The argument over whether the Republic of Ireland should have raised its corporation tax rate as a condition for receiving European Union bail-out support shows just how important the tax rate is.
France and Germany sought to push up the rate, regarding Ireland as competing unfairly for foreign direct investment.
Ireland, of course, won that tussle and the Republic’s rate is staying at 12.5%. And so |the debate is resumed about whether Northern Ireland must compete on corporation tax if we are to win more overseas investment.
Northern Ireland Secretary Owen Paterson is clear about where he stands. In a recent speech he said that not only is he convinced of the case to cut corporation tax — financed by a reduction in the UK block grant to Northern Ireland — but that he is pursuing it with “manic enthusiasm”.
Yet the potential loss of perhaps £200m a year in the block grant has caused concern to senior officials and some ministers. At a recent hearing at the House of Commons Northern Ireland Affairs Select Committee, examining the case for a corporation tax rate reduction, both Finance Minister Sammy Wilson and Enterprise Minister Arlene Foster expressed voiced strong concern about the proposal.
But the ministers’ more senior colleagues seem to have been won over to the case of for lower corporation tax. After a recent meeting with Treasury Finance Secretary Mark Hoban, First Minister Peter Robinson said: “We have used this opportunity to voice our concerns, in particular with regard to the issue of corporation tax, to the Treasury.”
Deputy First Minister Martin McGuinness added: “We sought and received assurances that the Treasury and NIO are actively considering mechanisms through which the executive could reduce our corporation tax rate.”
At the time of writing, the Treasury’s paper on rebalancing the Northern Ireland economy, including its view on a corporation tax rate reduction, was eagerly awaited. But it is common knowledge that while Secretary of State Paterson is strongly in favour of a reduction, Treasury officials are against.
Mr Paterson spelled out his view in his recent Leonard Steinberg Memorial Lecture. “Despite its current economic problems, in the first six months of this year the Republic of Ireland attracted over 50 foreign direct investments, including a number of big global hitters,” he said. “There’s an obvious reason for this and it does put us at a real competitive disadvantage.”
The Treasury paper, he explained, “will look at possible ways of turning Northern Ireland into an enterprise zone and potential mechanisms for giving it a separate rate of corporation tax to attract significant new investment”.
For the first time, there is a strong momentum behind the campaign for cutting corporation tax rates. As well as the Treasury’s paper and the House of Commons committee enquiry, there have been important interventions by Northern Ireland’s business community.
The Business Alliance — formed by all the major representative groups in Northern Ireland, including the CBI and the NI Chamber of Commerce — is lobbying for a cut and the Northern Ireland Economic Research Group (NIERG) has produced a detailed paper on the issue.
NIERG contains several of our leading economists, including Mike Smyth of the University of Ulster. Professor Smyth accepts there is a legitimate question about whether the jobs and investment created in Northern Ireland would simply displace jobs that are currently located elsewhere.
“MPs will be saying it will displace economic activity from England to Northern Ireland,” says Prof Smyth. “But the major part of regional policy is about displacement.”
And, he continues, with a land border with the Republic and its low rate of tax, it is |difficult for Northern Ireland to attract significant foreign direct investment, or to see |how else the economy will grow substantially.
“The Treasury currently gives Northern Ireland north of £7bn — 10 years ago it was four point something billion pounds,” says Prof Smyth.
“So it’s structural. There are not enough people in work |here and we earn relatively little, compared to the south of England. That’s because we don’t have the City of London and we don’t have [much] foreign direct investment.”
Prof Smyth adds: “There’s no killer argument against this. If you don’t do something like this, the subvention will be north of £10bn in a few years. If we don’t do something we will be bailed out by the Treasury in perpetuity.”
Making up the reduced block grant from Westminster is not a major challenge, suggests Smyth. “Do we want to go to 12.5% straight away?,” he asks. “Clearly the answer is no. The answer is that by 2020 the rate of corporation tax will be the same as in the Republic. That would cost less than £100m [per annum].”
That reduction in the block grant could be financed, says Prof Smyth, by increasing business rates, with a lower rate for small businesses. “In addition, there will be savings in |Invest NI’s grant used to attract inward investment. In 2007/8, business rates yielded £461m: if you put business rates up by 50%, you will easily bring in £200m and you can cut the rate for small businesses. The big businesses will still |gain more from that because their gain from lower corporation tax will be greater.”
That argument was strongly attacked by Finance Minister Sammy Wilson, giving evidence to the House of Commons’ enquiry. “In doing so, you would be penalising every business, including businesses that do not pay corporation tax,” he argued.
Those comments earned the riposte from Prof Smyth that the finance minister has been captured by officials more loyal to their block grant than to the Northern Ireland economy.
The discussion is complicated, though by confusion as to what rate businesses here want introduced. Some business leaders argue that Northern Ireland’s competitive position is strongest if the rate goes below that of the South, to 10%.
Meanwhile, some politicians believe that it should be below the rate of the UK, without necessarily having to match the Republic.
Ann McGregor, chief executive of the Northern Ireland Chamber of Commerce, says: “For the corporation tax discount to work it must be at |the very least the same as the Republic’s or lower if possible. The focus of our efforts is to ensure we get a reduction for Northern Ireland which will stimulate economic growth and provide much needed private-sector employment.
“The issue of the actual rate will be decided by the Chancellor and the Treasury who already have a clear understanding that any reduction is meaningless unless it is competitive with our neighbour.”
Nigel Smyth, director of the CBI in Northern Ireland, adds: “There’s a debate around this. But that’s down the line. We need a competitive rate and even at 12.5% we would have competitive advantage because our cost base is much lower than that of the Republic. From a marketing point of view you have to say 12.5%, but it might be better to get under this, but it is not necessary. We have not really had this debate with our members.”
Discussion on the corporation tax rate that would best suit Northern Ireland might be a discussion for another day. But if we really are on the cusp of agreeing a cut, that |day may no longer be far off.