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Urgent need to rebalance the economy but delays continue


Stormont parties are all against cutting office costs

Stormont parties are all against cutting office costs

Stormont parties are all against cutting office costs

The momentum of the decision making to allow corporation tax rates to be varied gives little hint of urgency.

The latest Treasury document Rebalancing the Northern Ireland Economy reads with no great optimism.

"No decision has yet been made on whether to devolve corporation tax." The document does not even suggest that a decision, in principle, has been taken.

Nowhere in the Treasury document is it acknowledged that delay in reducing corporation tax effectively means further delay in achieving economic progress.

The preparatory stages are proving time consuming.

Now, in January 2012, consultation preceding any decision will continue until at least the summer. Then there would be the delay while legislation is adopted in both Westminster and Stormont.

Reading between the lines there is a difference in emphasis between the UK Treasury and the Northern Ireland Executive (NIE).

The Treasury reflects uncertainties about the overall principles; the NIE puts weight on pragmatic questions of affordability, particularly on suggestions from the Treasury that the original estimate of the cost to the block grant was too low and must now be recalculated. Early estimates of £300m-£350m unofficially revised to over £400m.

The strongest arguments for making the change came from local business consultees and the main political parties.

The reasons for delay and seeking further clarity stem mainly from the Treasury.

Areas of doubt include:

  • Recalculating the cost to the 'block grant' including tax from businesses headquartered in GB with branches in NI (omitted from first estimate)
  • Agreeing how to calculate the total block grant reduction
  • Deciding how to define trading profits to ensure minimal distortion from profit shifting
  • Designing simple admin procedures for implementation without excessive scrutiny
  • Need to identify with certainty the 'residence' of eligible businesses
  • Scope for alternative non-tax measures to improve competitiveness that would rebalance the economy

From an NI perspective, the consultation produced some advice contrary to the ambition to reduce corporation tax.

  • Uncertainty about whether the benefits would exceed costs
  • The cost of reduced public sector spending and its impact
  • No assurance that reduced taxes would lead to extra investment
  • The absence of any emphasis on improving the public sector
  • If public sector employment has to be reduced it may offset increases in private sector
  • The impact of tax motivated incorporation of individuals reducing overall tax revenue

Although it will not make it a major qualification, the Treasury pointed out there are no proposals from NIE about managing reduced spending under the 'block grant'.

In an overall UK context, the Treasury had reservations.

  • Fragmentation of standard unitary UK tax structure and possible impact on rest of UK
  • Possible distortion of economic activity in UK and artificial diversion of profits

Although a Ministerial sub-group has been created to assess the next steps, the final section of the Treasury review sets out 10 significant non-tax areas regarded as equally important to rebalance the local economy.

This Treasury update, from the wider consultation, lacks enthusiasm.