It’s perhaps unsurprising that the issue of reducing Northern Ireland’s rate of corporation tax has come back on the agenda and that some continue to advocate for it, writes Ulster Bank’s chief economist, Richard Ramsey
The devolution of corporation tax has been a long-fought campaign and has been the flagship economic idea over the last decade to help transform the local economy.
However, much has changed in this time and the reality is that the political, social and economic environment has shifted to one that is much less conducive to such a policy.
At a national level, George Osborne led the way in reducing corporation tax when he was Chancellor, and the UK headline rate was due to hit 17%. However, the current government has scrapped this plan, and the rate will remain at 19%, signalling that the political attitude towards business and reducing corporation tax has very much changed.
Indeed, it is more likely that the next move could actually be up rather than down. In Northern Ireland, the New Decade New Approach deal talked at length about the need to create sustainable finances; the reality is that there seems to be little of any scope for absorbing the cost associated with reducing the local corporation tax rate.
Society’s attitude towards these issues has also changed, and in recent years there has been a significant focus on how much, or not, firms have been paying in tax. With public services under pressure, the prospect of reducing tax for large businesses seems a difficult concept to sell to a public that is increasingly more concerned with issues like the environment and health rather than the economy.
Even from an economic perspective, the potential benefits have been diluted by issues such as Brexit. The attractiveness of reducing corporation tax for Northern Ireland is in the perceived ability of the policy to attract foreign direct investment and to support the expansion of indigenous firms.
However, with so much uncertainty and complexity surrounding Brexit, the economic environment certainly is not currently favourable to enable such a policy to be effective. With all that is to play out regarding Brexit, there almost certainly also isn’t the bandwidth within government in Northern Ireland to deal with the corporation tax issue.
All of this is not to say that a reduction in corporation tax wont happen, nor that it would in principle be a bad thing. However, the conditions for making it happen certainly aren’t in our favour and many of the assumptions on which the case was originally made are no longer current.
And there is an argument to be made that there are other things that we can more easily do to boost the economy. The main thing is to make better use of the money that we have at our disposal. And rather than chasing new tax varying powers, we should perhaps double-down on existing taxes such as rates, where an inevitable increase could provide a ring-fenced pot of money to help fund our wastewater infrastructure; something that is critical to enable investment. Arguably such a rates hike would be a water charge in all but name.