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Using tax to the advantage of the regions

Joe Wright, 29 July 2015

Being competitive requires a comparative advantage. This is the logic behind devolving control of corporation tax to the Northern Ireland Executive. The prime minister announced the move last year with the expectation that Stormont would try to replicate Eire’s success by dropping the rate. The arrival of global giants like Google to Ireland’s shores has been attributed largely to its exceptionally low 12.5% tax. The Democratic Unionists have argued for a drop to 10%.

There is very good reason for doing so. Northern Ireland’s economic problems are enormous. Growth remains half that of the total UK’s while public spending was 74.4% of GDP in 2013/14 (it’s 28.6% in London). The public sector employs one in three people compared with one in five nationally. Giving companies more room to invest and attracting new ones to Northern Ireland is one proven way of boosting the private sector.

The best way to bed down the Good Friday Agreement is to put Northern Ireland on a stable economic footing, to ensure there are more opportunities for the young to join businesses than sectarian groups. With the centenary of both the Easter Rising and the Battle of Somme next year economic progression remains pressing. The Easter Rising marked the beginnings of Irish independence for Republicans, whereas the decimation of the Ulster Division in the Somme signifies Northern Ireland’s connections to Britain.

Time is of the essence. Under previous agreements, Stormont was set to take control of corporation tax in 2017. But the potential impact of a lower rate is already eroding. UK wide corporation tax dropped from 21 to 20 per cent this year, and the Chancellor announced in the July Budget that it will fall to 19% in 2017 and to 18% by 2020. Disagreement over Stormont minsters’ ability to balance their budget and implement welfare reform continues to block concrete agreement on devolution. Stormont runs a mammoth deficit of 33% of GVA, the highest of any region. For businesses planning their operations over the next five years, the incentive to set up subsidiaries will be blunted by the news. It is more important that Northern Ireland put measures in place to grow its private sector ─ a better welfare system and government finances will follow as strain is removed from the system with jobs growth.

While Northern Ireland needs to find a way round the impasse, the Chancellor should also reconsider the merits of setting corporation tax at a nationwide level. If he was serious about regional development, he would implement his cuts on a regional basis, according to need. London is fine without a rate cut. Growth remains strong with booms in the tech and financial sectors. A steady flow of highly skilled immigrants and good infrastructure pull businesses to the area. Housing and a decision on Britain’s third runway are more important to the region’s international competitiveness. Northern Ireland needs as much of an edge as it can get, so too do Wales and the North. Making the regions competitive requires giving them a comparative advantage.

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