A top financial expert has warned that there is no Plan B to stop Northern Ireland’s economy going into meltdown if corporation tax powers are not devolved.
Tax consultant Eamonn Donaghy has warned that EU grants which sustain inward investment here are set to be withdrawn and there will be nothing left to prop up the economy.
As a major report warned our economy is lagging behind the rest of the UK, Mr Donaghy said: “The system of grants we rely on is being phased out and, apart from corporation tax, there is no Plan B to replace it.”
The tax expert warned without a reduction in corporation tax the local economy was not sustainable. “The running cost of Northern Ireland is £20bn a year of which we contribute about £9bn in taxes. The British taxpayer is not going to continue giving us £11bn a year indefinitely.”
A leading financial expert has warned Northern Ireland’s economy cannot sustain itself without a reduction in corporation tax.
With lucrative EU grants which support investment set to end next year Eamonn Donaghy, head of tax at the KPMG consultancy in Belfast, said there is currently no Plan B to prevent our economy from going into meltdown.
The stark warning comes just a day after a key report warned that Northern Ireland’s economy is lagging behind the rest of the UK.
The PricewaterhouseCoopers report revealed that 11,000 jobs have been lost in the private sector in Northern Ireland in the past two years and predicted that the Northern Ireland economy will shrink even further this year.
With political discussions over the reduction in corporation tax currently stalled, Mr Donaghy has spoken publicly because he believes that it is the only remedy which can kickstart investment.
“As a parent I want my children to have a future here, that is why I am doing this, yet I am accused of being a Tory b******.
“When anyone asks ‘why would a company come to Northern Ireland instead of the Republic of Ireland?’, there isn’t a persuasive answer.
“If we don’t devolve corporation tax we will have little to attract industry with.
“The system of grants we now rely on is being phased out and, apart from corporation tax, there is no Plan B to replace it.”
Mr Donaghy is an industry insider. He provides tax advisory services to some of Northern Irelands largest businesses and is regularly consulted by multinational organisations considering inward investments here.
The key strategy of offering foreign companies cash to locate in Northern Ireland, known as selective financial assistance (SFA), is due to be abolished by the EU next year.
Mr Donaghy said: “Virtually every job we attracted in the last five years has been supported by these grants and that won’t continue.
“There is pressure to reduce SFA further, and eliminate it altogether in Belfast next year.”
Corporation tax, the tax on business profits, is levied by Westminster at up to 24%, compared to a rate of 12.5% in the Republic of Ireland.
We could reduce it locally if the tax levying powers were devolved to Stormont, but EU rules dictate that if that happens Northern Ireland must bear the cost itself. This would come in the form of a reduction to our block grant from Westminster.
Last month Sammy Wilson, the Finance Minister, told the Belfast Telegraph that the price being demanded is currently too high for us to bear. He called on Prime Minister David Cameron to intervene and make a political decision to end the deadlock.
Mr Wilson revealed that the Treasury was demanding an initial £400-£450 million deduction from the block grant.
He added that the Treasury proposed increasing this by twice the rate of growth in corporation tax in the rest of the UK. That could put the annual cost up to £700m within 10 years.
“Sammy gave you the worst case scenario,” Mr Donaghy said. “The reality is that this is capable of negotiation”
He considers it short-term thinking to focus too closely on the size of the block grant, which, he predicted, would be reduced anyway.
“£20bn is the running cost of NI, of which we contribute about £9bn in taxes. We pay for less than half of what it takes to keep us, and that won’t continue in the long-term.
“The British taxpayer is not going to continue giving us £11bn a year indefinitely,” he said.
“We are talking about a major structural readjustment of the economy and we would be foolish to stall it for the sake of £50m or £100m out of a £20bn budget.
“We have got to get this thing agreed in principle and then see what the numbers will look like later on.”
SDLP leader Alasdair McDonnell said that yesterday's economic report makes a move on corporation tax more urgent than ever.
He said: “The impact of the recession was more severe in Northern Ireland than anywhere else and it is clear now that economic recovery will take longer in this region.
“We know now that 11,000 private sector jobs have been lost over the last five years. The message is clear and must be heard by the Executive — a dramatic economic intervention is required.
“A move on reduced corporation tax is the only way to seriously protect the jobs we hold and promote new investment into Northern Ireland.”
Over the last two weeks we have seen some magnificent Olympic performances and there has been a sense of euphoria as we bask in the reflected glory of our athletes.
