I found last week’s UK Budget slightly scary. The speed at which the Chancellor is reducing growth forecasts, raising tax thresholds and cutting corporation tax hints more at “make it up as you go along” than “long-term economic plan”.
Much of it, quite by accident, was good news for Northern Ireland. The next Assembly gets another £220 million to spend over the term; a population which has few rich people but a lot of comfortable ones will gain from the rise in tax thresholds (a household of two senior public sector workers gains £1410); and the basic stability apparently on offer provides comfort to a region particularly hit by the Great Recession.
However, perhaps most striking from a Northern Ireland viewpoint was the Corporation Tax reduction, with the (UK Standard) rate set to reach 17% just two years after the NI Executive introduces a “Northern Ireland rate” of 12.5%.
A lot of the commentary around this issue is misleading. The application of a Northern Ireland rate is complex; specifically, it is not true to say that “corporation tax” in Northern Ireland can be reduced. Under the Act, the “Northern Ireland rate” must be applied for, and such applications may only be to “trading profits of SMEs whose costs and employee time are largely (75%) in Northern Ireland and to the profits of a large company attributable to a presence in Northern Ireland” (and limited other circumstances); and even then certain sectors are excluded. This means two important things – first, not all businesses qualify (so it is not quite fair to say that, if the “Northern Ireland rate” were set at 12.5%, its Corporation Tax regime would fully match the Republic of Ireland’s); and second, the implementation of any differential “Northern Ireland rate” would attract a significant administrative cost (regardless of how different the rate was from the UK Standard rate).
So, although the reduction from the Northern Ireland grant (i.e. from public spending here on devolved issues such as health and education) would be reduced by each percentage point that the difference between the “UK Standard rate” and the “Northern Ireland rate” were reduced, the administrative cost (which must also be borne exclusively by Northern Ireland) would remain the same.
This then brings us neatly to the point that the administrative cost and bureaucratic complexity which would be brought about by implementation of a differential “Northern Ireland rate” has to be worthwhile (and not just the reduction in public spending). Back when this was first proposed, in 2010, the headline gap would have been a full 15.5 points (the UK Standard rate was 28%). By the time anyone gets around to implementing it, in 2020, that gap will be just 4.5 points. Add to this that the current Chancellor’s speed in the direction of lower Corporation Tax is increasing (i.e. that he may well, in future budgets, announce a further reduction of 2020, quite possibly to as low as 15%), and the differential is scarcely noticeable. We may note also that the aforementioned bureaucratic complexity would not be borne solely by the administrators involved on the government side, but also by the businesses applying for (and proving their qualification for) the “Northern Ireland rate”.
The issue is simple. If they want a 12.5% rate, can Northern Ireland Ministers point with any confidence to a single company which would invest in Northern Ireland with a 12.5% profits tax (noting also the complexity in successfully applying for it) but not with 17% (or 15%)? Can they point to a company which chooses the Republic over Northern Ireland solely for tax reasons (given that employees in Northern Ireland enjoy significantly lower household taxes, more generous tax bands, and more limited VAT)? Can they point to a single company which would choose Northern Ireland over Great Britain because of four-and-a-half (or maybe even two-and-a-half) point profits tax gain? To be clear, it is possible such companies exist – but the public would need to see some evidence of them.
The other question is why, exactly, is the NI Executive so determined to set the “Northern Ireland rate” at 12.5%? Why invest so much time “matching” the Republic (in a limited way with added complexity) when it would now cost the same to beat it? If a lower rate is to be the key argument for choosing Northern Ireland over Great Britain, why not also set a lower rate to encourage choosing Northern Ireland over the Republic? Either a lower corporation (profits) tax rate is important, or it is not!
All of this ultimately suggests that a lower “Northern Ireland rate” of 12.5% will make no difference – merely matching the Republic while offering a steadily decreasing advantage over Great Britain. Northern Ireland’s problems are more fundamental – disinvestment in key skills (teachers over computer scientists), focus on the wrong areas in early education (RE over ICT), a laughably inefficient and instinctively anti-competitive planning system, an energy grid which is unfit for purpose and comparatively illiberal general attitudes (in general and towards incomers) are vastly bigger obstacles to real wealth creation than tax rates.
Not for the first time, the world is changing and Northern Ireland is still behaving as if it is as it was years ago. It is time to offload the “silver bullet” of differential corporation tax and move on to tackling the real economic problems we face – starting by tackling the vested interests which hold us all back.