United Kingdom’s Economic Low Unemployment Advantage Essay Example for Free

United Kingdom’s Economic Low Unemployment Advantage Essay In 2002, according to the Organization for Economic Co-operation and Development (OECD), UK’s standardized unemployment rate is 5. 1. For France the standardized unemployment rate is 8. 9, for Spain is 11. 5 while for Italy is 9. 0. Let us examine first why UK had this low unemployment rate compared to the France, Spain and Italy. First UK is very attractive to foreign investors compared to France, Italy and Spain. This is partly because UK has a proven track record of economic stability strengthened by its government economic policies. UK has one of the most stable exchange rates which equates to stability for investors. Increase in foreign investors also means an increase in employment, resulting in lower unemployment rate. If UK had not been attractive to investors, there would have been no rise in real GDP in UK brought about by new business and expansions in 2002. Another determinant factor of the low unemployment rate is the labour environment in UK. UK is home of highly skilled and dynamic labour force. Its pool of workforce comes from top universities and trained by RD centers (Research and Development). This workforce together with UKs less constricting laws for labour generates high level of employment. In terms of innovation UK is far advance compared to France, Spain and Italy. â€Å"Although UK has only 1 per cent of the world’s population but conducts 5. 5 per cent of global research† (OIPA, 2005). Innovation promotes more investment and thus lowers unemployment. Another factor that makes UK’s unemployment rate low is its being a leader in world trade. UK is second in the world in terms of exports and third in the world in terms of imports. The magnitude of trade is an indication that there is a corresponding high level of workforce behind this trade. There are also a considerable proportion of world’s leading companies who reside in UK. These companies provide stability and maintain the employment force in UK. If assuming that UK was not a leader in exports and imports, the economic indicators showing UK as having roughly 50% exports to other European countries would have shown otherwise. Another most significant contributor that makes UK’s unemployment rate low is its low taxation compared to other European countries. The corporate tax, which is at 30%, is relatively low compared to other key European countries. The Value Added Tax (VAT) in UK is also lower than most European countries. Lower corporate tax and lower VAT induces more investment and thus decreases unemployment rate. Let say for example we are a company from another country like Japan and we wanted to have some presence in Europe. Logically, if we have France, Spain, Italy and UK as alternatives we would definitely put up our business site in UK because we will be paying lesser taxes. Lesser taxes in our investments mean more income for the company. Even if looking at this corporate tax rate from a percent perspective, the difference seem small like 3% or 2%, but if we are talking about millions of dollars 2% is already a large amount. Thus a slight advantage in corporate tax means a lot in attracting investors. France, Spain and Italy’s Higher Unemployment Economic Advantage Most European countries suffer some levels of growing unemployment due to the pressures of lower labor cost in the world market like China. China’s growing threat of low cost manufacturing expands not just in employment but to the whole economic state of European Companies. France has been in a state of falling down GDP since 2000 and in 2002, France unemployment rate reach 8. 9%. Although France has easy access to UK, the France has a higher corporate tax compared to UK. France effective corporate tax rate is 34. 33% (Export Entreprises SA, 2005). This is 4. 33% higher than UK’s 30% maximum corporate tax. This higher tax rate is a major contributor why France has higher unemployment rate compared to UK. Higher tax rate deters investment and therefore lowers employment. Spain suffers the same condition of growing unemployment just like France because of its higher corporate tax and rigid employment scheme. The corporate tax of Spain is 35% (Export Entreprises SA, 2005). It is even higher than France. Even if Spain offers lower corporate tax of 30% to companies whose turnover does not exceed 6 million EUR, the overall average is still somewhere in 35%. The regulatory framework of employment in Spain is not so flexible leading to high dismissal cost and low part time employment. The overall result of higher corporate tax and less flexible employment leads to higher unemployment compared to UK. Italy is affected the most by China’s threat of low cost manufacturing. This