New pressure for hefty cut in corporation tax
A report launched today will renew the business community’s call to introduce a lower rate of corporation tax in Northern Ireland as the fastest way to reinvigorate the local economy.
The Northern Ireland Economic Reform Group (ERG), a group of senior economists, accountants and business interests, argues that a low rate of corporation tax is the only change which will quickly turn the province’s economy around from its current recession-hit state and could help create more than 90,000 extra jobs over the next 20 years.
The group advocates a cut from the current 28% level to a 12.5% rate in line with the Republic.
A similar high profile campaign in 2007 by the Industrial Task Force — led by Bombardier Shorts chairman Sir George Quigley — was supported by Stormont ministers but ended in failure after two controversial Treasury reports by Sir David Varney rejected the idea outright.
Sir David said Northern Ireland should focus on maximising its current competitive advantages rather than pursuing a corporation tax rate that would be preferential to the rest of the UK. However, the new group argues that without lower corporation tax Northern Ireland’s economy now faces a difficult future with continued dependence on a huge subvention from Westminster, low levels of employment and low wages.
The ERG includes Sir George, Eamonn Donaghy of KPMG, Michael Hall from Ernst & Young, Neil Gibson of Oxford Economics, Dr Graham Gudgin from the Centre for Business Research at the University of Cambridge, Michael Smyth from the University of Ulster and Dr Victor Hewitt from the Economic Research Institute of Northern Ireland.
Mr Gibson told the Belfast Telegraph: “The report is designed to tackle some of the concerns Varney had and look at the arguments again in light of the current economic environment. The question really is if not this, what options are on the table.”
He said that a cut in corporation tax would still require the Executive to make brave decisions as EU rules mean it would have to fund the change. However, he believes the UK Treasury could now be more receptive to the idea given the troubled state of public finances.
Shadow Chancellor George Osborne has said the Conservatives will look at lowering corporation tax across the UK if elected, but Mr Gibson |said the group does not have a political agenda.
“We wanted any ideas to come out before the General Election so this was not seen as having a political thread. Any party when it comes in is going to have to look at things that have previously been dismissed because the finances are so bad,” the economist said.
The group noted that 12 years after the Good Friday Agreement Northern Ireland remains the UK’s poorest region, with the lowest average wages and among the lower productivity. The unemployment rate is the third highest of any region of the UK, around half of all government expenditure is financed by taxpayers and the highest levels of government support for business.
The report uses the experience of the Republic to show a low rate of corporation tax would help to attract high value foreign direct investment and act as a spur to investment by indigenous companies. It argues a reduction in corporation tax to a level comparable to that in the Republic would raise overall tax revenues in Northern Ireland.
It also contends that the change could lead to a much larger private sector including at least 90,000 extra jobs over 20 years, and the UK Treasury would gain from additional tax revenues from income taxes, national insurance and VAT.
The authors said their report builds on the Varney Report’s admission that reduced tax would be legal under the Azore’s and Gibraltar Judgements of the European Court.
The report also suggests a headcount test that could be brought in to stop firms setting up shell companies in Northern Ireland without any real activity in order to benefit from the low corporation tax rate. Joanne Stuart, chairman of the Institute of Directors welcomed the report, said: “Reducing the rate of Corporation Tax would enable Northern Ireland to make the step change required to revitalise the local economy.
“A lowering of corporation tax would go some way towards helping us build a sustainable and vibrant private sector.”
However, economist John Simpson said tax should form only part of future economic policy.
“A reduction in corporation tax would be welcome, but it should not be a single stand alone issue. Also, it should be made clear that Northern Ireland would seek to adopt such a policy consistently with the EU rules. This means that the Azores principles might apply: any reduced tax revenue would be funded by reduced revenue to Northern Ireland through the Barnet formula.
“The adoption of a refreshed economic policy was commended by the IREP report. The case for corporation tax changes should be part of (and a major part of) this comprehensive rethink.”