Wilson: no corporation tax cut in this Assembly

Well, this is interesting. Sammy Wilson has essentially torpedoed the corporation tax cut, at least until after the next election. This shouldn’t come as a surprise.

Unsurprisingly, ministers are already struggling to implement the cuts agreed to in the last Assembly budget. The arduous, unfinished business of filling the £40m shortfall in the department for employment and learning shows the difficulty Stormont is having finding new savings. The proposed cut in corporation tax would have brought about an additional cut of at least £400m, basically to compensate for lost tax revenue in Northern Ireland. The lobbyists, pressure groups, businessmen and politicians backing the tax cut have never given indication of where this money would come from.

The BBC’s Jim Fitzpatrick hits the nail on the head:

“The Treasury has not yet decided to grant Stormont the power over the tax. Nor has a price been set. With the estimated annual cost to the Stormont budget thought to currently sit somewhere between £400m and £500m, announcing that it cannot happen within this budget period may simply be a statement of the obvious.”

When a high-cost idea comes from the left, the default reaction is ‘that’s very nice, but we don’t have the money’. When it comes from the right, excuses are made, and Very Serious People talk about how it’s all very necessary and sensible. These Very Serious People tend to be the bank economists, economically ignorant politicians and incurious ‘business journalists’ most to blame for the vast public ignorance preceding the big bust of ’08. This vast ignorance might help explain our collective inability to forge a better, alternative economic direction in the subsequent years.

The logic behind the tax cut was always very shaky; the best arguments against can be found here. The big question now is, what else, if anything, the Executive has lined up in the way of economic policy? Is this single, highly dubious, uncosted, now possibly dormant policy all they have for us?

  • VI Lurgan

    Could we not have had this statements months ago. even if you did think it was a good idea, which its not,it would be political suicide to remove £500m per year from the budget on the pretence that this would solve our economic problems and quickly.
    Best case scenario – Any savings would not be realised for some 15-20 years, HMRC would not have capacity to administer it and there would not be a single job guaranteed. Aside from that it makes prefect sense.

  • Frustrated Democrat

    The unemployed have just been handed another 4 years before the Assembly are going to do something to create jobs for them – I am sure they will thank Sammy Wilson for his benevolence.

    The best business brains in NI have come together to support the tax transfer, for this is not a cut in NI finances it is a transfer from the politicians, who never created anything, to the businesses who actually employ people and create jobs, companies like Andor, Galen and Almac. I know who I would trust to invest it wisely especially since these companies look at risk, evaluate it and make investment decisions on a regular basis with no guarantees of success. Compare this to the lack of decision making in the Assembly and the search for guarantees of success.

    The wild assertions of £400 or 500 million are just fantasy, the real figure for non retail industry is less than £200m and this is easily sustainable within the £18,000 million that is currently spent. I work on an international basis and I know from my own experience that the reduction has the capacity to transform NI over the next 10 years. Have our policticians the courage to be bold and take the risks we need them to?

    If anyone has better ideas for creating jobs here with guaranteed outcomes please share them with us, I haven’t heard them yet, and the sooner we start the sooner we make an impact for the all the people here.

  • Comrade Stalin

    FD,

    I’m cautiously in favour of corporation tax cuts but I don’t accept that they will instantly lead to a magic bullet for the unemployed, as you seem to imply in your opening sentence. Indeed, the cuts to the public spending levels will lead to an increase in unemployment, there is no doubt. That’s one reason why London are considering a £5bn capital spending increase this evening.

    I don’t know any occasion when a government has successfully cut its way out of a recession. Having the right fiscal policy is certainly key to having sustainable and prolonged growth, but it is by no means a quick fix to dig you out of a hole.

    Sammy Wilson hasn’t been in favour of this idea for quite some time and I’m sure his reasoning is sound. We do need to hear from those advocating the cuts exactly where the spending reductions need to be made. The first target would most definitely have to be that huge money pit that we call InvestNI.

  • Rory Carr

    “The best business brains in NI have come together to support the tax transfer…

    Hardly surprisng, FD, the best alkies round my neck of the woods come together each morning at the Mushroom on Tottenham Green to support a decrease in excise duty on White Lightnin’ and Tennent’s Superglue. Just like those canny businessmen they know what best profits them.

  • Comrade Stalin

    I’m wondering what Westminster make of this little announcement. My sense of things is that the notion of cutting corporation tax back is a wet dream for George Osborne and his pals – I believe they want to do it, in the hope that they can say “look at Northern Ireland, we cut taxes there and loads of jobs happened” in the hope of extending that policy across the rest of the UK.

    In that light it could be a simple negotiating tactic on the part of the Executive to try to obtain more concessions from them.

