FOR TAX INCENTIVES TO HAVE A REAL CHANCE OF CREATING A MULTIPLIER EFFECT, WE NEED A LONG-TERM VIEW

By Brian Williamson
Lee Kuan Yew, the father of Singapore who died recently, was many things – authoritarian, dictatorial, dismissive of a free media and a micromanager of quite remarkable obsessiveness.

But weighed in the balance against that is the indisputable fact that he created one of the most astonishing economic miracles of the 20th and 21st centuries, transforming a small and isolated island into a global powerhouse.

With a new Conservative government in place, it is conceivable that it may look east and ponder the choices it could make, in power in its own right, to attempt to replicate some of the Singaporean success story.

This is not to suggest for a moment that a Lee Kuan Yew style suppression of dissent, or even a trade-off of freedoms for prosperity, makes any sense in the UK, with its long established tradition of civil liberty.

But what politicians might take from the South-East Asian experience is that there is considerable merit in being courageous enough to take a long view of the direction in which they want this country to travel.

When Lee Kuan Yew left the Malaysian Federation in August 1965, the other states laughed behind their hands, assuming that this young upstart would take his country rapidly towards economic collapse.

But he took a long term view, planning over the course of decades, and hauling the island state slowly towards a position where it is now ranked second overall, behind only Switzerland, in the World Economic Forum’s latest Global Competitiveness Index. For the past seven years, it has been ranked the best place in the world to do business by the Economist Intelligence Unit.

British politicians, by contrast, are forced into short-term thinking by the nature of the electoral system, which mean that their policies and actions have to show a return within the five-year parliamentary term or they are unlikely to be considered.

But investment, properly targeted, can have ongoing benefits to the economy which roll on for years once the schemes are in place. Take for instance, the remarkable returns on investment over a longer period revealed in a report by the British Film Institute on creative tax reliefs.

The institute’s research showed that for every £1 of UK government spending on film tax relief, £12.49 is returned to the economy. For every £1 given in high end TV tax relief, £8.31 is returned to the economy.

It could reasonably be extrapolated that these multipliers would apply also to research and development tax reliefs, the vital incentive which encourages UK business to invest in staying ahead of the game in an increasingly competitive global environment.

If, indeed, the returns are so spectacular, why would the UK not be piling money into schemes which would pay back the investment in spades, boosting the economy and creating much-needed employment?

The answer to fiscal reticence in the crucial sphere of incentivisation through tax stimulus can only be the timing: if the return will not benefit the economy within the term of a parliament then, under the current structure, we are unlikely to get a real multiplier effect on economic growth.

Of course, long-term planning is difficult under the UK system, when the hands on the levers of political power change so frequently.

But in practice, schemes which have been put in place by one government tend not to be altered – and often are even enhanced – by an incoming administration unless they are politically contentious.

Incentivisation schemes such as tax reliefs are not contentious – there is a general consensus that they are “a good thing”. So perhaps the UK’s political leaders could consider a new approach to planning – a long term approach.

This would give the incentives time to bed in, be more widely recognised and exploited and – with the stability that would bring – start creating multiples on investment which have a long-lasting and sustainable effect on the UK economy.

Brian Williamson is managing director at R&D tax credit specialist Jumpstart.