Debate on tax devolution must look at all issues
Published 29/03/2011 | 08:00
The steps to pass devolved authority for the administration of corporation tax to the Northern Ireland Executive are now underway. If, or when, this becomes a reality, a major policy-making responsibility will fall to local ministers.
The Treasury has published a detailed analysis of the impact of a 'go for it' decision, illustrated the scale of the possible benefits in terms of extra investment, spelled out the budget costs, and asked the incoming Executive to consider how the reductions in the Northern Ireland budget would be met.
The Treasury is cautious. It does not make any recommendation. However, it does warn that there are many legal and practical problems to solve if a change is to be made and that the change cannot be delivered quickly.
The Treasury does make an important assumption about the administration of a devolved corporation tax rate. The authority to operate and collect corporation tax will stay with Her Majesty's Revenue and Customs (HMRC) and the Northern Ireland Budget will pay the additional administrative costs to administer a two-tier assessment system.
Although there are many complex issues to resolve, the Executive should work for an acceptable agreement. There is still the potential to change the impact of fiscal incentives in ways that will further test the capability and analytical skills of ministers.
Enterprise Minister Arlene Foster underlined the potential to secure extra business investment as well as to enhance the net profits of existing businesses.
"The possible change in corporation tax will bring a step change to the local economy. When we visit potential investors from other countries, we talk about skills, costs and available good young people as employees but not about profits. The change would mean that we are able to emphasise profitability.
"We believe that the Treasury [cost] figures are too high; our figures are nearer the mark but the consultative paper does give an opportunity to have a good discussion," she said.
For Northern Ireland, the changed arrangements merit an enthusiastic welcome.
There must be a serious debate about the way in which the newly devolved authority is developed. It is not necessary to opt for an immediate reduction in corporation tax. The Treasury paper makes clear there are other ways to incentivise change by phasing in tax-rate reductions.
The Treasury acknowledges that precise forecasts of the costs and impact of a corporate tax change are simply not possible. However, the Treasury offers a cost guideline to the local budget of about £265m per annum if the tax rates move straight to 12.5%, or proportionately less if the reductions were phased. The impact is imprecise but, as a central concept, the Treasury suggests that the level of investment could be around 6% higher each year than with the present rates.
By year ten, the additional investment might be over £420m. Although the Treasury makes no statement on extra employment, if that level of investment is achieved, then an additional 5,000-plus jobs would be possible before the indirect secondary effects are added.
Europe will ask for details not just of the legalities but also of the ways that the Executive propose to use the new fiscal flexibility. The European Commission has already reviewed the full range of proposed State Aids here and will challenge schemes such as the capping of business rates for manufacturing firms. That historic concession may not survive the proposed corporation tax devolution.
The Treasury paper is titled 'Rebalancing the Northern Ireland Economy.' Although the argument on corporation tax is impressive, perhaps the Treasury would allow a criticism of the wider remit. The consultative paper is essentially a single-issue topic.
The demanding agenda for extensive rebalancing gets only short shrift.
There needs to be a challenge to the ill-founded statement that rebalancing is a long-term objective for the next 25 years. That is neither necessary nor helpful.