zaterdag 17 juni 2017

Brexit; Are You On This Yet?

#Brexit, Tax-it? Brexit may be hanging in your mind as one of those tail risks you are supposed to worry about but cannot quantify. In The Hack for May 26th we looked at the importance of UK/EU trade and politics amidst what appears to be a messy divorce with a potential EUR 100bn price tag. The EU debt crisis remains the elephant in the room, with poor demographics, massive welfare commitments, huge debt loads, and a one-size-fits-all currency to bind the mix, the potential for a full-blown crisis remains as real as ever. Is the UK just the first rat to leave the ship?
# Is it all doom and gloom for Britain? This week Eurizon SLJ Capital published an excellent report outlining the potential opportunity for the UK to become a tax haven upon exiting the EU. What if Britain just refuses to pay the ransom note, endures a hard exit, and then steals all the EU’s corporate business? What if the breakaway from the EU allows Britain free rein to shape its own industrial policy? Stephen Jen of Eurizon SLJ Capital argues that once free from EU encumbrances, the UK could move forward with corporate tax cuts to fuel greater inward foreign direct investment (FDI). The UK is already the greatest recipient of FDI in Europe. The UK has a strong base of FDI due to credible institutions, strong rule of law, the English language, high-quality human capital, and good infrastructure. The opportunity for greater future FDI could be huge if the FDI stock matches that of other tax havens as a % of GDP...

# UK in the Sweet Spot; If the UK sparks a boom in FDI, taking business away from the Eurozone by having a more competitive corporate tax rate, that shift would have effects akin to the competitive devaluation of currencies we have seen since the GFC. But tax havens act differently: They have to be small enough to attract business away from larger economies but still large enough to retain the social and economic depth required to support large businesses. Britain appears to sit in the sweet spot: “In the middle, what we call ‘Middleweight’ economies, we may have a sweet spot for corporate tax cuts. The loss in revenues from the reduction in the tax rate may be easily offset by the new inflows of foreign investments. If the costs for a company of operating in London were driven lower, we believe this would tilt the balance on FDI flows away from, say, Dublin. The point here is that larger and more sophisticated economies command a premium on smaller economies that can.” This analysis gives a read across for the Trump tax cuts for investors. As the US is a ‘heavyweight’ and really operates its tax system under its own gravity due the sheer weight of its GDP and global importance. In the case of the US, cutting corporate tax may actually hurt the fiscal situation rather than having the impact of attracting enough FDI to compensate for the tax cut.
# Surely cutting taxes blows up the fiscal balance sheet? It may be that reducing the corporation tax rate further to a ‘sweet spot’ actually attracts more investment from abroad and results in more job creation in the UK, putting money into the pockets of residents and giving the government a greater tax base from personal income. Corporate tax is after all a form of double taxation, both the corporation and its shareholders are taxed on profits and then dividends.
# There’s got to be more to Britain’s chance of success than just tax cuts? To have a winning formula you also need industrial policy: “It would make sense, in a medium-sized economy like that of the UK, for there to be (i) more guidance and leadership from the government and (ii) concentration of financial and intellectual resources in the development of industries. In a globalised economy that offers ‘winner-takes-all’ propositions, or non-linear financial rewards, there is a role for the government to lead and nurture the industrial development process, in our view.” Currently the UK ranks no. 7 in the World Bank’s Doing Business report, above Germany, Ireland, and Austria. Denmark is the only member of the EU to rank higher. If Britain can continue to attract FDI and see it invested wisely in profitable and scalable sectors, there could be a winning formula on hand for greater growth outside the EU. Even if you have Brexit exhaustion, you need to read Eurizon SLJ Capital’s analysis, it is incisive and comprehensive and deserves to be a white paper floating onto the desks of leaders across Europe to drive forward some more functional politics.
# Does Theresa May have the balls? Britain has its destiny in its own hands. It needs a bold government to make some bold decisions, but otherwise, all the ingredients are there for success....