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.

  • Ernekid

    The arguments in favour for reducing Corporation tax are economic nonsense. It’s fantasy to think that it’ll have a tangible positive impact for the people in Northern Ireland if anything with a reduced bloc grant it’ll do active harm to our economy.

    As the majority of Northern Ireland’s economy is Small to Medium Enterprises it quite clear that reducing corporation tax isn’t going to do much. If Northern Ireland wants to grow it’s economy it needs to invest in it’s infrastructure and education resources. The two most viable industries that Northern Ireland has are the Tourism market and the Agrifood industry. Invest in those instead of trying to chase dreams of attracting mega giants like Google who couldn’t give a fiddlers about Northern Ireland and its people.

  • Comrade Stalin

    It seems likely that the NI politicians are at the cusp of doing a deal, as already observed by Newton Emerson. It is likely that final sticking points exist around a financing package that the parties want the US, Irish and British governments to contribute to.

    The Tories are not going stand over a reversal of their policy on the block grant or on welfare reform, so I’ll be curious about what the package ends up looking like. It may well be some sort of fudge, along the lines of UK government property being gifted to the Executive, or modest tweaks in certain Treasury calculations that allow the parties to present a paper increase in funding.

    Regarding corporation tax cuts – I will believe it when I see it. It is likely that the British government will agree to legislate for this power to transfer along the lines that Gideon spelled out in the autumn statement (ie legislation before the end of this Parliament). This will be presented as a successful conclusion of the talks.

    However, the primary legislation will, as with other similar provisions, almost certainly require the Assembly to pass an enabling motion which will have provisions for the Department of Finance to pay refunds to HMRC associated with the loss to the Exchequer of agreeing to the rate cut (in the same way that enabling legislation for Air Passenger Duty does – see the final Act : here. Sinn Féin will have to assent to Exchequer payments out of the DFP pot, and at the moment I just can’t see them authorizing this.

    As you pointed out Barton this is a gamble, in more ways than one. If after a few years the government discovers that cutting the rate of corporation tax isn’t working out very well, the policy cannot easily be reversed, as to do so would mean that companies who made investment decisions based on the lower rate of tax would end up being shafted. The Executive are, therefore, going to have to persuade businesses that the tax cut will not be reversed, and they will have to stick to this promise.

  • Zeno3

    “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.”

    Increased Investment? Last week it was reported that Facebook made £3 billion in Ireland and paid £2,3 million in Tax. Can we compete with that?

    Tens of Thousands of highly paid Jobs~? Who is going to fill these Jobs? We don’t have 10’s of thousands of highly qualified people on the dole.

    Higher productivity, Yes indeed the accountancy firms like KPMG who are leading the lobbying will make fortunes.

    Don’t be fooled into believing this has anything to do with creating jobs.
    With £400 million we could create 40,000 jobs paying £20k a year each.
    About £100 million would immediately go back to the government in PAYE deductions. Around 20% of the rest, say, £50 million would be paid back to the government in VAT. The rest would be spent in the local economy in shops,bars, restaurants etc etc and generate more tax income for the government every time it changes pockets. So creating jobs costs very little and is easily done.
    Obviously that won’t happen because this has nothing to do with jobs. Instead they will give £400 million to businesses and individuals who are already making substantial profits and hope they might maybe if they get around to it create a job.

  • chrisjones2

    “the economy would need to grow by a third, something he argues is impossible”

    With this lot in charge it certainly is

  • chrisjones2

    With £400 million we could create 40,000 jobs paying £20k a year each.

    Voodoo economics in the long run. Governments don’t make jobs except in the bureaucratic sense. What would these civil servants do except harass existing businesses an compete with them

  • chrisjones2

    There is no chance of a deal.Its all about the blame game when
    it collapses

    The Brits wont pay more

    The Irish don’t want whats seen as a SF victory so don’t want the Brits to pay more

    The DUP wont pay more

    Obama is a dead duck so is going through the motions. He has no real pressure on him from the Irish lobby – his need for them is gone and hes more worried about racial tensions with the black underclass

    SF wont move in any way that might damage their strategy in Ireland because the plebs up here are just cannon fodder to them

    All the NI parties have been lining up their cuts messages to prime the public and blame SF and the DUPs

    No deal this week.Last ditch attempt in January then it will fall on its nose by the end of January as no wants ton actually have to make the 2015-16 reductions ie to have to take hard decisions and be seen to take them

  • Dan

    Spend the money on scrapping APD.

  • notimetoshine

    Maybe its time to drop the business rate. I have to say I was shocked at recently hearing how much to business rate costs.

