Corporation Tax in Northern Ireland


House of COMMONS



Northern Ireland Affairs Committee


Wednesday 17 November 2010

Mr Peter Bunting, Mr Richard Murphy, Dr Esmond Birnie

Evidence heard in  Public Questions  165-239



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Oral Evidence

Taken before the  Northern Ireland Affairs Committee

on  Wednesday 17 November 2010

Members present:


Mr Laurence Robertson (Chair)


Mr Joe Benton

Oliver Colvile

Lady Hermon

Naomi Long

Jack Lopresti

Ian Paisley

David Simpson

Mel Stride

Gavin Williamson



Examination of Witnesses

Witnesses: Mr Peter Bunting, Assistant General Secretary of the Irish Congress of Trade Unions (ICTU), and Mr Richard Murphy, Director, Tax Research, gave evidence.

Q165 Chair : Right, we’re there. Can I welcome you to the Committee? Thank you very much for coming to give evidence today. Could I ask you very briefly to introduce yourselves and give us a little bit of background to your work please?

Richard Murphy: My name is Richard Murphy. I’m a chartered accountant. I have previously been in practice in London and have run commercial companies as well, including as an entrepreneur. I now, however, am Director of an organisation called Tax Research UK, which works on taxation policy matters, particularly with regard to issues such as tax havens and related issues, and I advise a range of organisations including the TUC.

Q166 Chair : Okay, thank you. Mr Bunting?

Peter Bunting: My name is Peter Bunting and I’m Assistant General Secretary of the Irish Congress of Trade Unions. On the island of Ireland there’s one confederation of trade unions-and I have responsibility for looking after Northern Ireland-of which there are 220,000 members in 34 affiliated trade unions.

Q167 Chair : Thank you very much, you’re very welcome. Perhaps I could just start the questioning with a fairly general question. As you know, the Committee is looking at the issue of corporation tax, the difference between the UK and Ireland, and the impact that has on the economy in Northern Ireland. I wonder whether you could just, for the benefit of the Committee, give us an outline of your views on this. Would a lower corporation tax, with a harmonised corporation tax for Northern Ireland, have a strong impact on the economy?

Richard Murphy: Corporation tax is something that is charged on profits; profits are only earned when there is strong economic activity. It’s therefore a bottom-line figure-in fact, it’s a belowthebottomline figure. The importance is actually to create a strong economy in the first place. As an accountant, I was always terribly worried when somebody came in to see me and said, "I want to make a lot of money." I said, "No, you want to do something very well; you probably want to employ quite a lot of people; and you want to generate profit as a consequence-then we’ll worry about the tax." To suggest that tax is the way to drive an economy is putting the cart very definitely before the horse. What we need to talk about surely is how we get Northern Ireland’s economy going, and then worry about the tax afterwards. This is not the right way to draw jobs; it is not the right way to actually influence economic policy in Northern Ireland. This is the wrong direction of travel, and I don’t actually believe it will be of benefit, because of some of the problems that I outline in this report called Pot of Gold or Fool’s Gold, which I wrote for the TUC in the UK and in Ireland.

Q168 Lady Hermon: What do you see as the right way?

Chair : What is the horse?

Lady Hermon: Yes.

Richard Murphy: The horse is undoubtedly demand. The shortage in our entire economy at the moment is of demand: we simply do not have people who want to buy the goods and services that the private sector is supplying at the moment. Therefore, the right course of action is in fact to stimulate the economy. That is not going to be happening in Europe at the moment, because of all the problems that are taking place. That is not going to be happening in the Republic at the moment, but the UK is in an exceptional position, in that it is not constrained by the eurozone at this point of time. If Gordon Brown gave us anything of a legacy, it was that: that he stopped us going into the euro. So we have a strength which other countries do not have; we have a free-moving exchange rate, we have the opportunity to price ourselves into work, and we can make choices that other economies can’t about stimulating demand. If there was real demand for products and services that were being made both in Northern Ireland and elsewhere, then that would drive the private sector economy in a way that nothing else could. That’s the top line, and that’s where all stimulation for all private sector activity comes from. Nobody makes money by saying, "I want to make a profit". Everybody makes money by saying, "I want to supply goods and services that are of benefit to other people and deliver to them at a surplus".

Q169 Ian Paisley: But you do accept that taxation, and taxation policy, is a stimuli and is an influence?

Richard Murphy: It is, in my opinion, way down the list of factors.

Q170 Ian Paisley: I’m not asking where it is-it is an influence?

Richard Murphy: Look-it has an impact, but the impact is really not very much on the sort of business that Northern Ireland needs right now. Northern Ireland needs new business that is going to generate employment opportunities and long-term growth in the economy. Tax, in my experience of looking at a great many tax havens around the world that use this as what I might call an artificial factor of production-one created by legislation to artificially relocate transactions for relatively short periods of time into a particular jurisdiction-is just that: it’s artificial, very difficult to sustain and doesn’t actually generate wealth in the long-term-

Q171 Ian Paisley: You’re the first accountant I’ve ever heard say you want to pay more tax.

Richard Murphy: Sorry?

Ian Paisley: You’re the first accountant I’ve ever heard of that wants to pay more tax.

Richard Murphy: Nobody says they want to pay more tax, but an awful lot of people actually are quite willing to pay fair tax, and particularly if they get in exchange what they need from the Government.

