A beggar my neighbor policy is a policy by which one country attempts to solve an economic problem (high unemployment rate, for instance) by means that have a very negative impact in other countries (the employment in other neighboring countries).
And in a way that’s what’s happening today in the UK (it’s also happening in Ireland, Finland or Cyprus… but we are going to limit our analysis to the UK).
During the last few years, the UK – especially the London region – has created hundreds of thousands of jobs. And we may ask: What’s the formula (or a key part of it)?
Fiscal policy, or more exactly, the lowering of UK corporate tax (CT).
That tax was 28% when Mr. Cameron came to power – and the unemployment rate 2.7 million at the end of 2011. Now the unemployment is close to 1.86 million, according to the latest ONS figures – and the corporate tax is 20% – “the lowest CT rate of any of the G7 member states and the joint lowest rate in the G20” (1)
We can look into other few reasons to explain these figures, but the UK Corporation Tax is a key one. Big corporations are flocking to London and other UK cities, to profit from the low UK Corporation Tax. And this brings jobs and generates economic activity, which creates other jobs, growth and more activity in other sectors, and so on.
Compared to the corporate tax of France (33.3%), Italy (27.5%) or Germany (30%), the UK tax makes a big difference. And to paraphrase a Wall Street Journal article about Ireland, and applying it to the UK/EU situation, we may ask: “If the UK isn’t a tax haven, what is it?”
Or in other terms: the UK is using a beggar my neighbor fiscal policy with a strong impact on the European market job. With a corporate tax of 20% in the UK, there will not be many big corporations basing their businesses in other continental European countries. That’s the UK beggar my neighbor jobs policy.
But this poses another question – a provocative question following two premises and two suppositions:
- 1st Premise: most of the foreign companies establishing bases in the UK are not limiting their activity to the UK; the UK is mostly a business-friendly place from which they conduct their transnational operations in many other European countries.
- 2nd Premise: There will be in 2017 a referendum about the UK’s membership of the EU – a referendum that Mr. Cameron has enthusiastically supported for a long time.
- 1st Supposition: a UK EU exit, following the referendum.
- 2nd Supposition: the EU strikes back with restrictions to capital movements of UK-located companies (it is not expected trade barriers, but financial activities can be significantly affected).
And the question is: In such circumstances, what will happen to job creation, foreign investment and economic dynamics in London and other British cities?