Extract F (line 1) states 'Following the pandemic, reducing the fiscal deficit shifted towards raising tax revenues rather than continuing strict austerity.'

Using the data in the extracts and your knowledge of economics, evaluate the view that there is a strong case for significant increases in UK corporation tax rates.

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Extract D

Figure 1: UK Government expenditure and tax receipts, 2012–2024

Figure 2: Corporate tax rates and profits bands in the UK, April 2023 onwards

Figure 3: Combined corporate tax rates in G7 nations, 2023

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Extract E: Deficit reduction and fiscal pressure

Following the unprecedented public spending during the COVID-19 pandemic and the subsequent energy price support schemes, the UK's national debt surpassed 100% of GDP in 2023, its highest level since the early 1960s. Although the budget deficit has contracted from its peak of over 14% of GDP in 2020–21 to around 5% of GDP in 2023–24, the Office for Budget Responsibility (OBR) has warned that structural pressures threaten long-term fiscal sustainability.

The cost of servicing the national debt has escalated dramatically due to rising global interest rates and high inflation, with interest payments exceeding £110bn in some fiscal years. Crucially, the OBR highlighted that productivity growth has remained persistently weak, dampening long-run tax revenue projections.

Economists debate the necessity of hard fiscal rules. Believers in deficit reduction argue that chronic borrowing risks crowd out private sector credit markets, increases the burden on future taxpayers, and risks sovereign credit downgrades. Conversely, critics suggest that tax rises during a period of low productivity growth risk locking the economy into stagnation.

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Extract F: Corporate taxation reform

In April 2023, the Chancellor of the Exchequer implemented a major reform by raising the main rate of Corporation Tax from 19% to 25% for companies with profits exceeding £250,000. To protect small businesses, a Small Profits Rate of 19% was preserved for firms making profits below £50,000, creating a progressive corporate tax structure. Proponents claim this reform targets high-earning multinationals that can afford to contribute more to public services, while protecting 70% of UK businesses from any tax increase.

However, business lobbies have expressed concern. The Confederation of British Industry (CBI) argued that the 6 percentage point increase could harm the UK's competitiveness and discourage Foreign Direct Investment (FDI), particularly when businesses are already grappling with high energy and labor costs. To mitigate this, the government introduced 'Full Expensing'—a capital allowance scheme allowing companies to deduct 100% of their investment in new plant and machinery from taxable profits.

While some worry about capital flight to low-tax jurisdictions, supporters of the tax raise note that at 25%, the UK’s rate remains the lowest in the G7 (joint with France). The Treasury estimated that the rate hike would raise an extra £18 billion per year by 2025-26, vital for funding public services and infrastructure upgrades that ultimately benefit productivity.