Q172 Chair : Mr Bunting, would you like to give your overall view on the issue, and then perhaps we can take questions from Members?

Peter Bunting: Well, the view of the Irish Congress of Trade Unions would be that reducing the corporation tax or implementing the corporation tax at 12.5% in a scattergun approach would not impact at all in contributing to an economic dynamic in Northern Ireland. We do believe that, quite rightly, there may well be incentives, but they should be target-based and operate under a range of criteria, such as, for example, research and development, the development of innovative products, growth of exports, or job growth. Then, certainly it would be our view that the difference in the amount that companies would pay in the reduction of corporation tax to 12.5% from what the vast majority of companies, by the way, in Northern Ireland pay, which is 19%, should be allocated based on those criteria and only those criteria, because we have the difficulty that there’s so many other people for whom it would only line their back pocket. There’s no guarantee, as was even identified by Terence Brannigan in his evidence as well, that if you introduced a 12.5% corporation tax in a scattergun, blunderbuss approach, that many, many companies or enterprises-for example, if "Bunting Enterprises" was to benefit from that, there’s no guarantee about whether I would put the difference in my back pocket and increase my profit, and whether I would grow one job, or benefit the economy in Northern Ireland.

Q173 Chair : You’re aware of the situation in Ireland and the Republic of Ireland-obviously, everybody is. We visited the Republic a week ago, and almost every we person we saw was saying, "We are going to defend our right to have 12.5% corporation tax". If it’s so insignificant, why are they so determined? Why are they risking political upheaval actually, not just economic upheaval, if it’s so insignificant?

Peter Bunting: Well, I’m not suggesting that it’s totally insignificant.

Q174 Chair : Well, you didn’t use that word, but that’s the tone of both your arguments.

Peter Bunting: What I’m saying is that public money should be utilised, which is what a reduction in corporation tax is, for the benefit of growing the economy. In relation to-

Q175 Chair : Which economy? The private or the public?

Peter Bunting: The private, and the public, in the long-term. But coming back to the Republic of Ireland, there has been a lot of evidence here about the Celtic Tiger. Let me say one thing: the Celtic Tiger had its origins in 1987, when we all looked into the abyss, and we decided we would enter at that time into the then Taoiseach social partnership, which was one of the principles which it had adapted. It only started taking off, if you watch through the economic growth chart in the Republic of Ireland, from 1994, which was two years after the single European market was introduced. And Peter Sutherland would then advocate, "But why did the companies move in and gravitate there; obviously they want to be there as part of the market?" As well as that, you had a very pro-European society in the Republic of Ireland; you had a bureaucracy, which permeated every section of the European Union, and in Irish terms, brought home the bacon in many senses. So it was very a pro-European society, it could speak English, it was in the European Union, and there was also-none of the evidence produced so far has advocated this fact-a common currency involved, which was difficult in relation to Northern Ireland and the rest of the UK regarding sterling versus the euro.

So in many senses there was that. There was also the fact that there was an education and skill base there, and a stable environment; and why I’m saying about social partnership is because it gave stability to companies coming in in relation to the labour market, where wages were set for three years in advance, so your cost structure was there. So for 21 years they had a threeyear wage moderation as well, linked to a reduction in tax, which was part of the social partnership deal. The Celtic Tiger, by the way, only went from 1994 to about 2001. Corporation tax came in at 2003 at 12.5%; at that stage we were on the downward curve.

Chair : We are time-limited, but the people in Ireland did say that that was not the only issue, but they were adamant that they were going to defend their right to have the 12.5%. However, there are a lot of people trying to get in. Naomi, can I bring you in, and there are lots of other Members who want to come in on this as well.

Q176 Naomi Long: Hi, how are you Peter?

Peter Bunting: Hi Naomi.

Naomi Long: You’ve accepted, in terms of your written evidence, that, at the very least, 12.5% corporation tax is a good marketing tool. If that’s the case, is that not, in itself, a worthwhile reason to consider its introduction in Northern Ireland?

Richard Murphy: One has to question whether a marketing tool that might cost £300 million a year is the right way to create a marketing tool. If you look at the 12.5%, it is in itself an illusion, because the truth is that the tax rate in the Republic is, for most corporations, very much lower than 12.5%, and that is because of the way in which tax is structured in the Republic, and it isn’t anything that Northern Ireland could compare with. I’ve outlined quite a number of reasons in this report for that, but there are some simple explanations for that. The Republic has no controlled foreign company rules. Now, that means that dividends can flow freely from tax havens that are owned by Republic of Ireland companies in a way that would not, I suspect, be possible in Northern Ireland. I really can’t see that that’s going to be replicated in Northern Ireland.

There is an opportunity to pool dividends in the Republic, which is not available in UK law, and it’s unlikely to be replicated. There is very lax-apparently very lax and almost absent in some cases-transfer pricing enforcement in the Republic. So, for example, the recent case which has been highlighted with Google-I worked on this case with Bloomberg-where their tax rate outside the USA is 2.4% and 92% of their sales take place through the Republic: that’s not by chance. That’s because the Republic is incredibly lax about the enforcement of transfer pricing rules.