  • Into the west

    Nationalists would like to see the tax-rate cut to 12.5%
    in line with the Republic.
    This wouldn’t have influenced Mr.Wilson would it?

    regards his judgement, last time I checked the ice-sheets:
    Arctic ice hits second-lowest level, US scientists say
    http://www.bbc.co.uk/news/science-environment-14945773

    I guess science and facts are not his thing !

  • Into the west

    comrade,
    interesting theory.
    perhaps worth pointing out that most things
    the DUP say won’t happen, tend to happen pretty quickly.
    Devolution itself, and policing and justice for rexample.

    sorry but I can’t take dinosaurs-lived-with-man young-earther poots
    or man-made global warming denier wilson seriously on anything.
    They have form, as clowns

    P.Robinson & A.Foster on the other hand, have sound heads,and would be an asset to any political party

  • DC

    They should devolve the existing rate over and work out the admin costs associated with that with a view to reducing the rate next term, it would also provide actual statistical data on which to base future projections.

    Currently there isn’t any *accurate/actual* data on how much the existing rate rakes in, so knowing how much reducing the rate could cost the block grant in future is complete guess work, because HMRC cannot fully establish how much profit has been raised in NI and this is because large multinational companies lump UK -based profits all in together.

  • iluvni

    They be better off winning the battle to reduce APD instead.

  • tomthumbuk

    Why is it OK for businesses to avoid paying their taxes when I have to pay mine?

    No wonder the French and the Germans are up in arms about undercutting other EU countries,who allow multinationals to get away with paying their fair share.

    It’s the equivalent of Swiss Bank accounts for tax dodgers.

    I’ll report it to Bono, he’ll sort it out!

  • FuturePhysicist

    The French and Germans are up in arms because the Republic of Ireland succeeded in getting jobs and industry in that made up for the losses made by corporation tax, taking them away from German and French workers (in theory).

    It’s Laffer Curve economics, you ease the tax burden, the company invests its money in raw materials, waste reductions, jobs, price reductions … doubles its profit, returns more to the tax-man.

    In terms of Swiss Bank accounts there are taxes returning to the countries the money is taken from, I believe now. It’s less of a tax haven than it used to be.

    In terms of the companies, as well as paying around an eight of their turnover for the right to work here, they I believe pay environmental taxes and council taxes for pollution and roads, refuge, pollution control; income tax and national insurance towards the health and education services as well as perhaps non-domicile taxes to pay their “fair share” to the countries that helped set them up in the first place.

    This on top of foreign investment and salaries that help the domestic markets, as well as the growth of domestic businesses.

  • I am one of those who favour the reduction of Corporation Tax. I believe that the DUP want that too. Sammy Wilson’s announcement needs to be considered carefully. He may have reasoned as follows.

    We are still in a the middle of a world economic crisis. The Western World is riddled with debt. De-leveraging of debt is going to be with us for years, such that economic growth will either be very slow or unlikely to happen. With that backdrop, businesses might be very slow to invest, even if they are provided with the incentive of low corporation tax.

    For the DUP, cutting corporation tax at the expense of services would probably look like a very bad political call in the short term. That is the short term. What about the medium and long term?

    The trouble is, Northern Ireland Politicians (particularly those parties in the ascendancy here) do not have the guts to take risks with their electoral success. I don’t trust the Executive to make the reduction in Corporation tax, even in four years time. After the saga over Student loans and Water rates, how can they be trusted to do anything for businesses?

    Given the choice, I would rather see public services cut now and Northern Ireland face consequential hardship (including substantial public sector job losses), even if those private sector jobs don’t materialise to replace them in the short term. At least the climate will have been created and we can look forward to Foreign Direct Investors making the decision to locate in Northern Ireland in due course.

  • FuturePhysicist

    RE: Student loans

    Queen’s University Belfast is producing more upstart companies than many other UK & Ireland universities of similar ilk for the size of it.

    I don’t think making student loans less affordable in the current climate to “rebalance” the public sector is pro-business. Business should be looking at reducing entry criteria and salaries to alleviate some of the graduate unemployment when it is still a buyer’s market, also look at R&D while tax credits are made available to ensure they can compete better in global markets. It is also important that while ROI is a low tax economy that cross border trade opportunities are explored.

  • Comrade Stalin

    FP,

    Putting my business hat on .. it’s very difficult to recruit clueful graduates at the moment. As such I think that everything that can be done to encourage people to go to university, especially to engineering, is a positive thing. On the other hand, there are clearly a lot of people going to university to do stuff there is an oversupply of, like teaching, law and psychology – that’s something that needs to be considered. Maybe some sort of bursary scheme is in order.

