Corporation Tax: Northern Ireland is walking into a disaster of its own making
I am worried that Northern Ireland could be sleep walking to a disaster on corporation tax. Across the political divide there is support for devolving power to set corporation tax to Stormont and then reducing that rate to 12.5% to supposedly match the rate in the Republic.
The main parties have very different reasons for supporting this measure. In my opinion any reason is wrong because this is going to cost Northern Ireland dear.
The cost is simply stated. The tax lost from a reduced corporation tax rate is considered regional aid by the EU. That means any such loss must be deducted from the support Westminster gives Stormont at present. Reasonable estimates suggest that this might reduce support to Northern Ireland by £300m, but it could be more.
To maintain public services in Northern Ireland the tax collected from the new and reduced corporation tax rate would, as a result, have to make good that loss of money. As Andrew Baker, an academic at Queen's University, and I have calculated, to make this equation balance the private sector in Northern Ireland would have to grow in size by about one third. There is no evidence from anywhere that cutting corporation tax by about 8% has ever resulted in such an economic miracle.
The UK as a whole does, in fact, prove it. Its corporation tax rate has been cut from 28% in 2010 to a promised 20% next year and despite that the economy has only, and just about, dragged itself out of recession.
What this means is that the proposed tax cut will represent a bonanza for existing business owners in Northern Ireland, who will enjoy a big tax cut as a result. For everyone else there'll be more pressure on public services and even less investment in jobs. And that's precisely the disaster I'm worrying about.
Richard Murphy is a chartered accountant and economist who directs Tax Research UK. He wrote Pot of Gold or Fool's Gold published by the ICTU on the proposed cut in corporation tax rates in NI. The opinions expressed are his own.