The Great Debate UK
Osborne right on UK debt addiction
– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –
George Osborne’s plans to break the British addiction to debt have drawn protests from some business groups. He should not be put off. If a Conservative government with him as Chancellor can offer the quid pro quo of a cut in the rate of corporation tax, business should welcome the move.
Under today’s rules, British businesses have every incentive to finance themselves by borrowing: not only is interest typically lower than the return that shareholders demand, but all interest is tax-deductable. This anomaly was criticised as long ago as 1978 by James Meade, the Nobel laureate, but the position has worsened since then. Pension funds used to be able to reclaim the tax on dividends, but that concession was removed by Gordon Brown in 1997. As has recently become painfully obvious, this regime has significantly increased financial instability.
Given the impact on corporate finances, such a fundamental shift needs careful management. It cannot be done quickly, and an acute recession is not the best time to impose it, but it might be a good time to signal that it’s coming. Business is risky, and equity has proved itself over time as the best way of raising the finance to back it.
