent, and the opportunity to sweep away some of the more complicated tax reliefs that were so beloved of his predecessors is an added bonus.

Still, is this the right priority for Mr Osborne? No business is going to complain about a lower corporation tax bill, but there will be plenty of firms that don't like the idea of paying for such reductions with the loss of their capital allowances, even with some sort of transitional arrangement to ease the blow (we will have to wait for next month's Budget to hear the detail).

All tax changes create winners and losers. But in this case, the losers are to be found in parts of the economy that one might, all things being equal, expect to see get more protection.

Specifically, cutting back on capital allowances will do most damage to manufacturers that allocate considerable resources to plant and machinery. In the services sector these allowances are much less valuable, so these businesses will be net winners.

That's an odd outcome for a Chancellor who says he shares the consensus view that Britain needs to rebalance its economy. You might characterise Mr Osborne's policy on business tax as offering tax cuts for businesses such as banks, on whom we want to depend less, paid for by tax rises for the sort of manufacturers we want to see play a greater role in the British economy.

It is not as if there are no alternatives. There is, for example, the much-rumoured rise in VAT from 17.5 to 20 per cent. Some of the money from that could be recycled into corporation tax cuts. That might be portrayed as asking retailers to shoulder the burden of the cost of lower business tax, which is possibly no bad thing as we ponder record levels of consumer indebtedness.