Northern Ireland’s new tax powers will not replicate the Celtic Tiger – thankfully

Joe Wright, 21 January 2015

After lengthy talks which began in October the government has announced plans to devolve corporation tax powers to Northern Ireland before the next election. The Bill, introduced by Teresa Villiers, Secretary of State for Northern Ireland, is due for its second reading next week. It has been rushed into parliament after cross-party agreement was reached with Stormont, the Northern Ireland Executive, just before Christmas.

The Bill is the first of its kind, with corporation tax previously being set at a single UK rate. It has set a huge precedence for those who wish to see a more concerted effort by government to rebalance economic growth using devolution. Stormont will now be able to encourage investment in the region by granting new tax breaks to businesses. Northern Ireland remains one of the poorest UK regions with regional GDP-per capita well below the UK average – it is also one of the poorest regions in Northern Europe. Speaking to the Financial Times, KPMG’s Belfast head of tax, Eamonn Donaghy, called the new powers ‘as significant to Northern Ireland as the Good Friday agreement was to the political side of things.’ 

The new powers come with requirements, however. According to European law the powers must be off-set by a reduction in the block grant given to Northern Ireland because it is considered a developed region. Stormont has already announced public sector job-cuts of 20,000 to reduce expenditure.

There also remains considerable opposition. Labour opposes the Bill on the grounds that it has been rushed while having profound implications for the UK and will result in large scale public sector cuts. The Bill is also seen as unfair to the rest of the UK, especially Scotland which retains only minor control of income tax rates despite September’s referendum. The government, however, believes Northern Ireland is a special case because it borders a low-tax country.

Northern Ireland is a special case, but not because it borders a low tax country. For one, these powers will not allow Northern Ireland to replicate the South’s economic model, let alone compete with it for FDI. Eire’s economic boom, stretching from the late nineties to the 2008 financial crash, is largely credited to (along with its well-educated workforce) its 12.5 per cent corporation tax – one of the lowest in Europe – which attracted corporate giants such as Google to set up their European operations there.

The powers handed to Stormont are restricted to small and medium sized companies, meaning larger companies will be taxed at the main UK rate (20 per cent as of April 2015). This Bill will not bring big corporates to Northern Ireland, only tax breaks for Northern Irish companies to invest in expansion.

Despite a misleading argument for special treatment, the government’s approach offers a more stable economic growth by relying on domestic innovation and investment rather than foreign corporates – a model requiring a downward tax race with other countries. And given that prosperity is a proven way to ease conflict between communities, Northern Ireland has long-deserved special economic treatment.