Let’s keep a cool head over corporation tax
The businesses in the Northern Ireland economy are coping as best they can with a recession which is more serious than any other downturn in the last 50 years.
Not only is the local economy feeling the pinch of recession but, more importantly, there are serious concerns that, as the UK economy recovers and other EU countries generate recoveries, Northern Ireland will not improve quickly enough to narrow the longstanding gap in GVA per head when compared with the UK average.
The outworking of economic events in Northern Ireland needs to be given more positive momentum: a sharp gear change. If Northern Ireland keeps on with the economic policies of the recent past, there should be little surprise if the outcomes continue to be the same and that means that they are inadequate.
The official ambition of the Executive is that the economy is the priority. That claim is not wholly credible. Social policy questions have been more influential.
The debate on stronger economic leverage ranges from advocates of a major change in the company tax system, lowering or amending the impact of corporation tax, to complementary perspectives which seek to identify changes to some other fundamental influences on the economy.
The case for changes in the corporation tax levels or structures is easily made. An effective change (not necessarily simply a lower rate) would help to attract FDI (foreign direct investment). It would make new investment capable of earning higher post-tax profits and match the incentive benefit that the Republic of Ireland has retained even as part of the fiscal structure after the IMF/EU bailout.
Those arguments cannot be denied. However, the context must be examined carefully. The business leaders, in an agreed letter to the Chancellor last week, conclude that giving the Executive power to reduce corporation tax is justified “so that we can begin to pay our way”. That conclusion depends on dramatic results more than offsetting the costs of the tax revenue foregone in a period of 10 years or more.
The optimism of the business leaders relies on assumptions that are, at best, vulnerable to disappointment. The read-across from the experience of the Irish is drawn on the international FDI flows earlier in this decade and the belief that in other respects the Northern Ireland economy compares favourably with the Irish. Both of these assumptions are questionable.
Even if the assumptions are excessive, that does not mean that corporation tax should not be devolved. It does mean that the impact may be exaggerated.
The critical issues then become what features of the economy need to be strengthened (and how).
As steps are taken to strengthen the local economy, there is the parallel question of redirecting the balance of public spending, first, to manage with the revenue lost as the consequence of reduced corporation tax revenue and, second, to enhance the strength of the economy.
The immediate needs would include more focused skills and training programmes, a more targeted public sector investment programme, more constructive planning policies and stronger urban regeneration programmes. These would add to the public sector spending totals and would need to be matched by spending reductions, even larger than in progress as part of the Comprehensive Spending Review.
Reducing, or restructuring, corporation tax is in danger of being over hyped. If it is to be a useful development, it should be linked with a series of other steps. Reliance on simplistic aspirations and modelling assumptions is not enough.
A freedom for the Northern Ireland Executive to use corporation tax as a differentiated incentive will be a welcome contribution to growing the economy.
The test, if the UK Government agrees to this change, is to make it part of a series of sharper and more directed steps which mean that, after several decades of limited performance, the local economy really does go further to pay its way.