So we have to look at a situation where basically the Republic has forgone its corporate tax base. A rate of 12.5% is simply totemic of the idea that we’re not going to tax you if you locate a business here, and it has, as a result, become not a place where jobs have come in any significant quantity, but where profits have been allowed to flow. Now, if you look at the Azores agreement, which I’m sure we will, you will discover that one of the things that the Azores agreement does not allow, for a regional corporation tax policy, is the location of intra-group services enjoying that low tax rate. The vast majority of the profits that are flowing through Ireland are exactly that: intragroup services profits. So, for all sorts of reasons, what looks like a marketing tool for the Republic would be a disastrous tool for the North, and, in fact, wouldn't deliver the certainty that businesses claim that they want. The EU Code of Conduct would simply block that in most cases in Northern Ireland.

Chair : Well, that’s an area we do want to look at, but it’s a separate issue.

Q177 Naomi Long: There is another issue, I suppose, in terms of foreign direct investment. In the evidence that we’ve heard, people are saying it is very difficult for Northern Ireland to compete-not on a skills basis, because actually we can compete on that basis with the Republic of Ireland-but we’re struggling to compete in terms of corporation tax. It’s off-putting for companies who are looking at foreign direct investment in Northern Ireland, because our tax rate is higher. You’ve suggested, when it comes to FDI, that obviously a lot of the Republic of Ireland FDI has been in financial services, and you’ve said that’s a bad thing. Apart from all your eggs being in one basket, as has been acknowledged, what is the problem with attracting a lot of financial services?

Richard Murphy: I have to say that seems almost like an odd question on a day when we’re talking about the Irish economy having to be bailed out because all its banks have failed.

Q178 Naomi Long: It’s being bailed out because of poor regulation, not because it attracted a lot of financial services.

Richard Murphy: Let’s be honest, it is not just tax that attracts in financial services. They were attracted in part because there was incredibly lax financial regulation, it is true; you could set up a hedge fund in Ireland until a couple of years ago by filing the papers at 3 in the afternoon and it would be open for business at 9 the following morning; there was no effective regulation. Again, if you don’t compete with that lax regulation, which is what was offered by the Republic, then you’re not going to get financial services in Northern Ireland. Again, the point has to be made, the Azores agreement says, "You may not use this to attract financial services into a location". In other words, if that is the basis of the Irish competitive position to attracting financial services, it is one that Northern Ireland couldn’t replicate, because Europe has said, "You can’t do that". Financial services and intra-group transactions are the two things that are banned from benefiting from this low rate of tax, even if the Azores agreement could be met. So it’s a pretty artificial argument with regard to Northern Ireland.

The other issue is that, frankly, financial services always cluster. There is a theory of economics that shows that the benefit always arises if you can put similar businesses next to each other. It’s why the best place to open a coffee shop is next to a Starbucks; curiously, you’ll get more business than by opening some way away. A financial services business needs to be next to another financial services business; that’s why the City of London works. That is why, to some degree, the Irish financial services centre has worked-because there’s a clustering effect. The prospect of creating a cluster of financial services businesses in Northern Ireland, when there is already the City of London in the UK, is remote in the extreme, apart from the fact the Azores Agreement wouldn’t allow it.

Chair : I don’t think we want to concentrate too much just on financial services; there are a lot of other businesses that we’re talking about. Can I bring David in first? He’s been queuing up for ages.

Q179 David Simpson: In listening to the discussion thus far, and taking what you two gentlemen have said, I take it that the economic group that have come to give evidence to the Committee-you’ve probably read the report: the CBI, the Federation of Small Businesses, Invest Northern Ireland, and the Minister of DETI-have got this wrong and they haven’t done their homework as regards corporation tax, because every one of those groups advocated that it was a stimuli to create more jobs within Northern Ireland. Are you saying that in fact these organisations have got it wrong?

Peter Bunting: What I’m saying to you David, very simply, is I’m not advocating that a corporation tax reduction in a scattergun and blunderbuss approach is the method of stimulating the economy in Northern Ireland.

Q180 Chair : What do you mean by scattergun and blunderbuss?

Peter Bunting: A blanket 12.5%-

Chair : Well that’s what you’ve got to do. If we refer back to Europe, Europe ruled against Ireland for doing it the opposite way, so which way do you want to have it?

Peter Bunting: We can invest in the Selective Finance Assistance , which we’re doing currently in Invest Northern Ireland , and utili se that finance as a criterion-selected way of targeting those who wish to inv est in research and development and develop innovative products . R emember one thing about Northern Ireland - I go back to Sir Richard Barnett’s independent economic review of how Invest Northern Ireland did its business. I was there when he was presenting this report, and he made one fantastic comment: "We competed with Bangalore, and we lost". So on low cost, low wages, we lost out, because what happened is that that was very susceptible to moving somewhere else.

I agree with the question, how do we stimulate the economy in Northern Ireland? I’m all for it, but let’s do it in a targeted way so that we’re not just lining the people’s pockets, but, in introducing whatever we introduce, actually growing the economy in Northern Ireland. That’s my proposition, and my fault line with what’s been said to date. By the way, leaving the evidence, nobody has stated specifically how much it’s going to cost and how many jobs they will create; that’s the dilemma we all have. Whereas I’m suggesting, if we do it in such a way that we target it where we can prove that it’s going to be invested in research and development, which has some degree of sustainability and certainty associated with it-if it’s going to be about developing innovative products that are going to contribute to the Northern Ireland economy, grow the exports and grow jobs-then at least we’re getting some bang for our buck.