    I am sceptical about corporation tax. It is too complex for such an unstable executive to manage effectively and with such large sums of money in a tight fiscal environment. Also invest NI has been doing a somewhat capable job of bringing in quality jobs already. And of course how effective would corporation tax be for our SMEs? If we can culture an environment of growth and low costs for our SMEs we could see real development. Reducing the business rate might be the way to go. Of would reduce a huge business cost and could encourage growth in existing business

    Maybe a focus on homegrown business (without sounding parochial) and leave the foreign investment incentives to invest NI.

  • chrisjones2

    The issue is though that rates still have to be paid> Corpo tax doesnt if you run a double Irish or double northern irishor even a tripple irish

  • Bryan Magee

    I would think 3p off would be affordable and would help with offsetting NI’s peripheral location and high energy costs. If that works then another 3p and you’re there. It’s a lot cheaper since UK cut its rate to 20p.

  • Bryan Magee

    Notime

    The evidence suggests that foreign owned firms can be beneficial in terms of best management practice.

  • Zeno3

    “Governments don’t make jobs except in the bureaucratic sense.”

    Eh? Teachers, Healthcare Workers, Emergency Services are all employed by the Government.

  • notimetoshine

    I wouldnt disagree with you at all but I think corporation tax could be very dicey for questionable returns. Maybe reducing in country operating costs, and maximising education standards would be a better way to entice foreign investment alongside the work invest NI does. This would be beneficial for outside investment and development of local companies

  • chrisjones2

    and they stand n the backs of the producers in the real economy

  • Ernekid

    I’m sure how much an economy there’d be if it wasn’t for the workers listed by Zeno. If you think those workers aren’t necessary pray that you never get into an accident at any time, have children fall ill, get robbed etc.

  • Belfast Barman(ager)

    Any research done on what a drop in business rates would mean for NI Barton?

  • Zeno3

    It is our Education and Healthcare systems that provide all the entrepreneurs, producers and workforce for the Private Sector. It is our roads that they drive on.,

  • Justoh

    notime: You say, “Also invest NI has been doing a somewhat capable job of bringing in quality jobs already.”

    I suppose it depends on what you mean by ‘capable’. According to Niall McCracken of detail.tv (5th October 2012): “The figures show that employment in Invest NI supported companies only increased from 86,322 in 2002-03 to 86,650 at the end of 2006-07 despite expenditure by Invest NI of almost £1bn (£932m) during the same period. This is only an increase of 328 jobs.”
    You’d have to convince me that things have improved since. Anyone pinning their star on either the corporation tax wheeze or InvestNI to bring jobs to northern Ireland should think again.

  • notimetoshine

    Don’t get me wrong I have a real problem at times with invest NI and their policies having worked in one of their subsidised call centres. But when they get it right they get it right. I really think though that they are just part of a package that could boost growth

  • Superfluous

    I’m currently living on the Isle of Man. I’ve lived outside Northern Ireland for almost 10 years now – working for tech companies in 4 states (probably soon to be 5 as I have just been offered a move to Dublin). There are no roles for me in NI, I’ve no current prospect of going back. How many other kids will run off if the NI state continues to be a backwater competing only on low wages? That’s where you get your highly paid jobs – keeping your own talent, and maybe even importing some like the IOM has.

  • Zeno1

    We have around 70,000 unemployed. How many of those do you think are highly skilled tech company workers? If you can come up with a figure, divide it into £400 million to see what the real cost per job is.

  • Superfluous

    It’s not costing £400m, it’s leaving £400m in the hands of the private economy to spend itself, rather than the Government spending on its behalf. Trying to be as humble as one can with these things, I pay enough income tax to the Isle of Man to pay a full time nurse – and that’s before I spend most of my net pay here which helps keep people in employment (all of whom pay tax on income and purchases). Pro-business environments can create a virtuous circle in tax revenue and jobs. You need to fatten the economic cow before you can milk it.

  • Zeno1

    We are taking £400 million out of the Block Grant every year and giving it to already profitable businesses. Over 10 years that comes to £4 billion. That is a cost. We could employ 40,000 Nurses with £400 million. If we knew that these businesses would create 40,000 Jobs I would say fine, but they are not obliged to create even one job. They can spend the money on anything they like. They can put it in their pensions or tax dodge it off somewhere.

    It’s basically doing this with £400 million a year.

    http://imgur.com/gallery/JYAVWj7

  • Superfluous

    Government spending is 65% of GDP in Northern Ireland, it’s 48% of GDP in the UK, it’s 42% of GDP in Norway, it’s 20% of GDP on the Isle of Man, it’s 18% of GDP in Singapore. As far as I can tell I get all the same state services on the IOM as I got in Belfast (and I have kids, one of them disabled).

    You could keep the state spending the money instead of trying to create business as you say, but then you will keep relying on another country subsidising you. The choice is between ambition – and I’d love for Northern Ireland to match mine at some point, so that I would at least have the option of going home.