Irish tax row causing Labour pains in Scotland…

THE Government’s so-called ‘£50 billion’ economic peace package was described by Peter Hain at the time as “extraordinary” and he condescendingly told (rightly) sceptical punters after its dissection that even “If it were only £2.5bn, people ought to be grabbing it before the chancellor has a chance to close his red box”. The package might even be worth that, but because no-one believed Hain’s spin (and everyone knew he was only hyping the package to impress the Chancellor before he became Prime Minister), the peace dividend has become devalued as a financial carrot to dangle in front of the local parties. Interestingly, what was missing from the Brown envelope – reduced business taxes – is now causing Labour ructions in the chancellor’s home, Scotland…At the time, a more circumspect Brown had said the funds would only provide “certainty” through which public services could be delivered. Hain has finally come round to that way of thinking. He now admits that “the package confirms that the current level of spending will be sustained in real terms over the period to 2011”.

Sir Reg Empey went on the offensive: “I think that there is anger at all the spin that went into it. What we want are the tools to correct the fundamental imbalances in our economy so that we can be self-sustaining and won’t have to be reliant on hand-outs.” Ah, but while hand-outs might cost the Exchequer a few measly million, ‘tools’ – such as a reduction in Corporation Tax to compete with the Irish Republic’s, as favoured by all NI parties – might prove more politically expensive long-term. And the Government doesn’t want that.

Not only are there the short-term losses between the introduction of lower business taxes and the arrival of outside companies to take advantage of them, there’s the added problem of the Scots jumping on the bandwagon, depriving the Treasury of further revenue and fuelling dreams of greater autonomy. After this intervention, who wouldn’t want to be a fly on the wall the next time the future Labour Party leader meets the Scottish Labour Party leader in their native country?

Jack McConnell told Members of the Scottish Parliament: “I believe in consistency in tax policy across the United Kingdom. And of course, measures introduced in Northern Ireland would be very welcome here in Scotland. We would want to have the same incentives as elsewhere in the United Kingdom”.

And if Brown perceives Hain’s unnecessary spin as having been unhelpful in the debate over the peace package, might the current chancellor be more inclined to look elsewhere for a deputy when he moves next door to Number 10?

One can only pray.

  • Henry94

    One can certainly understand the concern of Jack McConnell. But the solution for Scotland is to leave the UK and set its own tax policy. What happens in Ireland is none of his business.

    “I believe in consistency in tax policy across the United Kingdom

    If he also believed in consistency in spending policy across the UK he might have a point.

  • Smithsonian

    Corporation tax is a complete red herring, very few businesses actually pay the full rate and those companies that do pay it or might be encouraged to move here are given significant grants from Invest NI.

    The biggest problem for business is not the level of taxation on profits but the fact that costs are so high that profits are too low to support reinvestment.

    Fuel, freight, power, insurance, equality and environment charges are all higher in Northern Ireland. Whilst a positive case can be argued for some of these charges collectively they mean that Northern Ireland is simply uncompetitive.

    The ROI pulled a good stroke with corporation tax (hats of to them) but they got first mover advantage. simply copying them is unlikely to give us the same benefit and will cost a lot of money. We do need to address the issue of competitiveness, but reducing corporation tax is unlikely to be part of the solution. Over to the politicians.

  • Crataegus

    By doing nothing the chancellor is in fact fuelling the pressure that will lead to the division of the UK. It is like the tide coming in respond coherently or get soaked.

    The regions have suffered for decades from an economic policy that is sustainable in the South East only. It has led to the South East being seen to subsidise the rest of the country. You can’t run a country in this manner without doing real damage. A reduction of business tax would benefit the UK economy and increase productivity. It may actually mean that some of us start to once again to conduct more of our activity through Britain. It is easy to set up companies elsewhere and there is a booming industry in strange trust funds. Wise up the stupid little rules that dear chancellor keeps introducing to avoid tax make little difference if the companies are in another jurisdictions and the earnings are made abroad.

    If the UK were to grasp the nettle that you need to increase the wealth creation capacity and perhaps tax consumption (which is mainly imported) you would see a very different country in 20 years. To encourage people to set up business you need to ensure the reward warrants the risk and that it is easy for them to take this step. Currently they view business as a cow to milk but in the global economy the cow is moving to pastures new.

  • Crataegus

    Smithsonian

    The biggest problem for business is not the level of taxation on profits but the fact that costs are so high that profits are too low to support reinvestment.

    Good point, retaining wealth to reinvest really is important.

    As a developer turn around time is important and there needs to be serious look at regulations, number of agencies involved and streamlining the process. I am not asking for lower standards just an efficient process to deal with applications and a reduction in the number of bodies involved. I think efficiency and transparency would help protect the community and benefit everyone. Recently a colleague was asked to provide all sorts of traffic surveys for a large shed down in the docks!?!?! Now if you can’t bring goods into a harbour and into a shed in the harbour area where the hell can you? Waste of money, waste of time. Need to employ competent staff in some government bodies and you need to be able to get rid of dead wood.

