Northern Ireland Corporate tax cut – a good idea?

Photo: Business Standard

Photo: Business Standard

James Smith, Contributor

With the NI Assembly having once again imploded, one big question has been swept under the carpet: what about the proposed cut to NI’s corporation tax rate? The bill, for those not keeping up, passed on March 26th 2015 and gives the NI Assembly the power to set corporate tax at any rate it sees fit.  The original plan was to match the Republic of Irelands corporation tax rate of 12.5% by April 2017. This, it is argued, will help rebalance the Northern Ireland economy and “unleash an unprecedented wave of investment and growth”.  But now, with the Assembly out of action, might be a good time to step back and ask: is this really a smart move?

There can be no doubt the NI economy needs reform, it’s currently the least productive region in the UK with Labour productivity (how much each worker can produce in an hour) at around 83% of the UK average. Employment is also dangerously reliant on the public sector and is precariously propped up by subsidies from Westminster.

But is the answer to all these very real problems a tax cut for corporations? One could argue no. For one thing the UK has already cut its corporation tax rate to 20%, giving it one of the lowest tax rates among wealthy nations, and further cuts are planned. Have these tax cuts unleashed an unprecedented wave of investment and growth? No, the UK is currently experiencing it slowest recovery from a recession in nearly a century and NI has never returned to its impressive pre-crisis growth rates of 5-7%, instead languishing around 1-2% growth. Perhaps we just haven’t cut enough, but that is doubtful; we were growing pretty fast before the crisis and while some of this was housing bubble growth, it stands to show we’re capable of growing without super low taxes.

But what about the Republic of Ireland and its 12.5% tax rate, surely we have to be able compete with it? Hasn’t it has shown us the low tax road to prosperity? Well, how much the Republic’s low tax has added to its economy is a hotly debated topic, and while too lengthy to go into here it can safely be said the issue is far from settled. But the big problem of the NI economy according to economists is not competitiveness but its productivity gap with the rest of the UK. Productivity ultimately determines living standards and it’s hard to see how a corporate tax cut will increase worker productivity.

The NI economy is overly reliant on the public sector and thus ultimately Westminster for survival, and it will have to deal with that at some point, but right now fiscal austerity, political instability and a productivity crisis are an anchor around the region, and one fails to see how further draining the regions coffers to bribe big corporations will do anything but make these problems worse.

 

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