Low corporation tax not the answer for Northern success
Published 20/08/2015 | 02:30
As a general rule you know that the economy and society of Northern Ireland are not in such bad shape when they seem to disappear from the news in southern Ireland. The troubles were a regular daily reporting item there throughout the 1970s and 1980s. A gradual breakout of peace and a rising economic tide between 1993 and 2007 began to put Northern Ireland into a less reported category.
It is surprising how little attention or debate about the economy of Northern Ireland takes place, these days, in conferences, seminars, summer schools and other places.
Even within Northern Ireland there is no equivalent of the Dublin Economics Workshop. Flags, parades and related matters are more newsworthy. The lively and opinionated debates about economics on radio, TV and social media that characterised the crisis years in the Republic were, and are, relatively missing in the North.
For southerners the North is a curious place - close but distant. It is close enough to warrant more attention than might be the case in the London media or political circles. Family ties, business links and academic collaboration on a North-South basis are not without significance. Yet, little is known about the North - especially its economy.
That public spending accounts for close on 65pc of total income produced, there, is not grasped. Some of this income represents the annual transfer from Westminster which is the subject of periodic controversy and disagreement among analysts. It is around £10bn per year if you go with the 'Block Grant' measure or Department of Finance estimates and it is around £5bn if you go with an estimate based on taxes locally generated and spending specifically earmarked for the North. Part of the problem in measuring economic activity is that much of tax revenue generated in the North (VAT, income tax, corporation tax etc.) disappears into one large pot in London from which funds are dispersed for health, welfare, education in the North.
The amount of local revenue raised and retained in Northern Ireland is small. It is around £1.3bn per year and consists mainly of regional and district council rates. That represents, in total, less than 10pc of total public revenues collected in the North, or, just a little over 3pc of 'GDP' in Northern Ireland (strictly speaking GDP in the North cannot be estimated but that is another story!).
Economically, the North lost out on many of the benefits of post-World War II growth. A long-term decline in shipbuilding, associated industries together with textiles was not matched by a huge surge in other areas of economic activity. The public sector grew, especially in the 1970s, in line with the troubles as well as other factors.
The North did not share the success of the South in attracting large-scale multinational investors producing high value-added products and services. While large-scale UK enterprises and some very successful local enterprises continue to play an important role in manufacturing and business services, the economy of Northern Ireland remains under-developed.
Typically two reactions to this plight are common: one motivated by an agenda encompassing a political, and not just economic, united Ireland. It is argued that Northern Ireland is a failed political entity; has no meaningful local political autonomy and is suffering from the lack of synergies that would flow from a fully integrated all-island economy and politic.
The other reaction is very different and is entirely focused on the role of the private sector as a generator of growth. This latter view sees the large public sector as a barrier to growth and that the key to a flourishing and dynamic Northern Ireland economy is an ever lower corporate tax regime to stimulate foreign (or intra-UK) investment in the North. The subject of a lower (or even all-island corporate tax regime as advocated by Sinn Féin) tax rate for businesses had become a fad among many commentators, almost all politicians and not a few leading economists.
Both reactions - the unitary state proposal and, separately, what I would term the 'race-to-the-bottom' one pony solution involving a super tax-competitive jurisdiction off the shores of the British "mainland" raise significant questions and problems.
The idea of a united Ireland any time soon is unrealistic even if Brexit, Scottish independence and other events were to come to pass. Apart from any other consideration it is not clear that southern citizens would be content to have a united Ireland!
The low corporate tax policy has come to grief for at least three reasons:
l There is shocking little evidence that a further cut in corporate tax would 'pay for itself' and not cause continuing damage to an already fragile level of public services.
l The prospect of a lower tax rate has been frozen as a result of a continuing local political row about how UK 'Welfare Reform' should be implemented in the North.
l The UK Government has accelerated the cut to corporation tax for the UK as a whole by announcing in the July budget an 18pc headline rate for 2020. It will be hard to keep up with that level of ambition!
Missing from the public debate in Northern Ireland is a consideration of how a long-term strategy of investment, local enterprise development, innovative commercial state activity and raising of skill levels could help transform the economy over a long period of time.
As in the south, new social housing investment is a key area where public capital funding could make a difference to people's lives and generate additional local economic demand. There is no silver bullet and if there is one thing economists must admit it is that 'the unexpected will happen' politically, economically and otherwise (who, in 2013, would have forecasted a 50pc plunge in the price of oil in 2014/2015?).
There is much to be positive about in regards to Northern Ireland. It is rich in potential renewable natural resources; it has a relatively well developed infrastructure (it could be much better) and good quality of life (weather apart); it is in the European Union (for now); speaks English (of a sort), has Belfast Port and surrounding lands in public ownership and has weathered the storms of the 2008-2012 economic crisis thanks in no small part to UK monetary and fiscal policy in 2008-2010.
The cessation of violence, to a very large extent, is no small achievement and something that would have been unthinkable to many observers in the dark years of the troubles.
All we need is a wee bit of forward planning, political courage and Ulster business acumen.
Tom Healy is Director of the Nevin Economic Research Institute (NERI). The NERI is a trade union funded research institute committed to producing detailed policy analysis. The Institute's publications can be found at www.NERInstitute.net