How competitive is our economy? It's a slightly taxing matter
Published 04/09/2012 | 08:00
Business competitiveness matters, for each business and, in total, for the whole economy. Introducing devolved lower corporation tax is essentially an argument that Northern Ireland needs to be made more competitive.
Just how competitive is Northern Ireland? The answer is more complex than a cross-border comparison with Irish corporation tax. Some of the usual comparators with other places quote evidence that Northern Ireland has lower labour costs, lower costs of property, lower business taxes (rates) and an adequate and efficient public sector infrastructure.
Such performance indicators are useful and influential. However, they fall short of an objective comprehensive assessment.
Arlene Foster's Ministerial Economic Advisory Group has taken up this challenge. They have commissioned Cambridge Econometrics and partners SQW to assess where Northern Ireland would be (when assessed as a separate area) on the criteria used to compile the Global Competitiveness Index (GCI) which is published annually by the World Economic Forum.
The most recent GCI gives details of over 100 leading indicators for each of 142 countries. These indicators are aggregated into segments and then into an overall result.
The top three countries were Switzerland, Singapore and Sweden. A review of the characteristics of each of these countries is an object lesson on how to enhance the productivity of an economy and thus enhance living standards.
Where would Northern Ireland (assessed on its own) register? Detailed comment must await the local assessment.
An incomplete indication of the outcome can be drawn from the results for the UK and Ireland.
The UK ranks number 10 and Ireland ranks number 29 in the world list of 142.
The assessments for both the UK and Ireland are updated to reflect the impact of recent monetary and fiscal events.
In a forceful reminder that the GCI is a wide-ranging index, only partially influenced by tax rates, public sector debt and (in Ireland) weakness in the financial institutions, both countries remain uncomfortably high in the world rankings.
Two cautionary comments should be added. First, in the full GCI of 142 countries, only 35 are assessed as advanced economies. Ireland and the UK need to be assessed relative to the top 35 rather than the full list. Second, if the GCI gives an encouraging score, that alone is not enough to ensure the attraction of new business innovation and investment.
Until the local assessment is published, the potential ranking of Northern Ireland can only be estimated. Northern Ireland may be better placed than some regions of the UK but it is unlikely to emerge with a better score than the UK overall.
Indeed, the case for a lower local rate of corporation tax, to be able to compete with the Republic of Ireland, makes the implicit assumption that Northern Ireland would currently rank near or below number 29.
The detailed evidence used for Ireland and the UK points to some key features.
The UK ranks in the top 10 countries for its infrastructure, market size, labour market efficiency, technological readiness and business sophistication. The assessment of the UK macroeconomic environment at 85th place, reflecting large scale government debt, is the least satisfactory UK feature.
The Republic of Ireland's best rank scores are between 12th and 19th in health and primary education, market efficiency for goods, labour market efficiency and technological readiness. Hardly surprisingly but worryingly, the Irish assessment of the macroeconomic environment at 118th place is its weakest feature.
Tax rates are a factor, but not predominant. In the UK the highest complaint of 18% of businesses is that tax rates are problematic. In the Republic of Ireland, only 8% of businesses see tax rates as problematic yet it comes as the fifth highest complaint. In both the UK and Ireland a significant number of businesses complain about inefficient government bureaucracy.
The Northern Ireland results, due later this year, will make interesting reading.