However, when the Olympic Games are over and harsh economic reality returns, a big decision is going to have to be made on whether Northern Ireland will get the power to vary its corporation tax rate.
There is a very strong and clear business case for low corporation tax which is backed up by well researched and academically proven economic models. The business community is fully behind this, as are most of our local politicians.
Whilst there are those who have not been convinced, their concern is not whether this will work or not, but whether the cost of a reduced block grant is a risk worth taking.
The EU requires that Northern Ireland pays for the reduced corporation tax and this payment will effectively come from our block grant.
In turn it is hoped that the tax savings that existing companies make, combined with the attractiveness of a low tax rate to foreign direct investment, will stimulate economic activity and create private sector jobs.
Of course there is a risk of doing this, because job creation is not a racing certainty.
However, in every other country where corporation tax rates have been significantly cut, positive economic benefits and job creation has happened.
In my opinion, the risk of not doing this is far greater. There will be limited foreign direct investment, limited incentive for local companies to reinvest, and as a result limited prospects for our private sector to grow and for our young people to get well-paid, high value-added jobs.
Ask yourself this question — why would a company come to Northern Ireland to invest when it can go to the Republic of Ireland and pay half the corporation tax on its profits? There is no persuasive answer to that question.
The status quo is not a viable alternative. The EU are cutting back on grant assistance and it is highly likely that the greater Belfast area will not be able to offer selective financial assistance in the future to FDI (foreign direct investment) companies. This takes away one of the keys reasons why FDI companies would look at investing in Northern Ireland.
For too long, holding onto our block grant from the Treasury has been seen as a ‘sacred cow’ which cannot be touched. However, we will have to realise that the British taxpayer is eventually going to get fed up with giving Northern Ireland about £10bn per annum.
Indeed, as long as we have the financial support at that level there is limited incentive for us to come off this economic crutch. Unfortunately, there are too many people who like the certainty of the block grant crutch rather than the prospect of real economic growth.
There is a culture in Northern Ireland that believes we are entitled to what we get but we do not want to pay for the privilege. Unfortunately, there is no such thing as a ‘free lunch’ anymore and we do not have the luxury of taking risk free decisions.
There are times when difficult economic choices need to be made for the longer term benefit of everyone.
My support for a reduced rate of corporation tax is driven solely by the desire to see economic growth and the prospect of job creation within Northern Ireland.
As a parent I want my three children to have the prospect of a future here in Northern Ireland and not have to become economic migrants like so many of our youth today.
To those who oppose doing this, I would ask: what is your alternative? In the last three years, not one single person has given me a viable alternative.
By Liam Clarke
Eamonn Donaghy has a colourful turn of phrase for a tax consultant. “As a parent I want my children to have a future here, that is why I am doing this, yet I am accused of being a Tory b******,” he told me.
“Mind you, I would get into bed with Genghis Khan to get the right result on corporation tax,” he adds with a smile.
He compares the stalled corporation tax negotiations to the attempted Napoleonic invasion of Ireland in 1796 when Admiral Bouvet anchored his fleet off Cork until it was eventually blown on to the rocks.
Mr Donaghy fears that Sammy Wilson, the Finance Minister, will make the same mistake, playing things so cautiously that eventually the political wind will change and the whole venture will be smashed to pieces.
He sees signs that some in the Treasury, and perhaps even Mr Wilson, are seeking a face-saving exit strategy.
We aren’t on the rocks yet.
During his recent trip to Northern Ireland, Prime Minister David Cameron made mildly encouraging noises when asked about devolving the tax powers.
“There are difficult issues that have to be hammered out, but I am in no doubt that we need to do more to encourage the private sector and growth in the private sector in the Northern Irish economy,” said Mr Cameron. His own father Ian built up his £2.74m fortune in havens like Panama and Geneva well away from UK corporation tax.
The Prime Minister knows that a lower rate in Northern Ireland will be attractive to business; even if some corporate headquarters are moved here from Britain for tax reasons, it will probably prevent them going abroad and entirely out of the clutches of HMRC.
The Treasury, as Mr Donaghy says, will be cautious and pessimistic in their estimates. The amount they currently want to take from our block grant may be too high for us to bear. However attractive something is there is always a price that is unrealistic.
Taking a bold measure to help Northern Ireland to stand on its own feet, instead of depending indefinitely on a Westminster subsidy, is risky but it carries potential benefits both for us and the Treasury.
Mr Cameron can’t eliminate all risk but he can ensure it is spread fairly. Now that the policy wonks have pored over the figures he must cut the knot and our ministers must respond decisively.