David Simpson: Okay, right.

Peter Bunting: That’s where I’m coming from; it’s not about suggestin g that we shouldn’t spend money.

Q181 David Simpson: I accept your point about our not knowing how much it’s going to cost, and I think the Finance Minister, when he was here, made that point. It’ll be somewhere towards the end of this year before we really know how much it’s going to cost-the lower you go the more it’s going to cost-and what payback time there’s going to be on that. We don’t know about jobs either, because there are different figures on jobs. But the gentleman who was here from Invest Northern Ireland made it very clear that that was the one thing that would help them to create a lot more jobs in Northern Ireland-the one stimuli that would create that-and that was one thing that was holding them back.

Peter Bunting: Well, I don’t think it’s a single issue, and I don’t think it’s the magic bullet, and we all agree with that. There is another point that we have to identify. You posed a number of questions, when other witnesses were here, about people’s concerns about movement from companies from GB to Northern Ireland. The interesting thing about that is that companies didn’t move from GB to the Republic of Ireland. So if the 12.5% is such a wonderful stimulus, why did companies from GB not move to the Republic of Ireland, or, indeed, companies from Northern Ireland not move to Republic of Ireland? You’ve got to answer that question. The only movement of companies on the island of Ireland in the last two years has been CocaCola from the Republic to Northern Ireland, with the consequent loss of 270 jobs in the Republic-it transferred its whole operation, bottling and manufacturing, to Northern Ireland-and Aer Lingus from Shannon to the International Airport in Belfast. So the only movement we’ve had, by the way, from this wonderful paradise of 12.5% corporation tax, was to Northern Ireland. Why? Those are the questions some people have to ask.

Chair : Let’s carry on, we’ve still got a number of people and we’re still on early questions. Ian.

Q182 Ian Paisley: Coca-Cola were already in Northern Ireland.

Peter Bunting: Yes.

Q183 Ian Paisley: There was a contraction in business, so some people lose out. During the same period there was a contraction in business for Gallaher, where jobs in Manchester shrunk and jobs in Ballymena increased; that’s life. It’s unfortunate, but that’s life whenever businesses are put under pressure. I’d say the reasons why Aer Lingus moved was because of trade union activity in the Republic of Ireland, which forced the company to look elsewhere and base themselves in a regime where trade unions were there, but were practising in a good fashion as opposed to a restrictive fashion. I think there are some issues that need to be put on the record. I want to go back to the comments you made, Richard, earlier on. I’m not saying you’re opposed to financial services coming to Northern Ireland, but you indicated that, because there’s a cluster of them in the City of London and a cluster in Dublin, the idea that you should put them in Belfast is really silly, and we shouldn’t be targeting financial services because that might be a bad thing. I take it, then, in principle, you are opposed to the New York Stock Exchange locating 400 financial services jobs in Northern Ireland?

Richard Murphy: No, of course I’m not opposed to that. You actually asked about the creation of financial services as a hub inside Northern Ireland, and my point was that that actually isn’t deliverable under the Azores agreement, and if you’re going to try and actually be honest and represent what is deliverable in an economy, the last thing you want to do is mislead people. I’ll give you a very small comparison. The ruling from Europe that required Ireland to produce the 12.5% led in the Crown dependencies-Jersey, Guernsey and the Isle of Man, whose tax affairs I know intimately-to what they call the zero-ten tax rate. Well, this Friday, those are going to be reviewed by Europe, and I have very strong reasons for believing that they have been misleading everyone that they have for the last eight years got this right, and they are going to be told by Europe that actually their tax systems are illegal. Now, if you create a structure that you know might involve doubt, risk, and uncertainty in the future with regard to its EU acceptability, and try to market anywhere on that basis, you’re going to get the most enormous backlash in due course. If the Azores agreement says financial services cannot be subject to this, but you then set out to attract financial services into Northern Ireland with a low tax rate, and it then goes wrong, the flood of jobs outwards is going to be disastrous; alternatively, people are simply going to look through this and say, "Too much risk, we won’t come". So I’m just saying it’s the wrong-

Q184 Ian Paisley: Are you for key financial services posts being created and generated in Northern Ireland?

Richard Murphy: But those aren’t-

Q185 Ian Paisley: Invest Northern Ireland has a strategy; one is to attract more tourism jobs, and another key strategy is to attract financial services and the makers of financial services-

Richard Murphy: But those are, if-

Q186 Ian Paisley: Are you saying you’re opposed to that?

Richard Murphy: No, not at all-

Ian Paisley: You’re for it then?

Richard Murphy: But what you’re talking about there is behind-the-scenes processing within financial services. That is not the same as bringing in, for example, banks that are undertaking international transactions of the sort located in the Irish financial services centre-where, it is important to note, most of the FDI since 2003 has gone in the Republic; and the average number of jobs, as Jim Stewart at Trinity Dublin has shown, for each company in the Irish financial services is actually zero, extraordinarily.

Ian Paisley: Well, 400 jobs in the New York Stock Exchange will not be zero-

Richard Murphy: Yes, but that’s a processing job; that’s not the same as a financial services job.

