Get ready for round two of the scrap over business rates. By capping next April's increase at 2% instead of proceeding with an inflation-linked 3.2%, the chancellor implicitly acknowledged that there's a problem with this property-based tax.
High-street retailers have been screaming as much since the start of the internet shopping revolution, and administrators to casualties have joined the chorus. Blockbuster, the film rental chain, was paying almost 10% of its turnover in business(Store Fixture) rates, said Moorfields Recovery Service on Thursday. The online forces of Amazon and Netflix (plus changing consumer habits) might have felled Blockbuster in the end anyway, but the question is whether the fight was fair.
Common sense says not. Or, as Justin King of Sainsbury's has argued: "All retailers – whether on the high street, in out-of-town shopping centres or online – benefit from the services currently paid for by business rates."
An overhaul of business rates – perhaps creating a US-style local sales tax applying to all retailers – is one potential solution. And, since the Treasury could set the rate to ensure local authorities(Store Fixture) received the same sums, the government's failure to order immediate reform is baffling. The issue is "on the agenda" for the 2017 revaluation, said George Osborne.
Until then, it seems, the plan is to distribute modest tax-breaks for small high-street retailers. Thus there will be a new "reoccupation relief" in the form of a halving of business rates for operators taking on empty premises. And small shops, pubs and cafes will get £1,000 off their bills. From a government so keen on commissioning reviews into how best to invigorate the high street, the measures look like small-time fiddling.
But "pernicious" business rates, as the CBI calls them, cannot be blamed entirely for the fall in business investment. This problem leaped from the pages of the Office for Budget Responsibility's analysis. The OBR projects a fall of 5.5% in 2013, a big downgrade from its March forecasts. What's going on? Why has the level of business investment consistently disappointed?
Weak export markets, especially in the eurozone, are clearly a drag. But look at the forces supposedly rowing in the other direction. The pound fell by 25% after the 2008 financial crash; corporation tax has been cut; the government has pursued(Store Fixture) business-friendly measures, and has now removed national insurance contributions for people under 21 from 2015; and access to finance, though clearly still problematic for small and medium-sized companies, has improved.
Once again, official forecasts imagine companies letting rip – business investment will increase 5.1% next year, says the OBR, to be followed by rises of more than 8% in each of the next three years. If it happens, the mystery is solved – bosses were just waiting for recovery to materialise and for consumers to become more confident.
If business investment doesn't take off, though, it's time to take seriously the alarming explanation advanced by the likes of economist Andrew Smithers that bonus-driven executives have become risk-averse and prefer the sugar-rush of share buy-backs over projects with long-term benefits.(Store Fixture)
If that's the structural impediment to investment, the government faces a big challenge. It has identified £750bn of cash sitting on corporate balance sheets – but it still has to persuade corporate leaders that the recovery is worth investing in.
