Belfast Telegraph

Tuesday 23 September 2014

Conventional wisdom fails us over economy

Cutting corporation tax will not kick-start Northern Ireland's business revival. We should place our faith in environmental goods and services, says Robin Wilson

The great US economist J K Galbraith coined the phrase the "conventional wisdom" to challenge late-1950s' complacency about American capitalism, influencing the 'Great Society' programme to tackle poverty developed by Lyndon Johnson in the 1960s.

Half-a-century on, a "conventional wisdom" has set in in Northern Ireland which would have had Galbraith shaking his head. It is the notion that cutting corporation tax is the key to a step-change in economic performance.

Let's begin with the argument that matters most to most people who are not economists - the moral argument.

It cannot be right to lighten the tax burden on a tiny, but powerful business elite when the democratic majority - employees, their households and the unemployed - are suffering from insecurity on a scale unknown since the 1930s.

A renowned living US economist, Jeffrey Sachs, has condemned the "race to the bottom" in corporate taxation around the world, when the public services on which that majority depends are under threat.

A European Court of Justice ruling means that cuts in revenue from reduced corporation tax in Northern Ireland could not be made up from the Westminster public-expenditure 'subvention'.

So what about the narrowly economic case? Didn't corporation tax cuts create the 'Celtic Tiger' in the Irish Republic?

The Republic opened up to foreign investment in the late 1950s. Yet the delay of nearly four decades before the take-off suggests that the low (initially zero) corporation tax during the intervening period was not the primary uplifting factor.

Other conditions had to be put in place:

• the introduction of compulsory secondary education in the 1960s

• accession to the European Economic Community in the 1970s

• stabilisation of the public finances via 'social partnership' arrangements in the 1980s

• the socially modernising 'liberal agenda' initiated by Mary Robinson's election as president in 1990.

Further doubt on the talismanic capacity of cutting corporation tax comes from Sweden. That country has beaten the European Union average in attracting foreign investment over the years, while having the same rate of corporation tax (26%) as currently in Northern Ireland and more progressive income taxation.

Why? High tax revenue has made possible high spending on research and development, quality infrastructure and a generally strong public realm from which all firms benefit.

Scepticism is reinforced by a survey of firms investing in the Republic, conducted in 2000 by Forfas.

This found that workforce skills and competences were the most important factor behind the location decision - a hardly-surprising finding in today's 'knowledge economy'.

The Republic does not pursue the outdated division of children into 'academic' and 'non-academic' sheep and goats at age 11, and half of its third-level students go to institutes of technology (whereas Northern Ireland lost its 'polytechnic' out of social snobbishness in the 1980s).

They were able to provide cohort after cohort of technically qualified staff for companies like Intel or Dell, before the booming 'real' economy was overshadowed by the property bubble and its inevitable burst.

In 2007, an examination for the Treasury of corporation tax in Northern Ireland by tax expert Sir David Varney warned against drawing 'simplistic conclusions' from the Republic's experience.

Varney argued that, in many areas, taxes need to rise to provide the 'public goods' on which private investments depend.

Reduced corporation tax would thus not turn the trick in Northern Ireland, because the other key requirements of an economic upgrade are not in place.

We have a poorly-qualified workforce: around a quarter of adults are functionally illiterate. We have inadequate R-amp;D expenditure - even by internationally-poor UK standards.

We have overwhelmingly small- and medium-side enterprises, poorly networked and poorly integrated into international supply chains.

And we do not have the activist government characteristic of successful European regions to broker those networks, ensuring the regional economy is greater than the sum of its enterprise parts.

In that wider European context, a beggar-thy-neighbour approach to corporation tax would bring us exactly the same loss of precious goodwill as the Republic has suffered.

Having been for two decades recipients of considerable EU largesse, we would appear as ungratefully determined to undercut fair competition in the single capital market.

There is a clear alternative, which would focus on enhancing Northern Ireland's public realm.

And a key objective would be to renew our decayed industrial structure via a single-minded focus on innovation and, in particular, on developing environmental goods and services.

This would transform Northern Ireland from a region of discrete, low-productivity enterprises competing mainly on low wages to one at the leading-edge in international markets, competing on quality and 'eco-efficiency' and providing good work for all.

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