Ian Paisley: But I’ll tell you what it does. It creates PAYE.

Chair : I think we’re going round in circles.

Q187 Ian Paisley: It creates PAYE into the Exchequer, and it creates, importantly, private sector employment.

Richard Murphy: But I don’t think this will qualify as financial services jobs, if I can be honest.

Q188 Chair : If the Westminster Government gave the Assembly the ability to reduce corporation tax, and it reduced it to 12.5%, and that attracted financial services companies; that’s not breaking any rules at all.

Richard Murphy: Well, it appears to be breaking the rules of the Azores agreement, which says you may not attract businesses by using a regional tax rate. It says you may not.

Chair : So Europe would step in and prevent Zurich, for example, who are thinking about some relocation, from going to Northern Ireland?

Richard Murphy: They would not stop a processing centre in Northern Ireland only by that.

Q189 Chair : But would they prevent that?

Richard Murphy: But they would stop it on two bases. One is if it’s a pure financial services company-in other words, undertaking a regulated financial activity. It appears that that is going to be outlawed by Europe under this, and remember, we’ve only got the Azores example to go on. The second one is-

Chair : Well, exactly; that’s a good point.

Richard Murphy: And it is only the Azores example to go on, but it does create risk and when you are creating risk, business will run away from it. And the second thing it says is, you mustn’t do intra-group transactions on this basis.

Q190 Lady Hermon: Just for clarification, you’ve repeated the phrase, "that Europe will say", or, "Europe will tell us in a particular ruling". Do you mean the European Court of Justice in Luxembourg is going to rule in relation to the tax regime that has been operating in the Isle of Man, and Jersey and Guernsey? Is it a European Court of Justice ruling that will bind the UK Government, or is it the European Commission? Who is going to clarify this?

Richard Murphy: It is the EU Code of Conduct Group, who report to ECOFIN-the Economic and Finance Ministers-and they impose it on the member states and expect them to enforce it inside their jurisdictions. The UK will be required to get Guernsey, Jersey and the Isle of Man to change their tax laws as a consequence.

Q191 Lady Hermon: Okay. So it’s not of the same status as the Azores ruling?

Richard Murphy: No. It’s a different body altogether in that case, yes.

Lady Hermon: Thank you.

Joe Benton : Yes. The questions that I had have become somewhat redundant in view of the recent exchanges. I was going to ask, in view of the ICTU report, just how strong your opposition was to the equalisation of the corporation tax.

Chair : I think we’ve got some measure of that.

Q192 Joe Benton : Obviously, your fierce opposition is not unnoticed. Can I put this question to you: are there any circumstances or combination of other incentives that, if put to you, would somehow weaken your opposition to-or what seemed to be your total opposition to-equalisation of the corporation tax? You referred to a point that I absolutely take: that it’s not just the magic corporation tax, that there are other factors, and that that’s all the evidence we’ve had so far. If I may say so, your opposition to corporation tax seems so vehement that it appears to me to be excluding it-not now, not ever. Combined with other incentives, can you envisage a position where a reduction in or equalisation of the corporation tax would be beneficial?

Peter Bunting: For me, if it was for a manufacturing company who were going to manufacture jobs and create stuff in Northern Ireland, I’ve no problem with it. But if it was for "Bunting Enterprises", a banker or a utility company, and it was to increase more profits, and they’re going to increase energy prices, sponsored by my own money-taxpayers’ money, anyway-why would I? I think we’re all for incentives to grow the private sector, which Northern Ireland is crying out for. It’s how we get to that particular stage, rather than describing it as corporation tax, because then what happens is the scattergun approach. People who will not contribute one iota to the Northern Ireland economy will make additional profits, and that’s my difficulty. Other than that-

Q193 Chair : That’s quite an extraordinary claim.

Peter Bunting: Do you understand the point I’m making?

Ian Paisley: No. Not really.

Chair : I think it’s an extraordinary claim to make-that a company going in creating profits doesn’t help the economy of Northern Ireland. That’s an extraordinary claim.

Peter Bunting: No I’m not talking about a company making profits; I’m saying that the owner of the company makes the profit. There’s no guarantee. If I’m putting public money into a company, I would like the criterion to be that the end result, the outcome of that money, is creating jobs, is growing the economy, as opposed to growing an individual’s, or shareholder’s, profits. There’s a difference.

Chair : Okay. Can I take Mel, who’s been waiting very patiently?

Joe Benton : Sorry, Chair, but I would be interested in Mr Murphy’s comment if you wouldn’t mind?

Q194 Chair : Go on.

Richard Murphy: I do think that there are obvious things that could be done. As I said when I introduced myself, I have created a number of real businesses; I am very aware of the sheer thrill of creating jobs; it is one of the most exciting things that anyone can do, and I’ve done it. So do not get me wrong about this; I would love to see more jobs in Northern Ireland, but if you’re going to do it, the best way by far is not to reduce tax. The best way by far is to look at the businesses that are already in Northern Ireland and work out how they can be encouraged to grow. This is a policy about bringing in transitory businesses-and I’m afraid that’s one of the characteristics of this sort of policy-who will take their profit out again the moment that it’s arrived: they will use it as a conduit. Instead, you want to have, for example, an extension of loan guarantee schemes to make sure that small businesses can access capital or mezzanine financing; new mechanisms to provide the capital that they need to grow the existing businesses in Northern Ireland in order to exploit the opportunities that are already there-the people who are going to stay in the long term because they’re committed to Northern Ireland. If there’s to be a way to spend money, that’s how to do it.

