Corporation tax no magic trick to banish all our ills
The idea that you can create a level playing-field with the Republic just by cutting companies' tax bills is nonsense, says Andrew Baker
Published 02/04/2013 | 09:00
The sensible reaction to last week's news that there will be no decision on the devolution of corporation tax to Northern Ireland should be one of relief.
Our politicians were about to do something particularly stupid. That David Cameron's decision has effectively forced the lemmings to step away from the cliff and prevented them from jumping should be a cause of minor celebration.
Cutting corporation tax to 12.5% was not just a huge economic risk; it was an enormous gamble with our shared political future.
Look at the data. Cutting corporation tax would have been accompanied by a significant cut to the Northern Ireland block grant.
The lowest possible figure would be a £300m per annum cut. For Stormont to recover those lost public resources, it would require an extra £2.4bn to be generated in private profits.
That translates into a £10bn expansion in the size of the Northern Ireland economy, which is currently at a size of £28bn.
That means growing by a third to break even on the budget. That is three to four times the current rate of growth of the Chinese economy.
There is no escaping the fact that cutting corporation tax would come with significant cuts to Northern Ireland's public budget.
Northern Ireland would be voluntarily increasing their austerity medicine by two to three times at a time of unprecedented public and private deleveraging.
Cutting corporation tax would, therefore, not be pain-free. But how would the pain be shared out? There is little doubt that cutting corporation tax cut would have had a stimulatory effect. But, given the significant withdrawal of public resources that would accompany the move, any net growth in the current climate would probably be modest.
Viewed in that light, cutting corporation tax would essentially involve a redistribution of existing wealth, creating a more skewed and stagnant income distribution, further fuelling economic inequality.
Further social polarisation is the last thing Northern Ireland needed, but that is what beckoned, because the most vulnerable, lowest-income communities also have the lowest skills and the lowest levels of educational attainment.
They would not benefit from the high-end, high-skill investments required to make corporation tax pay for itself. These communities need public investment and assistance that would become ever-more remote and distant under a devolved corporation tax regime. In short, they would be left behind.
Economic exclusion and social polarisation fuel political instability. As a society, we need to take this opportunity to step back and ask ourselves: do we really want to run this risk?
Ultimately, the arguments in favour of cutting corporation tax were hastily assembled and ill-conceived. For example, the idea that you can create a level playing-field with the Republic simply by cutting the headline rate of corporation tax to 12.5% is embarrassing nonsense.
Creating 50,000 new jobs was the ambitious objective, but the most immediate effect of a corporation tax cut would be higher retained profits for some companies.
By handing control of these resources to private and often very mobile companies, you also lose control over how they are spent and whether they are even reinvested in Northern Ireland, or in those communities most in need.
The corporation tax cut proposal was the equivalent of politicians offering up the electorate a glace cherry and saying here is our economic plan.
If Northern Ireland had an economic cake in place, it quite literally would have been the cherry on the cake. But Northern Ireland first needs to create an economic cake, consisting of improved infrastructure and targeted skills, and that requires public investment.
Corporation tax was a magic bean of an economic proposal.
We should all be thankful that the lemmings have been quietly ushered away from the edge of the cliff – at least for the time being.