(Bloomberg Opinion) -- It was dubbed “Project After”: A secret emergency plan for the U.K.’s Conservative government to pull all of the economic levers at its disposal if Britain crashed out of the European Union without a deal. The ingredients included slashing taxes to woo multinationals, cutting trade tariffs, and boosting investment. The FT’s report of its existence in February didn’t come as a huge shock, given the U.K.’s public ambition to have the lowest business tax rate in the G20. But it was a sign of what Europe would have to contend with in the worst-case scenario: A race to the bottom on corporate tax with its neighbor.
It now looks like the Tories’ Brexit Doomsday plan is becoming the official policy of the two contenders to replace Theresa May as prime minister. Boris Johnson and Jeremy Hunt both dangled tax cuts at the weekend as they prepared the country for life after the EU, whether through a negotiated withdrawal or a no-deal Brexit. Hunt called for a reduction in British corporation tax to “Irish levels” (12.5% currently) to land an “economic jumbo jet on Europe’s doorstep.” Johnson, deflecting questions about his turbulent private life, said he would “turbocharge” the economy with cuts to business and income taxes.
This may of course just be cheap talk on the campaign trail. Tax cuts would be financially and politically difficult. The Resolution Foundation’s Torsten Bell estimates Hunt’s plan would cost the exchequer in the region of 13 billion pounds ($16.6 billion), while Johnson’s would cost about 10 billion pounds. The idea that the shortfall would be more than made up by companies and wealthy investors flocking to the U.K., especially in a no-deal scenario where the trading relationship with the EU is unresolved, looks very confident indeed. That longed-for jumbo jet might end up looking more like a single-propeller Cessna.
Still, the increasingly reckless political climate in Britain means Europe will be paying careful attention. Nigel Farage’s Brexit Party is open to closer ties with the Conservatives to ensure a no-deal Brexit, an eventuality that is winning increasing support from Brits. The “Singapore-on-Thames” low-tax, low-regulation model still seems to be very much on the table: Even Britain’s Financial Conduct Authority is hinting at deregulation.
The problem for the EU isn’t so much the overall corporate tax rate itself, but what else might accompany any cut. What if the U.K. engages in the kind of individual sweetheart deals that the EU doesn’t usually allow? Brussels has already accused Britain of offering some multinationals an “unjustified exemption” from anti-tax avoidance rules. Imagine a supercharged version of this, like the effective tax rate of 0.005% enjoyed by Apple Inc. in Ireland in 2014 (slapped down as illegal by the EU).
A buccaneering Britain would certainly create new tensions within the EU about how best to respond. A 2018 Ifo Institute working paper, modeling the effects of a country moving from harmonized taxes to competing with its neighbors, predicted that the pressure wouldn’t be felt equally. Low-tax jurisdictions would suffer more than high-tax jurisdictions from tax competition. It’s easy to see how Ireland’s economy, where foreign-owned companies pay more than three-quarters of total corporation tax, would be vulnerable to a Britain trying to grab some of those corporate headquarters.
Whether it’s Johnson or Hunt who becomes prime minister and launches the inevitable whistle-stop tour of Europe’s capitals to push for fresh Brexit concessions, the U.K.’s commitment to fair taxation and fighting fraud should be part of the negotiations. Britain’s foot-dragging on transparency at its Crown Dependencies is one reason to be worried. Trust will be a big part of any future trade relationship, and Brussels should insist that the “jumbo jet” stays in the hangar.
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Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.
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