Fantastic Mr Tax – is devolution of corporation rates wily economics or a fairytale?

Chancellor George Osborne yesterday stood in Westminster and fired a starter pistol that was heard across the UK and Ireland.

The hunt is on for Stormont to track down the prize of devolved corporation tax powers, albeit with some last minute complications added by the Treasury boss.

Responsibility for the rate could transfer from London to Belfast during this parliament, thus in the next six months, said Osborne, “provided the Northern Ireland executive can show it is able to manage the financial implications. The current talks will see if that’s the case.”

So: agree welfare reform and you’ll get corporation tax, an economic lever that has been talked up for years among some of our politicians, proffered as a crucial part of ending local private sector underperformance.

The argument goes that businesses like lower taxes (something that, all other things being equal, is impossible to dispute) and that, by lowering taxes, Northern Ireland will be relatively more attractive when compared with other nations and therefore receive more industrial investment, particularly from abroad.

However, there is a voluble group of dissenters arguing this is an oversimplification and that devolution of corporation tax powers will bring few gains to NI while costing us elsewhere.

If it happens, will this prove the goose that laid the golden egg, or will Simon Hamilton and Arlene Foster be our Hansel and Gretel, skipping towards an economic gingerbread house where anticipation and reality are worlds apart?

Plot holes

Tax policy expert Richard Murphy is withering in his assessment of how a lower corporation tax rate would benefit the local community.

He told Scope it was unlikely to dramatically increase foreign direct investment (FDI) but will provide further cuts to public spending, ending up in more pain for the NI economy.

Devolving corporation tax must bring in a higher benefit than cost to be called a success, but Murphy says this is very unlikely in current circumstances – with direct cuts to the block grant of £300m-£400m as well as start-up costs of around the same amount, all against the backdrop of huge budget reductions for the Executive.

“It’s worth asking where tax features in most companies’ decision-making, with regards to relocation. It’s maybe the fifth, sixth, seventh consideration – it’s not the highest priority and it never will be.

“Geographical considerations, logistics, the training of the workforce, infrastructure – these are all generally more important.”

In 2010, Murphy wrote a report, commissioned by the TUC and ICTU, assessing the costs and benefits of lowering corporations tax in NI. It comes to the “obvious” conclusion that a lower rate cannot address our most pressing concerns and “far from solving its problems such a tax rate could only increase the isolation, uncertainty and cost of trading from Northern Ireland.”

Corporation tax is 21% across the UK, set to drop to 20% in April, with the Executive keen to lower rates to compete with the Republic of Ireland for inward investment.

Murphy says that following the Celtic Tiger model, given events of the past seven years, is a dubious strategy, while his ICTU report notes that the 12.5% corporation tax in the Republic of Ireland, often cited as the main driver behind the Celtic Tiger, ignores several key points, including:

• Corporation tax has been low in RoI since the 1950s, including rates of 10% from 1981 to 2003, subject to certain conditions
• Major EU investment boosted Irish infrastructure from the 1990s onwards, transforming its relative appeal to FDI, as well as membership of the Eurozone generally
• The role of the International Financial Services Centre, which it says cannot be replicated in NI, and other financial differentiators between RoI and NI which will not be addressed by corporation tax

Implementation of a lower tax will also lead to questions about NI’s place within the UK, with other regions competing for investment crying foul about being left at a disadvantage, and a requirement for further bureaucracy on trading within the UK.

Murphy is far from the only critic of these proposals. Bro McFerran, MD of Insurance giants Allstate NI – precisely the kind of big firm Stormont wants to attract – was not alone among senior Executives in echoing some of Murphy’s points, saying workforce skills were more important than a lower rate of tax.

This week the Allstate boss again spoke out against the lower rates, this time with remarks that might cause even more wincing on the Hill biting, as they do, a bit closer to the bone:

"Our Northern Irish politicians need to show that they can deal and resolve the existing issues before they get into the realms of corporation tax.

"I think if we introduce something where we need much greater understanding and nuance and sophistication, I'm not sure those are words that we naturally associate with our Northern Irish politicians, and I think that is something that we have to be very careful about."

Grimm expectations

Northern Ireland’s private sector has had problems since 1921.

When asked what he thought would best help the ailing economy, Murphy’s first thought is for significantly increased investment, especially in skills and infrastructure.

Political reality means this will not happen in the short- or medium-term. With that off the table, he says more efficient links with RoI and a reduction in social unrest will be crucial.

“Businesses love consistency. When people see some of the disturbances that are too common in Northern Ireland, they will question whether they want to live there, whether they want to base their company there, and also whether their workforce will be reliable and free of divisions. It really is a problem.

“As well as that, viewed purely in business terms, it would be preferable for the island of Ireland to operate as one coherent economic unit. There are obviously cultural differences between different people across the island, but these have to be dealt with and – whether through a united Ireland or legislation making cross-border work easier for business – it has to be simpler to operate across the border.”

Future-building or fantasy, these issues remain academic for now. The Chancellor’s insistence on an agreement over welfare reform means there are real doubts about this getting over the line – in part, down to the political reflections of the very social divisions Murphy highlights.

The next six months will be very interesting for Northern Ireland.

Scope will have more on corporation tax in the next couple of weeks – look out for an upcoming piece arguing against gloomy predictions, and please respond with any thoughts of your own @scopeni