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Cameron’s Payroll Tax Holiday and the G20 Summit

Jonathan Ortmans on June 28, 2010 Source: Policy Dialogue on Entrepreneurship

I suggested in my blog following President Obama’s Presidential Summit on Entrepreneurship earlier this year that what we now need is for routine global ministerial level economic meetings to concentrate on policies that encourage the creation of new firms. As I depart Toronto where we have been gathering for the official G20 Young Entrepreneurs Summit, I note at least one minister arriving having put his money where his mouth is for entrepreneurs - UK Chancellor of the Exchequer George Osborne.  

While no doubt all the attention at the G20 Summit this week will focus on UK bank levies, financial regulatory reform and the wisdom of German, Spanish and now British cuts in public spending (despite U.S. and Canadian appeals to put growth ahead of restraint), a closer look at George Osborne’s new budget might be in order. In the new Chancellor’s budget speech, he refers to budget measures designed to create a “strong, enterprise led recovery”.  He has my attention.

Known as the “Emergency Budget,” the June Budget 2010 contains some measures designed to encourage startups.  First, from April 2011, the threshold at which UK employers start to pay National Insurance will rise by £21 per week above indexation, thereby reducing payroll taxes.  However, more significantly, employers will be exempt from a proportion of Nation Insurance Contributions for the first ten jobs they create (except in London, the South East and East of England).  

Cameron’s idea, especially set against the context of such drastic cuts in public spending, deserve attention in Toronto this week.  As noted in a previous post, perhaps President Obama might set the example by considering similar new business hiring incentives voiced earlier this year by Kauffman Foundation President, Carl Schramm.  Given that in the past 25 years, firms less than five years old have accounted for almost all net job growth, in his State of Entrepreneurship Address in January, Dr. Schramm recommended creating an exemption from payroll taxes for these young companies to stimulate job creation through startups.  George Osborne has clearly recognized the wisdom of tax breaks for employers based on firm age rather than size when he proposes giving a payroll tax holiday for the first ten jobs businesses create.   

After Canadian Minister of Industry, the Honourable Tony Clement had finished outlining how competitive Canada now is in terms of tax policies for entrepreneurs, I took the opportunity in Toronto to ask him whether he was aware of the UK proposal and whether Canada might follow suit.  While the idea appeared new to him, I sensed it was not one to be dismissed too quickly.  It is not budget neutral, but to lessen the impact on deficits, policymakers could consider implementing such a payroll tax holiday for young firms on a temporary basis.

If a payroll tax holiday would not work, we can look further into last week’s UK budget for signs of recognition of entrepreneurship.  For example, Osborne introduces a new Enterprise Capital Fund of £37.5 million to provide additional equity finance for new businesses, as well as a new Green Investment Bank and a Growth Capital Fund to provide capital to fast-growing firms.  

And while, like the U.S. the UK budget increases the capital gains tax from 18 to 28 per cent for those with total income and taxable gains above the higher rate threshold, it does not forget how important it is to avoid harming entrepreneurs who need to raise capital for startups.  Osborne extends the 10 per cent capital gains tax rate for entrepreneurial business activities for the first £2 million to the first £5 million of qualifying gains made over a lifetime.

The G20 Young Entrepreneurs Summit I addressed in Toronto brought Presidents and Sherpas from around the world who not only pledged to re-convene immediately preceding upcoming G20 gatherings in Korea and France but issued a formal communiqué calling for policies that foster a better enabling environment for their peers.  With so many economies in trouble, the G20 should take note of Osborne’s ideas outlining how to encourage the world’s future job creators.  

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Jonathan Ortmans is president of the Public Forum Institute, a non-partisan organization dedicated to fostering dialogue on important policy issues. In this capacity, he leads the Policy Dialogue on Entrepreneurship, focused on public policies to promote entrepreneurship in the U.S. and around the world. In addition, he serves as a senior fellow at the Kauffman Foundation.

Category:  Global  Tax Code 

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