    I’ve yet to be convinced that corporation tax is a magic bullet. I understand the laffer curve argument, but that obviously presumes that corporation tax is the only differentiator when a business is choosing a place to start up. The Irish republic has been successful because of the overall package, which includes issues such as membership of the Euro, the English language, a young population, sureness of purpose within the government, a very well educated population (the Irish government as yet have not chosen to penalize people seeking a university education). The Euro membership detail is very important for multinationals seeking to sell into Europe, and the prospect of UK membership is obviously very much off the table.

    It is also important to point out that small firms, especially in their earlier years, pay very little corporation tax. So this is a measure that is not in itself going to encourage small/indigenous startups. On the other hand, a lot of places like Microsoft and Intel use the corporation tax to shuffle their money around. Their total number of employees in Ireland, relative to their global presence, is still very small, smaller than would be expected if the argument that corporation tax leads to jobs expansion has any truth to it. Note that Intel’s plant in Leixlip also receives substantial IDA funding. Since manufacturing plants are cost centres, and not sources of profit, corporation tax is in theory nothing to do with Intel’s business case for having the plant in that location.

    The barbs about Sammy and the environment are silly. Not a lot of people are aware that Sammy is an economics man (he’s written a number of A-level economics textbooks) so, while I wouldn’t say that we should automatically trust economists, I think he has a good grasp of what the arguments are. As I said above, cutting public spending during a recession is a dangerous – nay, foolhardy – move.

  • Frustrated Democrat

    The only question I have for those who doubt the bona fides of the business community is – if business people do not create employment then who will?

    The only alternative I can see is to create more public sector jobs and that will inevitably end in tears as the public sector is already much too big.

    I still await other proposals to increase the private sector!

  • Frustrated Democrat

    CS

    You obviously do not understand business and international Corporation Tax, which is always a complex integrated model.

    A business is a function of all its component parts;- e.g. no production = no sales, no sales = no production. Calling something a cost centre does not mean that it does not contribute to the overall profitability of the group, it is all to do with transfer pricing from one part of the business to the other. That is why tax authorities are so exercised about transfer pricing between the parts of a company which are in different countries so they can ensure they get their share of the profit.

    It is why companies come to the South, they can get low corporation tax on the profits they declare there and offset them in their home country against higher taxes.

  • quality

    Rory Carr

    The difference is that even the smaller business organisations that will not benefit directly from a lower rate of corporation tax are actively lobbying for it.

    A lower rate, particularly given the south’s 12.5%, has the potential to be a massive tool in attracting FDI, particularly given the ending of selective financial assistance. This results in large scale job creation, and trickles down to the scale to suppliers.

    Reducing tax on large businesses while VAT remains high sits uneasily with me in terms of ideology/priniciple, but it would be a massive, massive step to growing the private sector (and creating jobs) in a sustainable fashion in NI.

    NI, rightly or wrongly, borders another EU state with a much more attractive rate of corporation tax and a highly educated workforce. Then you factor in the BRIC countries, emerging eastern European states and more; a lower rate of corporation tax is a way of NI to establish itself as a place to do business. I hope that opportunity hasn’t been lost.

  • Barnshee

    A few facts based on personal tax audit experience
    The big inward investors never pay(or paid)any material corporation tax

    There are a series actions used

    1 Transfer pricing of production feedstocks (MMF and Artificial rubber were big users of this)

    2A sub set of 1 involves purchasing via intermediate companies to move profits to predetermined locations ( a well know multinational had its European HQ in Brussels specifically for this reason)

    3 Management charges,”strategic support” charges, interest on “loans” at very attractive rates—for the overseas lender, were all used to lower profits and thus Corporation .Tax

    The big attraction of inward investment was the relatively highly paid jobs they brought but perhaps more important ( I speak from personal experience again) was the training and experience opportunities these organisations brought.

    Reduced corporation tax levels are not the answer for the promotion of inward investment

    What about existing companies I hear you ask?
    How would the locals spend the funds freed up by lower Corporation Tax?

    More employees?
    Higher Wages for existing employees?
    Another better bigger Beemer/Merc ?a bigger villa in Spain? an Castle in Cumbria?

    Place your bets

  • Barnshee

    FP

    “Queen’s University Belfast is producing more upstart companies than many other UK & Ireland universities of similar ilk for the size of it.”

    I think you mean startup or are you talking about student body at QUB

    “arrogant or presumptuous person, nouveau-riche: characteristic of someone who has risen economically or socially but lacks the social skills appropriate for this new position” Sounds about right

  • Old Mortality

    “The proposed cut in corporation tax would have brought about an additional cut of at least £400m, basically to compensate for lost tax revenue in Northern Ireland.”

