Job losses force business tax back into the spotlight
The loss of nearly half of FG Wilson's workforce makes efforts at economic regeneration all the more urgent, says John Simpson
The announcement of 760 job losses at FG Wilson by parent company Caterpillar is a serious blow. It comes as a further sign that the recession is having dramatic effects. Coherent and effective local competitiveness policies have never been more essential.
The uncertainty about proposals to devolve corporation tax must be resolved - one way or another. The logic of the idea must be urgently assessed. Is devolution of corporation tax on the terms available acceptable?
Secretary of State Theresa Villiers, now in a central role, has cautiously said that she needs to become better informed on the merits of the idea.
The Treasury has outlined some of the costs of the deal. It is not as attractive as was hoped. Finance Minister Sammy Wilson has serious reservations. The prospects for the devolution of corporation tax are not good. Senior business leaders are asking the Treasury to live up to the original aspirations and offer a more acceptable option.
Before a final decision to abandon the efforts to devolve corporation tax is taken, an urgent evaluation of options is needed on how the economic strategy might be reshaped to rebuild the economy. The nature of a 'Plan B', in the event corporation tax is not devolved, is not obvious.
Is the local business sector so vulnerable that only this fiscal subsidy offers the prospect of encouraging increased investment and attracting investors from outside Northern Ireland?
Any alternative must be understood and practical. Plan B cannot be built only on Treasury arrangements to give extra finance to the Stormont Executive, unless such extra funding can be applied to incentivise additional private sector investment, enhance profitable businesses and increase employment opportunities.
For example, could Invest NI be permitted to restore an enhanced range of selective financial assistance with derogation from EU rules? The search for Plan B should start from a comparison with the logic for devolution of corporation tax.
Business investment would be incentivised, because post-tax returns on investment would be enhanced. Whether assessed in absolute terms, or relative to other locations, when investors had discretion on decisions about business location, Northern Ireland could expect to attract more investment projects.
The further logic, partly imposed because of EU rules on state aid as it affects competition between different regions of the EU, was that the fiscal transfer to fund the reduced corporation tax would be paid for by an internal adjustment to the Executive Budget. Northern Ireland taxpayers would carry the cost for some years until the economy improved sufficiently to offset the cost.
The incidence of the impact of reducing corporation tax in the succeeding years becomes a further complication.
In an oversimplified form, the Treasury would expect a stronger local economy to need less support through the Barnett formula while, in contrast, the Executive would seek to retain the Barnett allocation and use a growing economy to offset the loss of part of the corporation tax revenue. To focus solely on the problems of the Executive Budget would be too restrictive. The effectiveness of a reduced rate of corporation tax is that incentives to attract investment increase.
Post-tax profitability is enhanced or, in the terminology of competition and competitiveness, the competitiveness of businesses in Northern Ireland would be improved. Can a Plan B be devised with a similar impact?
If the Treasury were to enhance the capital budget at Stormont, possibly with an extra £200m each year, that would help to underpin the financing of a revised strategic investment programme. There are many public sector capital projects, ranging from social housing to schools and health facilities, which could be advanced. However, while there would be some indirect impact on the economy, this would not give a boost to business competitiveness.
There is no available reliable assessment of the impact of a reduction in corporation tax to (say) 12.5%. For illustrative purposes, if corporation tax is halved, for pre-tax profits of £100, retained profits would rise from £75 to £87.50. Profits would be 17% higher. If - very hypothetically - the wage bill was five times the pre-tax profit (it would often be more), the tax reduction would be equivalent to about 3% of labour costs.
The alternative Plan B might be illustrated as needing the equivalent of either a 3% improvement in productive efficiency, or a 3% delayed pay increase. Those comparators point to the complications of a Plan B. While productivity improvements on that scale are not impossible, a collective effort to make that a demonstrable shift is hard to envisage.
Alternatively, any policy to restrain pay increases to improve competitiveness opens the prospect of Northern Ireland endorsing a lower pay answer in the search for economic expansion.
Compared to Plan A, a Plan B is possible, but more difficult to design and implement.