is because Italy has a large number of manufacturing enterprises that belongs to the small to medium sized. Small to medium sized manufacturing enterprises fall under those than finds low cost alternative in China. Similarly the corporate tax in Italy is 33% (Export Entreprises SA, 2005), 3% higher than UK. Again this explains why Italy has higher unemployment rate than UK. To what extent might the pursuit of full employment conflict with other economic objectives. Looking at the previous explanation of why UK’s unemployment is much lower than France, Spain and Italy, the most significant contributor is the taxation. This is because low corporate tax can give economic advantage over its rivals. As corporate tax decreases, investment spending increases and employment rises. In reality this is not always true because as corporate tax decreases, the government collection also decreases. If we keep on pushing by lowering corporate and individual tax rate, it will also have some negative effects. A lot of economist cautioned that lowering corporate tax will result to short term economic growth unless backed up by extensive government economic infrastructures. â€Å"KPMG concludes that indirect taxes appear to be playing an increasingly important role in the revenue-gathering strategies of many countries around the world† (KPMG, 2007). Lowering corporate tax may reach to a point that the overall collection is not enough to sustain the expenses required to maintain government maintained organizations and infrastructures needed for economic stability. The stress cause by such condition may swing the economy to a condition where the overall economic structure will cause impediments to investment. An example is that if it increases crime rate due to the poor security given by the government. High crime rates can deter investors and bring down employment. Another possible case is poor roads and transportation. This could greatly affect the decision of investors. Therefore a balance must be achieved. When the lowest minimum corporate tax is achieved it must be offset by some other means in it needs to be lowered further to compete in the world market. One possible strategy is increasing VAT when lowering corporate tax. VAT increase has major benefits over corporate tax because VAT is continuous flow of cash as oppose to lump sum corporate tax. Another similar approach to offset a reduction in corporate tax which has the same effect as VAT is increasing Goods and Services Tax (GST). Again GST has the advantage of bringing a continuous cash flow as oppose to lump sum corporate tax. â€Å"On the other hand, the survey shows that corporate tax rates are continuing to fall worldwide, but there are signs that this trend is slowing† (KPMG, 2007). This year it is 26. 8 from 27. 2% last year which indicates that the average rates have decreased compared to the major reductions in 1997 to 2007. So far UK still has some capability to lower its corporate tax to compete with other country. The more relaxed labor regulations in UK, although helpful in keeping more people get employed, may also have some limits. This may also lead to inefficient employees that would take a toll on company’s revenue. This could lead a company to loose interest in investing their money. If we take for example if we make employee regulations very relaxed like for example by not having to require that employee need to have a specific security measures in applying for a job, the employee might end up to be a member of an underground organization. An organization that may have some security threats to the company. If a security breach would occur like a patent design being stolen, the company will loose millions and end up withdrawing their investment. In the end everything is just a matter of balance, where the equilibrium between a relax labor regulation and the negative effects that it might bring. References OIPA (2008). Invest in UK. Retrieved from the Overseas Investment Promotion Agency website: http://www. investoverseas. org/United_Kingdom/Invest_UK/uk_economy. htm, on February 8, 2008 Export Entreprises SA (2005). France TAXES ACCOUNTING. Retrieved from the Export Enterprises website: http://country. alibaba. com/profiles/FR/France/taxes_accounting. htm, on February 8, 2008 Export Entreprises SA (2005). Spain TAXES ACCOUNTING. Retrieved from the Export Enterprises website: http://country. alibaba. com/profiles/ES/Spain/taxes_accounting. htm, on February 8, 2008 Export Entreprises SA (2005). Italy TAXES ACCOUNTING. Retrieved from the Export Enterprises website: http://country. alibaba. com/profiles/IT/Italy/taxes_accounting. htm, on February 8, 2008 KPMG (2007). Indirect Taxes The price for low corporate tax. Retrieved from the Winterman-am. blogspot website: http://winterman-