    Lorcan
    I don’t know where you plucked that figure from unless you mean it to be a cumulative estimate over a number of years.
    The Treasury discussion paper estimated that corporation tax receipts paid by companies domiciled in NI was around £465m in 2009/10. Therefore, a £400m annual loss of revenue could only occur if corporation tax was all but abolished in one fell swoop.

    “The lobbyists, pressure groups, businessmen and politicians backing the tax cut have never given indication of where this money would come from.”

    Well the simple answer is that the money doesn’t have to ‘come’ from anywhere but public expenditure must be reduced which isn’t the same thing unless you are ideologically wedded to the idea that public expenditure must always increase.
    In fact, it’s surprising that some businesses, especially retailers and banks, support lower corporation tax when their top lines will be threatened by any consequent reduction in public sector employment or incomes.

  • Comrade Stalin

    FD,

    No I am not an accountant, but you don’t seem to have said anything that disputes my essential point, which is that corporation tax reductions don’t necessarily translate to jobs.

    As I said, Intel and Microsoft do their thing by “licensing” the intellectual property (all the juicy, expensive, high-tech stuff developed in the USA) to a subsidiary in Ireland which then sells the products on the market and books the profits. Ireland obviously gains a little bit by having that slice of tax revenue they would otherwise not have had, other than that I don’t see how this leads to jobs.

    It is fairly clear to me as a layman that there is a clear disconnect between profits and manufacturing/R&D costs. Obviously, keeping those costs down helps, but corporation tax is paid on the profit you’ve already booked, not on the profit you might make due to making efficiencies, isn’t it ?

    The large FDI investments we have seen recently .. eg Liberty IT, Citi, Allstate etc – do not book any (appreciable) profits in Northern Ireland, and as such do not pay corporation tax anyway. So where is the benefit of tax cuts to those kinds of operations ?

    As I said, in terms of my own experience in the IT industry, corporation tax don’t represent the barrier to investment. The limitation on quality graduates, which effects the cost of labour, is the single biggest headache that high-tech businesses here have to deal with. I checked with the finance director in the office today and confirmed that a corporation tax reduction to 12.5% might effect a few decisions on the margins (eg training budgets, capex expenditure plans etc) but certainly will not lead to strategic changes in the way the company is run specifically with respect to how it employs people.

  • FuturePhysicist

    FP

    “Queen’s University Belfast is producing more upstart companies than many other UK & Ireland universities of similar ilk for the size of it.”

    I think you mean startup or are you talking about student body at QUB

    “arrogant or presumptuous person, nouveau-riche: characteristic of someone who has risen economically or socially but lacks the social skills appropriate for this new position” Sounds about right

    I really hope this is Just a bit of pedantic confusion over my use of upstart instead of start up. Let me clarify, I am NOT speaking about the Student Body, I am speaking about exporting companies like Andor Technology which have developed on the back of QUB sponsorship.

    In terms of your last quote, I’m completely lost. I don’t know whether it’s an archaic definition of an upstart, or some opinion on either the student body or myself. In all three cases, I don’t believe that it does sound about right from my own opinion.

