My Lords, I address my remarks to the subject of business finance: the right way for the Government and the private sector to support businesses to grow, and ultimately the right way for the Government to tax them when they become profitable.
However, I start with a concern about the wrong way to finance businesses. In my day job as European chairman of an international corporate finance advisory firm, I am seeing the return of a disturbing trend: very high leverage levels—eight or nine times EBITDA—in large, “covenant-lite” leveraged loans that are quite often used to de-equitise businesses. In 2016 in the USA, such loans reached over $700 billion, compared to $670 billion in 2007, the year of the start of the financial crash. In the EU, the 2016 number was €220 billion, very nearly an all-time high. The good news is that banks’ participation in these loans is down to about 12%. The flip side, however— the bad news—is that this means that 88% was provided by non-bank investors, such as sovereign wealth funds, life and pension funds and the more lightly regulated CLO and credit funds, where, notably, there is asymmetrical personal risk and rewards for the individual fund managers, who typically take 20% of profits on the funds and none of the losses. Ringing in my ears is a quote attributed to Warren Buffett's business partner, Charlie Munger:
“Show me the incentive and I will show you the outcome”.
Leverage is not bad in itself: it is a way of increasing the quantum of capital available to finance business. It has, however, to be proportionate. In 2013, the Bank of England Quarterly Bulletin contained a report that highlighted the risks of the excessive use of leverage to financial stability and corporate solvency. Let us hope that the Bank of England is still watching closely.
My second point is that, thankfully, the Government are aware of the need to constrain the most bullish instincts of lenders. They have implemented the OECD recommendations to limit the tax deductibility of debt interest. This will at least remove the tax reasons for piling debt on to UK plc, especially if and when interest rates rise. The Government are also to be commended for developing more diverse channels for business finance, in particular SEIS, EIS—enterprise investment schemes—and VCTs. These continue to provide vital equity capital for start-ups and small businesses. The Business Growth Fund, founded by the major clearing banks as recently as 2011, has invested £l billion in over 160 companies in the UK, and is going from strength to strength. Entrepreneurs’ relief, too, is encouraging founders with great ideas to set up here, knowing that if they succeed they will keep more of the wealth they help create.
My third point is that helping businesses of the future requires long-term strategic support. Take artificial intelligence: how are we to ensure that the UK can capitalise on its leadership position, led by Cambridge University technology? The Government can play a role here, alongside the private sector. I welcome the industrial strategy Green Paper, published in January, and in particular the industrial strategy challenge fund. With an initial commitment of £270 million, this will invest in electric vehicles, artificial intelligence and advanced medtech. This strikes me as a bold and positive approach to business finance in areas where we are strong as a country, albeit an approach not without risk, given government’s mixed record on picking winners.
Finally, one of the challenges is knowing what to do when these technology companies grow and bestride the globe with multiple offices and subsidiaries in many jurisdictions, including the UK. I am referring, of course, to the taxation of multinational companies, on which I spoke in this House in a debate on the economy a few months ago. My thinking on this has developed, and I am clear on one point: directors’ fiduciary duties mean that the idealistic concept of companies voluntarily paying additional tax would almost certainly result in shareholder lawsuits—probably from US shareholders in particular—and is not practicable. We need, therefore, a global tax system that is fit for taxing these multinationals. Based on discussions that I have had at the top level in some of these global companies, including in the new disruptive technologies, I believe that those executives know that they have a growing social problem with low actual tax payments, an issue referred to by the noble Lord, Lord Howarth of Newport, in his apocalyptic description of a country that I do not recognise. These executives need a lead from major economies, and they are likely to respond in a responsible way. Unlike the noble Lord, I believe that lower and simpler is the right place to start. The refreshed corporation tax road map, which confirms that corporation tax will fall to 17% by 2020, is an excellent start. This will encourage technology businesses to be centred here and create jobs here.
It is no use, however, for the UK to try a unilateral approach to taxing multinationals, which sometimes take the dark arts of techniques like international base erosion and profit shifting to extremes. Britain must lead on this on the international stage. We have a low and attractive corporate tax rate and should seek to force the pace for a G20 pact on global corporation tax, whereby profitable multinationals pay a fair rate of tax in the jurisdictions where those profits are made. I have the following suggestion for my noble friend the Minister. Given that this is a worldwide issue, is of economic importance and requires a forum for a meeting of minds, the Government could do worse than to push for it to be the key agenda item on next year’s World Economic Forum, otherwise known as Davos.