Can Northern Ireland afford to gamble on corporation tax?

Chancellor George Osborne will devolve corporation tax powers to Northern Ireland if our politicians can show they are able to manage the financial implications of such responsibility. He seems to be measuring their preparedness by the outcome of the current talks process, though it’s not clear just how much progress he needs to see before his decision. Nonetheless, signals coming from DUP and Sinn Féin indicate a deal is in the making, meaning the long sought after powers could be with us very soon. The question will soon change to whether we want to use such powers.

There is a strong case for reducing corporation tax in Northern Ireland. Unique and radical measures are needed to address our over dependence on the public sector, the legacy of the Troubles, and an uneven playing field with the Republic, who have set corporation tax to 12.5%, versus the 21% paid in the UK. Currently the public sector contributes two thirds of local GDP; in the era of austerity, a transition to a more dynamic, private-sector driven economy is needed for long-term sustainability. But is the reduction of corporation tax the radical idea Northern Ireland needs?

Campaigners in favour of reducing corporation tax say the measure would lead to increased foreign investment, higher productivity and the creation of tens of thousands of well paid jobs. Indigenous companies will benefit, they say, because they will be able to reinvest increased profits into the growth of their own business, thus being able to employ more people and pay them more. In addition, there’s probably scope for cross-border regional economic zones as well, something those in the North West are already discussing.

But, as Nevin Economic Research Institute warns, reducing corporation tax could lead to a reduction of £400m in public expenditure, as money from our block grant is reduced, greatly harming an already suffering economy. Advocates respond by arguing that with more employees making more money, whatever losses are incurred by cuts to the block grant will be made up through income taxes and increased expendable income entering the local economy. But there are no guarantees that reducing corporation tax will lead to increased FDI, employment, or overall growth. The level of growth needed for Northern Ireland to break even is staggeringly high. Tax expert Richard Murphy points out that the economy would need to grow by a third, something he argues is impossible.

There is no magic bullet to transform the Northern Ireland economy. Corporation tax might play a vital part of a larger strategy, but without a comprehensive plan in place, such a gamble might be a risk Northern Ireland can’t afford to take. If our politicians are serious about transforming the local economy, then we need to overhaul more than just our corporate tax policy. We need to look at education, skills, wages, childcare, and of course cementing the peace process. No matter what we set our corporation tax to, many company executives will refuse to invest in or move operations to a Northern Ireland beset by rioting, sectarian conflict, and unstable politics.  The hard questions around reconciliation will continue to haunt local politics and impact on the economy until they are dealt with. Let’s make sure corporation tax isn’t a diversion, but rather, if it’s to come into play, a single piece of a larger comprehensive vision of transforming our society and economy.