Outlook: CBI accuses Treasury of squandering Britain's tax advantage

Network Rail; BSkyB succession
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Business leaders have been complaining for some years about the steady erosion of Britain's competitive advantage as a relatively low tax country. Now along comes a report by the Confederation of British Industry to suggest it vanished entirely during the late 1990s, with only France among our major trading partners currently imposing a significantly heavier tax burden on business than Britain.

The CBI somewhat damages its case by suggesting in the press release that its assessment of the business tax burden, at 9.9 per cent of GDP, is a current number, whereas it in fact refers to 2000, the last year for which international comparisons are available. This has allowed the Treasury to ridicule the entire endeavour as inaccurate and unreliable. Read further into the report, the Treasury points out, and you find that the tax burden has since reduced to 8.9 per cent, which is no higher than it was when Labour first came to power.

The CBI's methodology is also open to question, for instance in reporting the business tax burden in Germany at just 10.1 per cent of GDP. This may significantly understate the true position by ignoring the relatively high proportion of German enterprises that pay only income tax, which naturally doesn't fall within the CBI's definition of business taxation.

None the less, the broad thrust of the CBI's findings is plainly correct. The amount paid by business as a proportion of GDP has fallen over the last two years, but only because business activity and profits have collapsed. Exactly the same thing would have happened in other developed economies, so it seems unlikely that our relative position has improved. Furthermore, it seems undeniable that from here on in, the proportion of the total tax take accounted by business will start rising again. The increase in employers' National Insurance Contributions and the recovery in corporate profits alone will ensure it.

Tax is one of the major determinants of business investment. If tax is too high, business won't invest, or it will turn instead to lower tax regimes. You can bat the numbers to and fro as much as you like, but in the end it is perceptions that matter, and the problem the Treasury has got is that business believes it is being more heavily taxed whether it is true or not. Corporation tax has been substantially reduced under Labour, yet what the right hand gives, the left one has taken away, and other taxes that fall on business have been increased markedly.

The most important of these was the removal of the tax credit on dividends, which at a cost to business and investors of £5bn a year has forced companies both to raise their dividends by more than they would otherwise have done and pay more into their pension funds. But there has also been a host of smaller, often industry specific tax rises of some complexity, the collective effect of which is to give the impression of a tidal wave of rising taxation.

The Institute for Fiscal Studies, the tax and spending think-tank, sometimes argues that there is no such thing as a business specific tax, in that all taxes fall ultimately on either employees or investors. A pedantic point perhaps, but the macro economic issue here is that it is the total tax burden which really matters; how it is distributed between business and individuals may in the round be of only marginal significance.

And on this score at least, there is no room for argument. The total tax take as a proportion of GDP has been rising steadily, from 33 per cent in 1993-4 to a projected 36.3 per cent this year and 38.2 per cent by 2007-8, according to the last Treasury forecast. Growth is lower than the Treasury expected, so the longer term projection almost certainly understates the Government's peak funding needs.

The Government would argue that higher taxes are helping to support growth, employment and investment in public services, yet ultimately all tax must come from the private sector, for governments only spend wealth, they don't generate it. Precisely where the tipping point is that defines when more taxation means less is a subject of fierce academic debate, but it may be quite near.

Network Rail

Railway price reviews are not what they used to be. On Friday, the Thin Controller Tom Winsor will announce how much the state-supported Network Rail will be allowed to spend over the next five years to make the trains run on time. In the bad old days when we had a privately-owned railway, this was the cue for a fearful head-on collision between a regulator determined to screw Railtrack to the sleepers and a company intent on securing the best possible deal for its shareholders.

Now, however, peace has broken out and the sum Mr Winsor seems to have in mind - £24.5bn - is almost exactly what Network Rail has asked for. The Rail Regulator knows he has less leverage over Network Rail than its predecessor. For one thing, there are no shareholders to answer to, which has allowed costs to rip. For another, Mr Winsor knows that Network Rail can always go cap in hand to its owner, the Government's Strategic Rail Authority, if it decides it has been hard done by.

The £24bn or so that Network Rail looks like getting is £10bn less than the first number it thought of but £8bn more than its predecessor wanted. It can only come from one of two places, the fare box or public subsidies. Passengers and taxpayers alike will wonder whether this is really going to be money well spent.

Part of the increased funding need is the legacy of Railtrack's past under-investment, witness the £3bn power upgrade which Network Rail is having to carry out in southern England so that the train operators can bring their shiny new fleets of air-conditioned carriages out of the marshalling yards and onto the tracks.

The new Transport Minister Kim Howells, who has taken to railway buffs about as enthusiastically as he did to conceptual artists, described the failure to plan for the new trains as a "massive clanger". However, sorting out the mess will, in the short-term, mean a more disrupted, less punctual railway with something like 1,500 possessions required to install the extra power supply. Merseyrail had the bright idea yesterday of banning alcohol from its trains. Yet for commuters in the south of England, drink may be the only way to get through the next nine months.

BSkyB succession

The outcome of the BSkyB succession battle is not in doubt now that James Murdoch has finally thrown his hat into the ring, if indeed it ever was. The psychometric tests that Mr Murdoch Jnr is being forced to sit, as the nominations committee goes through the charade of finding the most suitable successor to Tony Ball as chief executive, would have to identify him as the next mad axe murderer before striking him out, and even then, Lord St John, head of the committee, might think twice about finding him unacceptable for the job.

The point is that Rupert Murdoch, the chairman, wants his son appointed, he controls 35.4 per cent of the stock, and James is widely thought the best man for the job within News Corp. Only "due process" is holding up the inevitable. Peter Chernin, News Corp's chief operating officer, confirmed publicly for the first time over the weekend that James is News Corp's preferred candidate, and that it is pretty determined to have him. Unless other shareholders want to spark a battle royal with Mr Murdoch snr, there's not a lot they can do about it.

Nor would it be such a great idea to push for Mr Murdoch Snr's removal from the chairmanship as a quid pro quo. That would only produce a proxy fight and would end up damaging everyone. There are legitimate concerns here, not least how business opportunity is dealt with given the Murdochs' array of different interests. But they are better dealt with through oversight than by throwing the baby out with the bath water.

jeremy.warner@independent.co.uk

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