Cutting corporation tax to 10% is the quick route to stimulating the growth that the economy desperately needs
Today’s still-difficult economic environment requires not losing sight of long-term competitiveness fundamentals amid short-term urgencies.
Indeed, any exit strategies from the situation must be complemented by competitiveness-enhancing efforts aimed at improving the potential for growth in the medium to longer run.
Competitive economies are those that have in place factors driving the productivity enhancements on which their present and future prosperity is built. Today, Northern Ireland has the lowest average wages and lowest productivity of UK regions, and has suffered the largest percentage loss of jobs in the recession, while two in every seven people work in the public sector, the highest in the UK.
Therefore, in order to create a step change in economic performance and a rebalancing of the public and private sector, lower corporation tax rate would dramatically accelerate economic growth as evidenced in the Republic of Ireland. The experience of the Republic suggests reducing the corporate tax rate would encourage profit growth at existing indigenous companies and, most importantly, foreign corporations relocating their trading activities to Northern Ireland.
Pros and cons
If political agreement can be reached with the national government to reduce corporation tax to our preferred level of 10% as opposed to 12.5%, giving Northern Ireland a competitive advantage over the Republic, we would expect Her Majesty’s Treasury to attempt to recoup their losses by automatically seeking a reduction of around £250m/year from the Northern Ireland block grant. This does not include the additional costs for administration for local government and HM Treasury.
At the same time, Northern Ireland may not see the inflow from the lower corporation tax regime for four to five years, while HM Treasury would begin to experience reduced expenditure in benefit payments resulting from people being brought into employment.
A formulae should be negotiated with HM Treasury to phase in any reductions in the block grant over a longer period and possibly in line with projected 10% corporation tax receipts or the planned reduction in the national corporation tax band.
The UK government is forecasted to cut corporation tax to 27% with effect from 1 April 2011 and anticipate a further reduction by another 1% per annum until 2014/15, when it will settle at 24%.
We accept the argument that a preferential corporation tax regime in Northern Ireland could incentivise some UK businesses to install their marketing, sales and customer invoicing operations in Northern Ireland, and benefit from a transfer pricing arrangement that would compound the loss of revenue to HM Treasury and create additional exposure to claw back.
This risk should be addressed as part of the overall negotiation and not interfere with any other longer-term financial structures existing between the Northern Ireland Executive and the national government.
While our priority activity should be to achieve a reduction to 10% corporation tax negotiated, so as to minimise any negative short-term impact on the block grant, other tax incentives should be explored in the round, which may provide a fall-back alternative that would have equal transformational impact on investment and business growth.
We would expect the alternative approach would mean additional bureaucratic burdens on businesses and government administration. It has been suggested by a variety of sources that cash could be freed up by the introduction of up to 150% first-year capital allowances.
Add to this the introduction of allowances of up to 300% for key areas of expenditure within strategic areas of business, such as research and development, export marketing expenditure and job creation, including employment skills training and development.
It is clear that unless we |have a radical change in our economic policy, Northern Ireland will continue to drift along as a mediocre economy, remain uncompetitive globally and be condemned to carry on as the poorest region within the UK.
On balance, it would be the Centre for Competitiveness, considered opinion that, under |the right conditions, a reduced rate of corporation tax in Northern Ireland is the best way of quickly stimulating economic growth and boosting the economy. The 2010/2011 world competitiveness report on the most competitive nations places Switzerland in first place, Sweden second, Singapore third and the USA as fourth.
These and other nations have spent decades achieving these productivity gains — Northern Ireland doesn't have time.
Change is inevitable and necessary, productivity improvement will play a major part, political and regulatory choices are pivotal and the next five years are critical. How we get there is up to the politicians, economists and tax experts.
The evidence of the benefits are obvious in the Celtic Tiger’s ability to attract inward investment in large-scale manufacturing, financial services and job creation with some multinationals locating their European headquarters in Dublin.
Now is the time to engage radically and persuasively with the new UK Government and create a competitive advantage for the Northern Ireland economy.
Bob Barbour is the chief executive of the Centre for Competitiveness