There will be major distortions as well in the Northern Ireland economy if you actually introduce a 12.5% corporation tax, because it will create significant distortions with regard to the income tax system. As we saw when we had a 10% corporation tax rate in the UK for a period of time, which was not one of Gordon Brown’s finest moments, perhaps, we saw a massive number of people shifting from being self-employed into running limited companies. It distorted activity; it created artificial contracting. All of these activities could take place. They’re not real growth; they’re actually deliberate undermining of the revenue stream of Northern Ireland. If that comes out of the block grant, that is a very unusual way to use funding, and that would worry me.

Q195 Mel Stride: Thank you both for coming in. It’s been a very lively session, if nothing else. Let me start with something we can, I think, agree on, which is in your report, as Naomi has mentioned. You say that lower corporation tax is at least a useful marketing tool, and that it is no silver bullet: it doesn’t in and of itself generate all this inward investment, and so on, which is not what I think the Committee has been hearing from others. Yet it is the case, is it not, that the Republic of Ireland has drawn in about two and a half times the average EU level of inward investment of FDI whilst it’s had these low tax rates? So my first question to you would be, if it hadn’t been operating under a tax regime of 12.5%, but, say, 28%, do you think that would have had a significant impact on the level of FDI into the Republic of Ireland? My second question relates to a comment made by Mr Bunting earlier about seeking to grow both the private and the public sector in Northern Ireland. One of the things that the Government are seeking to do is to rebalance the economy in Northern Ireland-where 77%, as I understand it, of the Northern Ireland economy is accounted for by the public sector-to grow the private sector. Do you think that that rebalancing policy-this is my second question-is the correct policy, or should we be seeking to stay roughly as we are, or indeed growing the public sector further?

Peter Bunting: Can I answer the second point first?

Chair : By all means.

Peter Bunting: The reason why we have a large public sector in Northern Ireland is because we are a very small private sector. It’s not the size of the public sector; it’s actually the size of the private sector. If you look at it in comparison with the region of, I think, the north-east of England, the public sector in Northern Ireland is two percentage points higher. That’s where it’s at. The difficulty that we have in Northern Ireland is that we have a very small private sector, and the reason for that is very simple. Unlike the Republic of Ireland and other places, when you talk about stability-certainly, we had 40 years of mayhem and conflict, ridiculous stuff, which held us back from developing as an economy. So we lost out for 40 years, and we’re playing catch up. So that’s the reason why that’s there; there’s no other wonderful reason. Plus the fact that in one sense, of course, we were an economy dependent on heavy engineering and we’ve lost that and the textiles; that all went over the last 20 years, during this mayhem. So those are the reasons why we’re an undeveloped economy and a bit dependent on the public sector.

Those are the reasons why 68% of GDP comes from the public sector. We should also realise, as well, that Northern Ireland, in purchasing goods and services, purchases from the private sector in Northern Ireland £3.28 billion-worth every year. So in that sense there’s a virtuous circle of purchasing goods and services. With relation to the Republic of Ireland, there’s a report from the IDA of 2000 that is prior-I repeat, prior-to 2003, when the 12.5% corporation tax came in. It’s a publication that recognises that tax cuts did not create the Celtic Tiger, and I can give it to your Secretariat for evidence, as well. So, this business of "the tax cuts made the Celtic Tiger" is absolute nonsense. If you look at the tax rate, corporation tax at this stage, in 2000, was 20%. The statistics are there about employment, and which sectors the companies were from: they were from the UK, Germany, Asia-Pacific, the rest of Europe, the rest of World and the US. Some 524 were in situ in Republic of Ireland prior to the 12.5% corporation tax being introduced.

Q196 Mel Stride: But my question is, on the public sector, do you agree with the Government’s approach, which is that we believe there is a need to rebalance the economy and that the public sector should take a smaller proportion of GDP in Northern Ireland?

Peter Bunting: Well, I would only say that in the context of growing the private sector. It should be done in a parallel movement. To do it the way things have been done currently by the Government will drive Northern Ireland into a depression. Northern Ireland cannot sustain the loss of 30,000 jobs and a very underdeveloped economy. One of the other targets we need to address is stimulating our skills base, which Naomi was talking about, and tackling the huge number of economically inactive people. We need to tackle that with the skills base.

Q197 Mel Stride: Will you not accept, in the case of stimulation, if you take the Republic, if you include all the bad debts associated with the banking system, we’re up to a deficit of effectively north of 30%, compared to our 11.4% in the UK? There’s very limited scope for pumping these economies up any further.

Peter Bunting: I’m not so sure-

Mel Stride: If you look at public sector jobs.

Peter Bunting: Well, if you excluded the collapse of the banking sector in the Republic of Ireland-it’s a reasonably sound economy, by the way, despite the recession, in the sense that our exports are still growing by 6% this year, and there’s still an inflow of jobs into companies who are manufacturing, by an extra 6,000. You were looking for that information, and I brought that as well, Mr Chairman. I know somebody promised it to you and I brought it. I am talking about information on the growth of jobs this year in the Republic, from the IDA; I have it with me and I’ll leave it with your secretariat.

