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George Osborne corporation tax cut is the wrong way to start EU negotiations, former WTO boss says

The cut takes the UK rate close to Ireland's 12.5% and fuels the idea that the UK is pitching itself as a tax haven

Hazel Sheffield

Monday 04 July 2016 09:57 BST

George Osborne spoke during a visit to the Manchester Chamber of Commerce yesterday in an attempt to reassure businesses after Brexit (getty)

Chancellor George Osborne’s decision to slash UK corporation tax from 20 per cent to 15 per cent has been criticised by the former director general of the World Trade Organisation, who said it was “not the right way psychologically to prepare" for negotations over tax and trade with the EU.

Osborne has said that he will reduce the current rate by 5 per cent to 15 per cent, taking UK corporation tax to the lowest of any major economy.

It also takes the UK rate close to the Irish rate of 12.5 per cent and will fuel the idea that the UK is pitching itself as a tax haven as it enters into trade negotiations with the EU.

Pascal Lemy, former director general of the World Trade Organisation, said that understood that Osborne wants to put the brakes on companies moving their business overseas.

But he said he thought Osborne was making a mistake by effectively starting negotiations this way.

“The UK is already activating one of the weapons in this negotiation, which is tax dumping, tax competition,” Lemy said.

He added that he could understand the need for swift action “because obviously investors are flowing out from the UK, and he wants to provide them with some sort of premium that would make them think twice before they leave the United Kingdom”.

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But he urged Osborne to think about the impact on the continent.

“This will be seen on the continent as the start of the negotiation.

”And I'm quite convinced that at the end of the day, if you want a proper balanced win-win relationship in the future, starting with tax competition is not the right way psychologically to prepare this negotiation,” Lemy said.

Osborne meanwhile has said the cuts will make the UK a “super-competitive economy” with low rates.

The Treasury have confirmed Osborne’s statement but no timeline has been given for the cuts. Osborne was already planning to cut the rate to 17 per cent by 2020, according to a plan outlined in his March budget.

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 corporation tax cut has been slammed by John McDonnell, the shadow chancellor, as a “panic tax cut” instead of a “steady strategy”.

“I don't think it sends the right message to those countries that wish to establish a co-operative relationship with us in the future, so that we get some of the benefits we had in the EU, even though we're outside of it,” he said.

On Friday, Osborne abandoned his budget promise to return the UK budget to a surplus by 2019-20, saying that the current situations required people to be “realistic”.

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