    Tax levels are important as money moves to other locations though I agree with you Corporation Tax is not the be all and end all of it. For many small businesses the rates and the differential between borrowing in sterling as compared to the Euro are probably more important and in NI there is a lack of competition in many sectors and increased trade across this island would benefit both jurisdictions. Also I would imagine the difference in fuel tax severely disadvantages NI freight companies and the cost of using Airports is also probably higher due to tax. Is there any business activity in the UK that has less tax than in the Republic???

  • Smithsonian

    Crataegus
    Is there any business activity in the UK that has less tax than in the Republic???

    In Northern Ireland, the only advantage was for companies that operated in high volume (as in space) and relatively low margin sectors (e.g food processing, concrete blocks, furniture manufacture).

    Such companies had the advantage of not paying industrial rates(a tax on space), this advantaged is now being phased out.

    Wealth in the UK is created in financial services (banks and the city), pharmaceuticals (Glaxo,SKB) and energy (North Sea Oil). The UK does have strengths in the creative industries such as advertising and entertainment industry but these are clustered around London. High value added industries (low labour) are less affected by tax rates. Of course everybody is employed in different sectors NHS, Retail, Defense, tourism, but these sectors have low levels of productivity.

    Northern Ireland has few competitive advantages. No politician of any party has any idea (let alone a plan) about how to sort this situation out.

  • If McConnell thinks Scotland would need to match a lower tax rate for Northern Ireland, why doesn’t he think it needs to match the Republic’s rate?

    Surely there’s no practical economic argument for matching (or under-cutting) one that isn’t also an argument for matching the other.

  • Smithsonian

    Tom Griffin
    Can’t quite agree with you there. Some countries put more emphasis on VAT, others on delivering services, some on property. All of which combines to give the countries an appropriate balance (in their own terms) between raising and spending money. If you tinker within an economic unit (such as the United Kingdom) you run into problems. The differences between two neighbouring states are more complicated.

  • Shuggie McSporran

    smithsonian

    “… simply copying them is unlikely to give us the same benefit and will cost a lot of money.”

    Why wouldn’t it?

  • Reader

    Shuggie: Why wouldn’t it?
    Reducing corporation tax can raise more money if either: (1) It pulls in a bigger share of foreign inward investment, or (2) It fuels business growth.
    Option 1 caused the boom down south, which is an English speaking low tax region of the EU. American companies love that. But they are already there… A latecomer to the low tax regime will be competing with the RoI for companies that haven’t already arrived. That’s hard work, for a finite, and relatively tough, share of the market.
    Option 2 is the American way. Unpopular with the left, who want the tax money right now, and with moderates, who are sceptical about how much growth you can get simply through tax cuts.

  • Greenflag

    Crataegus,

    ‘To encourage people to set up business you need to ensure the reward warrants the risk and that it is easy for them to take this step.’

    Worldwide there is a negative relationship between percentage of an economy that is public sector and the number of people ‘setting’ up in business . The higher the former figure the lower the rate of ‘entrepreneurship’. As well as NI another example is Puerto Rico . Sweden has the same problem although cushioned at least for now by it’s successful economic policies in the 1950-to 1990 period .

    There is no magic formula to revitalising the NI economy . Reducing corporation tax is just one tool that can help. Without political stability and constitutional certainty even that tool would have limited returns .

    The tiny size of the NI private sector makes it very difficult to propel the NI economy forward without significant foreign direct investment . The Republic learned this lesson in the 1950’s . They learned the ‘taxation’ lesson in the mid 1980’s when income tax for many reached over 40 % of gross pay.

    Today Ireland is cery competitive in the amount of deductions made in peoples income for insurance , medical etc etc etc . Just slightly ahead of Switzerland . The Economist present edition shows the competitive league table .

  • Crataegus

    Greenflag

    I agree with the points you raise. I have always said we need a smaller more efficient administration and an end to the grant culture. Equally the point about political stability is crucial. No one is going to invest in an area that is potentially unstable, there are plenty of good alternatives. To give this place an economic bounce requires a coordinates political initiative over numerous related issues. It is about ethos, efficiency, creating appropriate skills base, creating the environment that enables people to take initiative. Currently it looks like hell will freeze over before this happens.

    At the moment I am running up the air miles and what I am confronted with back in NI bares no resemblance to the wider reality. The myopic smug complacency beggars belief. With regards efficiency in the South I believe it is slipping due to increased costs, the trend is down and that also needs to be addressed.

    It is in the interest of everyone on this island that both jurisdictions do well, that both cooperate to common benefit and that we increase the cooperation and competition on this island. This is not to deny East West links but augment them. It is not an issue that should attract political flack, but alas in NI we would prefer to run around with the arse out of our trousers than concede some minor, contrived, political point.

  • Brian Boru

    I correctly predicted this would happen and continue to predict it will block an harmonised corporate-tax rate on the island.

  • IJP

    What “row” is this?

    Do our politicians really think that after all these years of “sponging”, NI is going go get away with £6 bn subvention and lower taxes?

    NI’s economy has grown faster than Scotland’s for as long as I can remember; house prices (a reasonable assessment of wealth) are now higher here; unemployment is lower; competitiveness improving faster; etc etc.

    I’d say Scotland has a better case than NI, after all that!

    Henry94

    A question of genuine interest – why are Irish Republicans so interested in uniting one island and dividing the other?