Q198 Lady Hermon: Can I just clarify that you did say that you were fearful of a depression; it wasn’t recession that you said-

Peter Bunting: No I said a depression. We’re already in recession in Northern Ireland.

L ady Hermon: Yes.

Peter Bunting: To lose 30,000 jobs in the public sector-I think the Finance Minister quoted 28,000; our projections are around 30,000-and then the consequent 16,000 in the private sector-

Q199 Chair : What’s that based on, because we don’t know the hit figure-it’s referred to as the hit-if corporation tax were reduced? We don’t know that figure, so how can you know this figure?

Peter Bunting: Well, the figure is produced by the Minister of Finance and Scottish parliamentary model, which we extrapolated and utilised across Northern Ireland: that for every £1,000 spent that is lost, you create X amount of job losses in the public sector. If you look at taking 30,000 disposable incomes out of Northern Ireland-

Chair : I understand that point-

Peter Bunting: About 16,000 jobs-

Chair : I don’t know how you get to 30,000 if you don’t know the original figure.

Peter Bunting: Sorry, the original figure is £4 billion over four years-

Chair : No, no. Your argument is that if corporation tax was reduced-

Peter Bunting: Sorry, no-I’m talking about the current expenditure-

Chair : That’s a completely separate issue.

Peter Bunting: Sorry; that’s what I’m talking about. I moved into that in a broad sense.

Chair : That’s a completely separate issue. Can I bring Naomi in?

Q200 Naomi Long: You’ve mentioned, for example, the potential job losses and the impact it would have on the economy if you took a reduced rate of corporation tax. Obviously, at the initial phase what would happen is that your tax take would be reduced. However, if you grow profits and companies, and if you attract more profitable companies to Northern Ireland, potentially, even with a lower rate of tax, you could end up actually having more tax revenue collected. So is it fair to say that you would have to look at the projections in terms of what it could do regarding growth, in order to measure what impact it would have? It would not be fair to take the first year and assume that that is a steady state that you would be in for ever and a day. You would have to take the first year, then you would have to look at projected growth, in terms of profits-you can dispute whether it’s growth in terms of other things. You’d have to look at growth in terms of profits and then work out whether or not the profits that would grow in companies, and the potential for companies to come and create profit, would actually eventually lead to more money coming into the economy.

Richard Murphy: The problem with that analysis is that you’re assuming that you’re dealing with what is a closed economy; in other words, the profits that you are going to generate in Northern Ireland are going to stay in Northern Ireland. The fact is that the model from the Republic, the model from most small states that have tried a low tax path, is that the profits flow-

Naomi Long: No. You’ll only assume they’ll be taxed in Northern Ireland ; you’ll only assum e they’ll be paying tax. I f they go out of Northern Ireland , I’ve said that it wouldn’t necessarily create jobs and other things, but it would create profit at the point of taxation, so it would be taxed in Northern Ireland .

R ichard Murphy: Let me, however, look at that in the context of other data. First of all, I’ve already explained to you that actually in the Republic, although the notional tax rate is 12.5%, for very many corporations it is near 0%-very near for many of them-and they quite openly say that, because it is so easy to transfer price through there, the treatment of dividends is so lax, and there is the control of foreign company rules and so on, which I’ve already mentioned. But we also have to look at the UK situation. I have been monitoring the tax gap of large corporations in the UK for a number of years on behalf of the TUC. The headline rate of corporation tax in the UK was, of course, for quite a number of years 30%, and, from 2000 to 2006, the effective tax rate of the largest companies in the UK fell from 28% to 22%. The effective rate of corporation tax at the moment that I can work out-this is a little complex because of the impact of the financial crisis-is 21% in the UK. That’s 7% less than the headline rate.

Well, if we’re talking about that being replicated in Northern Ireland with the 12.5% rate, that comes down to an effective tax rate of little over 5%. Now, 5% of how ever big the number of profit is, is very little contribution to make up the losses that will arise. I’m not disputing that, if a criterion is attached to earning these profits of having some labour in Northern Ireland, creating some employment-although that is exceptionally difficult to do under EU Code of Conduct, where there is no basis for that inside the rest of Europe, and they require consistency for such models to be acceptable-yes, people would put a few jobs in. But 5% corporation tax, even if it flows straight out again, produces a remarkably small input into the Northern Ireland economy, and that worries me. I don’t see the feedback for this enormous investment that is being asked of the people of Northern Ireland generating a return to compensate them for the loss they’re going to suffer from the block grant.

Oliver Colvile: Thank you very much for the most riveting afternoon I think I’ve had for a very long time. I’m being absolutely serious; I have found this very interesting. I have to say that the structure of what we were going to ask you today has, I suspect, had a coach and horses driven through the middle of it, so thank you for dealing with that.

Chair : You can blame the Chairman for that.

