Cutting the tax on profits could create a new ‘Tiger’

A rather unusual thing happened over the weekend. The Northern Ireland parties had a bitter row, not about parades or flags but about economic policy. Even more unusually, the argument was about cutting taxes.

In the past, all the local parties have had to do is to spend the money they receive from the Treasury in London. The only differences of opinion have been about how this should be spent. Now, for the first time in this election, the issue of raising money has come onto the political agenda.

The wonderland of free money has underpinned our growing prosperity for decades and given us more generous public services than in Great Britain. Unfortunately, it has grown to be a burden that the British taxpayer has noticed and may well come to resent.

During the Troubles, this burden was shouldered without much complaint. Even after the Good Friday Agreement in 1998, there was no suggestion of changing the rules by which national tax revenue was allocated across UK regions.

All this has changed with the possibility of a Conservative Government at Westminster. David Cameron singled out Northern Ireland in his BBC2 Newsnight interview last week as the region where the balance of public and private sectors had got most out of kilter.

What he said was that the private sector needed a substantial boost, but his political enemies in Northern Ireland only heard a threat of cuts to public services.

The Conservative approach has, in fact, been made clear in their national manifesto and in the joint UUP-Conservative manifesto.

Their approach to rebalancing the economy is constructive. They propose to build up the private sector rather than introducing any special cuts to Government spending in Northern Ireland.

To achieve this they have promised a serious examination of a reduced rate of corporation tax, the tax on company profits, to attract a large number of new companies into the Province.

The idea of reduced corporation tax has been around for some years, but was rejected by Gordon Brown as Chancellor.

What has changed since then has been the determination of Owen Paterson, the Conservative Shadow Secretary of State for Northern Ireland, to push the idea of reduced corporation tax.

He accepts the belief, widely held by economists in Northern Ireland, that low corporation tax underpinned the Celtic Tiger boom south of the border (without causing their recent slump). He believes it would do the same for Northern Ireland.

Unfortunately in economics there is rarely any gain without some pain. In this case the pain is imposed by EU rules.

These rules dictate that any costs of reducing tax rates would have to be borne in Northern Ireland, without further subsidy from London. In other words, if we reduce corporation tax rates, we must bear any associated loss in tax revenues.

All the major parties say that they support a cut in corporation tax, although most do not mention any associated cuts in public spending. Even so, the statement in the DUP manifesto that it supports the tax cut, but not the potential expenditure reductions which must accompany it under EU rules, is — to say the least — misleading.

Reduced corporation tax is a big issue for Northern Ireland. All parties want to strengthen Northern Ireland’s weak private sector, but know that existing polices are not doing this.

In a global world of mobile companies, tax talks very loudly. Now is the time for our parties to decide whether to continue as a dependency of the British welfare system or to move decisively in a new direction.

Dr Graham Gudgin is based at the Centre for Business Research at the University of Cambridge

Belfast Telegraph