The International Monetary Fund’s forecast that the UK will be the only big economy to shrink in 2023 has reinvigorated the Tory tax wars. Some backbenchers think it confirms the folly of Rishi Sunak torching Liz Truss’s tax cuts. I’m less convinced of that argument, but do think Sunak is playing with fire on corporation tax.

Let’s put aside the forecast itself. The read-between-the-lines of the IMF analysis is simple: the British economy lacks the capacity, rather than the spending power, for robust growth. With core inflation (excluding food and energy) already 6.3 per cent, energy prices elevated and fewer people seeking work, deficit-financed tax cuts to goose demand would risk stimulating little more than inflation and interest rates with supply constrained.

This implies that Sunak was correct to spike Truss’s personal tax cuts. At last month’s American Economic Association conference, the British economist James Cloyne presented historical evidence that income tax rises cool inflation. By supporting the Bank of England’s efforts to squeeze spending, Sunak is on strong ground in arguing that tax rises will reduce inflationary pressure, keep borrowing costs lower, and mitigate the risk of gilt strikes and financial disruption.

Where the prime minister errs is in treating all tax rises equivalently. His government is raising the headline corporation tax rate from 19 to 25 per cent in April, for example, but Cloyne’s research suggests this won’t help lower prices. If anything, it might modestly push up inflation in the medium term.

Why? Well, because the careful academic evidence confirms again and again that raising corporation tax dampens business investment and so weakens productivity and GDP. Hits to stock prices of technology, fintech and manufacturing companies when corporate tax rates rise suggest that innovative, R&D‑intensive sectors suffer most, reducing the economy’s productive capacity.

This is worrying, because weak business investment is already a drag on British productivity. The UK had the lowest average business investment of all OECD nations between 1995 and 2015. Since Brexit, it’s been stagnant — a devastating decline relative to the growth we would have expected.

We are crying out for more businesses to headquarter here, for new greenfield foreign ventures, for domestic funds to flow into much-needed manufacturing, infrastructure, and housing projects to grow our capacity. Yet Sunak’s government looks set to dampen investment tax incentives by both raising corporation tax and letting the super-deduction allowance for machinery and equipment expire.

“Allowing this rate hike and the super-deduction to expire will push the UK down to 33rd from tenth in the corporate tax competitiveness rankings of 38 OECD countries,” says Daniel Bunn, of the Tax Foundation, in Washington DC. Effective marginal tax rates on plant, machinery and buildings investments are set to rise by more than a third, making a mockery of Jeremy Hunt’s ambition to have “the most competitive tax regime of any major country”.

Sunak convinced himself as chancellor that slashing corporation tax from 28 to 19 per cent in the 2010s did not affect investment and that raising it again would therefore be harmless. His simplistic analysis forgets that capital allowances were tightened through 2013 as the headline rate fell, leaving most investment incentives far less improved than the rate cut implied. It ignores too that the benefits of lower corporation tax can take up to eight years of steady policy to materialise, leaving decisions vulnerable to the headwinds of Brexit, Covid-19 and the yo-yo of higher taxes again.

As the March budget approaches, MPs serious about growth should stop calling for big deficit-financed tax relief and instead lobby to prevent this looming corporation tax cliff-edge. They must provide offsetting revenue ideas to allow the government to keep the corporation tax rate down and reinstate more generous allowances. The economy has enough problems without deliberately compounding its investment weakness.