The fallout from the Brexit vote continues – and continues to disproportionately affect Northern Ireland. The focus now is on how the intention to cut the UK’s corporation tax rate affects plans to reduce the rate in Northern Ireland to 12.5% from April 2018.
George Osborne – who remains Chancellor of the Exchequer, at least until a new Prime Minister is in place – intends the UK corporation tax rate to come down from its current 20% to “less than 15%”. It is unlikely to be Osborne’s decision once Autumn Statement time comes around, but the move seems to fit with the Government’s ‘policy’ (panic is another word) following the Brexit decision.
A corporation tax rate of 14% or 15% would certainly make the UK very competitive, assisting the government’s objective of attracting foreign direct investment – a job made more difficult by Brexit. It is mostly very small countries that offer such a low rate – Latvia charges 14% and Ireland 12.5%. By contrast, the United States has an effective rate of 38.92%, France 34.43% and Germany 30.18%. The UK is continuing its direction of travel – Osborne had previously announced the tax rate would fall to 17% in 2020, which is significantly below the 28% he inherited when he took office.
But the UK’s strategy to make it more attractive to foreign direct investment is a potentially serious blow to Northern Ireland’s own plans. The Fresh Start Agreement, signed last November, had brought together the two main Northern Ireland political parties – though with some disquiet within Sinn Fein – in supporting a new 12.5% corporation tax rate for Northern Ireland from April 2018. A UK corporation tax rate of 15% or less undermines this.
Would a foreign direct investor be persuaded to come to Northern Ireland for the sake of a 1.5% or 2.5% lower corporation tax rate than applies in Great Britain? Bear in mind the higher logistical costs here because of our geographical marginalisation, plus the gaps in our skills provision and infrastructure capacity. The fact that we have the second highest electricity costs in Europe for large manufacturing businesses is likely to weigh heavily for many investors.
On the upside, the cost of adopting a 12.5% rate will become much cheaper for Northern Ireland. While the benefit will be smaller, so too will be the loss in central government grant. In fact, away from the EU’s state aid rules there would be no requirement on the UK government to cut financial support to Northern Ireland to meet the costs of a reduced corporation tax rate. But the rise of English nationalism – a factor in the Brexit vote – makes it highly unlikely that English MPs would be willing to subsidise Northern Ireland’s tax rate cut.
So perhaps it is time to look at other ways to boost Northern Ireland’s economy and to make it more attractive to inward investors. OCO Global – a consultancy firm that advises international investors – suggests that Northern Ireland might become an enterprise zone to make itself more attractive. At present one enterprise zone has been announced for Northern Ireland, at Coleraine. Until now the use of enterprise zoning has had limited attractions because of EU rules that limit the capacity of governments to provide multiple layers of financial assistance. Awarding an area enterprise zone status might prevent it from also receiving employment assistance grants.
Just how attractive an enterprise zone would be depends on what it offers. In England, the new generation of enterprise zones benefit from enhanced capital allowances, reductions in business rates and super-fast broadband access. The Conservative governments of Margaret Thatcher and John Major were strong proponents of enterprise zones, setting-up 38 of them between 1981 and 1996, with limited planning controls, as well as tax incentives. While the government believed the approach worked, some academic studies argued that they tended to displace jobs and economic activity from elsewhere and concluded that big infrastructure projects were more effective in regenerating marginalised areas.
There is an argument in favour of Northern Ireland enterprise zones that support individual areas – perhaps West and East Belfast, Derry and Ballymena – rather than the whole of Northern Ireland. This would help direct investment into places with the greatest need, displacing investment that has disproportionately benefited South Belfast. But the policy could generate unhappiness in areas that lose out.
Another policy option would be to establish a lower rate for employers’ national insurance in Northern Ireland. The attraction of this policy would be that it directly addresses the desired outcome – providing an incentive to increase employment here by making it cheaper. However, analysis for Nicva by accountancy firm PwC argues this would be an inappropriate tax to devolve as it would be difficult to reconcile with obligations to pay welfare benefits.
There is another way to make employment in Northern Ireland cheaper – and to do it even more directly – which is to regionalise the national living wage. Some of the Brexit campaigners are strong ‘free marketeers’, motivated by a desire to reduce regulation, and favour cuts to the minimum wage. Economist Roger Bootle – an influential voice with Brexiteers and the Conservative Party – has suggested not only cuts in corporation tax, but also lower personal tax rates, infrastructure investment, cheaper energy and a reduction in what he describes as the “absurdly high national living wage, which threatens to cause extensive job losses”.
It is perhaps time to consider which factors enabled the Irish Republic to benefit from the ‘Celtic tiger’ years and have helped it to again become the fastest growing economy within the EU. Academic studies have dismissed the lazy idea that it was just down to low tax rates – indeed the beginning of Ireland’s economic boom predated the cut in its corporation tax rate. Rather, Ireland benefited from the combination of skills, good universities, strong vocational training and EU membership, as well as tax rate.
“The findings [of studies] show access to markets, and the level and availability of skills, are vastly more important than tax rates for businesses,” observed Stephen Farry, the employment and learning minister in the last Executive. Despite that awareness, the last Executive cut funding for higher education and further education, which hardly fits with the needs of Northern Ireland in the modern economy.
Yet the chances are that the economic policy debate will be dominated by discussion of corporation tax. The DUP has previously floated the idea of a 10% corporation tax rate to provide a stronger incentive than that available in the South. Focusing instead on the foundation stones of a modern economy – skills and infrastructure – might put Northern Ireland on a firmer footing.