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Corporation tax cut: EU leaders condemn George Osborne's post-Brexit announcement

Germany's finance minister hopes George Osborne 'will elaborate' on the announcement

Thursday 07 July 2016 10:04 BST

The cuts threaten to scupper Britain's negotiation position with the EU (GETTY)

George Osborne's post-Brexit decision to cut corportaion tax as a way of attracting firms to invest in Britain has been criticised by EU leaders as triggering a "race to the bottom".

Germany's finance minister, Wolfgang Schäuble, said Germany had "no intention" of doing likewise after Mr Osborne announced UK corporation tax would be cut by five per cent.

Presenting his 2017 budget in Berlin, Mr Schäuble said his country was “not opposed to fiscal competition" but that it had to be "fair”.

The German finance minister added: "[Mr Osborne] made the announcements and I hope he'll elaborate on them."

The EU's economic affairs commissioner, Pierre Moscovici, has also expressed concern over Mr Osborne's decision, saying: "We should not enter into exacerbated fiscal competition between ourselves."

Mr Osborne announced his plans to cut corporation tax following the Leave vote, emphasising the need for Britain to “focus on the horizon and the journey ahead and make the most of the hand we've been dealt”.

The chancellor claimed the reduction would make the Britain a “super-competitive economy” with low rates, signalling to multinational corporations that in spite of Brexit, the UK is still "open for business".

The decision has been criticised for threatening to scupper Britain's negotiation position with the EU, countering the union's drive in recent years to try and harmonise taxes across the bloc.

Former director general of the World Trade Organisation, Pascal Lemy, claimed it was "not the right way psychologically to prepare" for negotiations over tax and trade with the EU.

6 ways Britain leaving the EU will affect you

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1/66 ways Britain leaving the EU will affect you

6 ways Britain leaving the EU will affect you

More expensive foreign holidays

The first practical effect of a vote to Leave is that the pound will be worth less abroad, meaning foreign holidays will cost us more

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6 ways Britain leaving the EU will affect you

No immediate change in immigration status

The Prime Minister will have to address other immediate concerns. He is likely to reassure nationals of other EU countries living in the UK that their status is unchanged. That is what the Leave campaign has said, so, even after the Brexit negotiations are complete, those who are already in the UK would be allowed to stay

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6 ways Britain leaving the EU will affect you

Higher inflation

A lower pound means that imports would become more expensive. This is likely to mean the return of inflation – a phenomenon with which many of us are unfamiliar because prices have been stable for so long, rising at no more than about 2 per cent a year. The effect may probably not be particularly noticeable in the first few months. At first price rises would be confined to imported goods – food and clothes being the most obvious – but inflation has a tendency to spread and to gain its own momentum

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6 ways Britain leaving the EU will affect you

Interest rates might rise

The trouble with inflation is that the Bank of England has a legal obligation to keep it as close to 2 per cent a year as possible. If a fall in the pound threatens to push prices up faster than this, the Bank will raise interest rates. This acts against inflation in three ways. First, it makes the pound more attractive, because deposits in pounds will earn higher interest. Second, it reduces demand by putting up the cost of borrowing, and especially by taking larger mortgage payments out of the economy. Third, it makes it more expensive for businesses to borrow to expand output

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6 ways Britain leaving the EU will affect you

Did somebody say recession?

Mr Carney, the Treasury and a range of international economists have warned about this. Many Leave voters appear not to have believed them, or to think that they are exaggerating small, long-term effects. But there is no doubt that the Leave vote is a negative shock to the economy. This is because it changes expectations about the economy’s future performance. Even though Britain is not actually be leaving the EU for at least two years, companies and investors will start to move money out of Britain, or to scale back plans for expansion, because they are less confident about what would happen after 2018

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6 ways Britain leaving the EU will affect you

And we wouldn’t even get our money back

All this will be happening while the Prime Minister, whoever he or she is, is negotiating the terms of our future access to the EU single market. In the meantime, our trade with the EU would be unaffected, except that companies elsewhere in the EU may be less interested in buying from us or selling to us, expecting tariff barriers to go up in two years’ time. Whoever the Chancellor is, he or she may feel the need to bring in a new Budget

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The decision was also criticised by John McDonnell, the shadow chancellor, who described it as a “panic tax cut”, saying it didn't "send the right message to those countries that wish to establish a co-operative relationship with us in the future".

Mr Schäuble said the Brexit vote had not had "any negative effects" nor affected Germany "so far", but added that they would “see if that remains the case”.

Mr Osborne has proposed to cut the corporation tax from 20 per cent to 15 per cent, but he has given no target date for the cut.

Tax rates currently stand at 33 per cent in France, 30 per cent in Germany, 31 per cent in Italy and 40 per cent in the USA.

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