  • FuturePhysicist

    Putting my business hat on .. it’s very difficult to recruit clueful graduates at the moment. As such I think that everything that can be done to encourage people to go to university, especially to engineering, is a positive thing. On the other hand, there are clearly a lot of people going to university to do stuff there is an oversupply of, like teaching, law and psychology – that’s something that needs to be considered. Maybe some sort of bursary scheme is in order.
    Firstly, the highest unemployment rates of new graduates are in computer science and electrical and electronic engineering. The skills gap/shortage in these areas is a complete myth; the gap for graduates is specifically an experience gap. From an engineering/science background there are perhaps two main frustrations for graduates … lack of appropriate companies and lack of relevant work experience. It is difficult for such companies to insure such graduates in these times; perhaps and this is a bit leftfield we need to look at whether life insurance policy is a contributing factor. Unlike the other subjects an engineering company cannot simply do a graduate internship, as such companies cannot insure new graduates. I believe that this will have to change if companies wish to remain here.
    I’ve yet to be convinced that corporation tax is a magic bullet. I understand the laffer curve argument, but that obviously presumes that corporation tax is the only differentiator when a business is choosing a place to start up. The Irish republic has been successful because of the overall package, which includes issues such as membership of the Euro, the English language, a young population, sureness of purpose within the government, a very well educated population (the Irish government as yet have not chosen to penalize people seeking a university education). The Euro membership detail is very important for multinationals seeking to sell into Europe, and the prospect of UK membership is obviously very much off the table.
    Well it has been a magic bullet of sorts in the Republic of Ireland, obviously they have additional benefits, and dare I say it partially due to the attitude, the infrastructure, the higher education and the Euro, which have all helped develop the economy during the Tiger years. How this will play out in the future is anyone’s guess. Attracting companies in the first place helped develop infrastructure and higher education and improved the package. Business people here have access to all this talent which may have been laid off as companies in the Republic struggle, and yet they still complain about skills shortages. It does remind me a bit of a story my careers teacher told me about a company looking for a structural engineer who couldn’t find one complaining with the university. After being told to check with the person who was doing the job before, she was surprised to hear it was being done by a civil engineer using a spreadsheet. Perhaps there is a HR and bureaucratic problem (be it lack of appropriate job market and university content information) as well.
    It is also important to point out that small firms, especially in their earlier years, pay very little corporation tax. So this is a measure that is not in itself going to encourage small/indigenous startups. On the other hand, a lot of places like Microsoft and Intel use the corporation tax to shuffle their money around. Their total number of employees in Ireland, relative to their global presence, is still very small, smaller than would be expected if the argument that corporation tax leads to jobs expansion has any truth to it. Note that Intel’s plant in Leixlip also receives substantial IDA funding. Since manufacturing plants are cost centres, and not sources of profit, corporation tax is in theory nothing to do with Intel’s business case for having the plant in that location.
    And where is the financial centre of these operations based? I bet you there’s a financial wing of both Microsoft and Intel around Dublin, sorry Microsoft Ireland, Intel Ireland just to clarify. These centres capitalize the cost centres such as R&D and manufacturing as part of the way they “shuffle money”. The money they do pay in tax does provide more than I’m not taxation expert by any means but there are reasons why the likes of Seagate put their financial wing in Dublin instead of the Cayman Islands. The UK prides itself as the financial courier between North America and the Eurozone, it has the largest import to export ratio of all the EU states, you would struggle to name a domestic engineering firm outside of Dyson. It doesn’t surprise me that most engineers in the UK are working on Black-Stokes equations not Navier–Stokes equations.
    I am surprised by David Willets surprise (or rather I didn’t believe that level of out of touchness could exist in a minister renowned for financial analysis but also in charge of science) why many of the UK engineers are working in the City, and why others are fixing glass windows, and it’s simply that the industry isn’t there, the investment isn’t there and the financial brains aren’t there in government and the civil service to capacitate the science and technology research, particularly in the physical sciences and engineering needed for the export trade and for manufacturing efficiencies. In terms of our small firms, perhaps more can be done.
    The barbs about Sammy and the environment are silly. Not a lot of people are aware that Sammy is an economics man (he’s written a number of A-level economics textbooks) so, while I wouldn’t say that we should automatically trust economists, I think he has a good grasp of what the arguments are. As I said above, cutting public spending during a recession is a dangerous – nay, foolhardy – move.
    I certainly don’t support Sammy on the environment but I am aware of Sammy’s background, and I’m sure he’d be the one to tell you that the economists struggle with trusting each other (He was a teacher of the subject not an actual economist from what I am aware), but needless to say I trust he has some concept of some of the consequences to certain actions. I will be the first to agree with you that there are other dimensions to the problem. We have to remember that George Osbourne doesn’t have as much as an Economics A-Level, never mind degree. Yes I know there are hardships, but isn’t that what economics is all about, and why does Scotland have a falling unemployment rate when it’s rising in the rest of the UK and Ireland? Perhaps lessons could be learned from another Economist (Salmond) in charge of government.
    Needless to say, if growth doesn’t develop then cuts will happen as tax revenues will fall as inflation and population rises.

  • FuturePhysicist

    The big attraction of inward investment was the relatively highly paid jobs they brought but perhaps more important ( I speak from personal experience again) was the training and experience opportunities these organisations brought.

    My appologies if I’ve missed this point, but I agree and the above post was not meant to be arguementative, I appreciate your comments, and I would not have spent so much time on a response otherwise.

  • FuturePhysicist

    What about existing companies I hear you ask?
    How would the locals spend the funds freed up by lower Corporation Tax?

    More employees?
    Higher Wages for existing employees?
    Another better bigger Beemer/Merc ?a bigger villa in Spain? an Castle in Cumbria?

    Place your bets

    Paying electricity bills and water rates.

    As for your first question, I suppose the bigger issue is that do we have business leaders who can do the Faustian bargining with venture capitalists and spendthrift prodigies, while appealing to the indulgences of angel captialists and old money philantropers.

    What we’d see though with any tax reduction is the removal or reducation of grants, which will free up money in the public sector.