Labour corporation tax hike could help schools but dent economy

CREDIT: This story was first seen in the PSE
The Institute for Fiscal Studies (IFS) has put its backing behind Labour’s pledge to invest heavily in education infrastructure – around £8.4bn a year by 2020-21, the PSE reports.
However, the organisation raised concern about how the party will go about financing the plan, by putting up corporation tax to 26% from 19% – meaning it would make up around 2.3% of national income by 2021-22.
Increases to corporation tax has been one of the biggest drains on government funds since the Conservatives came to power in 2010. And the IFS predict that cutting tax has cost around £16.5bn a year in the near term, with tax raising measures bringing the net cost to £12.4bn a year.
In two separate observations, researchers stated that Labour’s plan to reverse all real-terms cuts to date and maintain school spending per pupil would be a positive move towards safeguarding funding for schools which are in desperate need of extra investment.
“Labour have promised significant increases in education spending. If the additional £8.4bn, of which £4.8bn is for schools, is spent well then it will make a positive difference,” the IFS stated. “And the latest economic evidence from the US suggests boosts to school spending can improve pupil attainment and their earnings.”
In the Spring Budget, chancellor Phillip Hammond announced that £320m was being put aside to build 140 new free schools, but only £216m would be invested in maintaining the current school estate.
Luke Sibieta, research fellow at the IFS, said: “These commitments would represent a significant increase in education spending and would leave the school sector insulated from cuts made to most other areas of public service spending.
“If this extra cash is used well, then it could make a positive difference to educational attainment.”
But, the IFS also argued that raising corporation tax could also have a negative impact on the economy, saying that the policy would be a “trade-off” that would lead to some negative consequences.
Helen Miller, associate director of IFS, said: “Cuts to corporation tax have been one of the largest and most expensive policy changes since 2010.
“They have bought the UK a more competitive tax rate and are likely to boost economic activity in the medium to long run. 17% – the rate due to be in place in 2020 under current plans – is not a magic number and raising corporation tax can bring in substantial sums in the short run.
“But, as always, there are trade-offs,” Miller explained. “Were rates to be increased, the benefits of additional revenue would need to be weighed against any long run effects on growth.
“We should always remember that all taxes are paid by people and that workers can feel the effect of corporation tax indirectly though lower wages.”
Labour’s promise comes after a number of warnings from different reports about the effect that years of chronic underfunding is having on schools in the UK.
In March, MPs sitting on the Public Accounts Committee said that Whitehall simply “did not understand” the severity of declining school standards.
And the LGA also said that cuts to education grants was likely to leave around five million children at risk as councils would be unable to fulfil their duties to protect school children.
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