Q201 Oliver Colvile: I have to say I found part of this actually quite confusing and challenging to work out. I have similar problems in my constituency in Plymouth, where there is exactly the same kind of problem with dependency upon the public sector. That is obviously going to be hit quite badly as the cuts in public expenditure take place and a reduction happens, and we therefore need to find ways of employing people and making sure that they contribute and that we have a stimulating potential economy. After I finished here last Thursday, I drove down to Plymouth and I watched on Channel 4 a very interesting programme about what had been taking place in Hong Kong, which doesn’t have all the regulations and some of the problems which the European Union imposes upon us. I just want to understand: if you were the person who was going to be responsible for trying to make sure that the Northern Irish economy could grow and work, how would you go about doing that? Would you take into account what has actually happened in Hong Kong, where, as I understand it, they decided to get rid of VAT and they actually reduced taxation in quite a big way, and saw a significant amount of growth, which then took place? Is that a silly way of behaving, or do you think that that is actually quite attractive, because my personal view is, the lower you can make taxes, the greater the encouragement to get people to create businesses and industry and growth?

Richard Murphy: Can I leave you a copy of that afterwards?

Oliver Colvile: Please do.

Richard Murphy: It is my book on tax havens, and it explains why these places sometimes work. I haven’t got lots of them-

David Simpson:Free sample?

Richard Murphy: No tax on this book-it’s free. I felt that Michael Durkin, who made that programme, made an extremely poor comparison between Hong Kong and the UK, because you have to look at what happened. First of all, when Hong Kong introduced the tax system that it now has, it was imposed on it in a nondemocratic way; nobody voted for it, it was imposed by a colonial Government; that happened to be us. I am not sure you would get such a change through any democratic, elected Government in Northern Ireland at the moment. Secondly, you have to look at the historic situation of Hong Kong. It’s tiny, and next to an enormous state that was looking for an incredibly long period of time to send goods into the western economy and appears not to be doing so, and that therefore had one conduit for that purpose, which was Hong Kong, substantially.

As a result, Hong Kong could tax two rents exceptionally highly; one was the fact that profits in Hong Kong could be much higher than they would otherwise have been, because of this exceptional circumstance-that everything had to flow through Hong Kong. Now, Northern Ireland hasn’t got that advantage; nobody has to send goods through Northern Ireland to get to anywhere, unfortunately, and therefore it can’t extract a rent in the same way that Hong Kong could on goods flowing out of China. So it hasn’t got that reason for a profit flow, which Hong Kong could exploit.

Secondly, because Hong Kong is tiny-let’s be honest, it’s had to create a lot of its land mass to meet demand-it can charge extraordinary rates of tax on land, which has meant it can have very low rates of tax on profit, on labour, or on anything else. Therefore, its tax base is these rents; it is not particularly labour, or sales, or anything else. Therefore its economic situation, compared with Northern Ireland, is absolutely incomparable. So to say it’s a model that can be transferred into the UK-again, nobody has to send something into the UK to send it onwards, let alone into Northern Ireland, which is on an extremity, not a point of flow-is an impossible comparison to make. In that sense his programme was deeply misleading.

Q202 Chair : That is one aspect to it, but that was only one part of that programme. Apologies for those who didn’t see it; it was called "Britain’s Trillion Pound Nightmare", or something like that. I have to say, in the best part of 40 years watching programmes like that, it was the best programme I’ve ever seen. It didn’t just focus on Hong Kong; there was a bigger issue: public spending and private sector growth. Do you agree with the basic thrust of the programme in that respect, because that was the main aspect of it?

Richard Murphy: Well, let’s be clear: what he was proposing was something which is from beyond the current normal political spectrum in the UK. It is a very strongly libertarian, strongly free market economy, of the sort which perhaps the Tea Party movement in the US is supporting, but which has not got, at the moment, very strong support inside the UK. He was talking, for example, about eliminating most benefits, and while I think that most people in this country would have problems with the elimination of most benefits, halving state spending in the UK would be a fundamental transformation of our society. Would it generate extra growth? Personally ,I don’t believe it would.

Q203 Chair : You don’t?

Richard Murphy: I actually think that our economy, unlike the economies of places like Hong Kong, which are very fundamentally different, because people can come and go as they will-the same is also true of many of the small tax havens which have tiny populations in comparison to the financial flows through them. When you have a static population, you need to support that population with real jobs, real benefits, real long-term futures, real pensions and so on, and that is the state sector. I see the two working symbiotically together; I call it the cappuccino economy-strong coffee on the bottom, white coffee on the top.

Chair : Jack.

Jack Lopresti: Is it my go?

Chair : Although we have been all over the place, we’ve covered most of the issues in a sort of piecemeal manner, but go on.

Q204 Jack Lopresti: Well, thank you for coming, and I agree with Oliver that it has been very interesting. What steps do you think are required for Northern Ireland to have its own corporation tax rate and to comply with the Azores judgement? Do you think these steps provide any insurmountable problems? Right, off you go.

Richard Murphy: Peter seems to be indicating that I should answer this one. The first requirement would of course be that the Northern Ireland Government be given the power to change their tax rate, and clearly they haven’t got that at the moment. There is, in my opinion-having looked at a lot of these issues over some period of time, perhaps more than most people, of how Europe works on giving these sorts of concessions-an extremely strong chance that the fact that the UK would have to simply give permission in the first place for Northern Ireland to change the tax rate would be seen as a series of connected events that mean that Northern Ireland was not taking this decision independently, which is the requirement of the Azores decision. This is entirely different, for example, from the Gibraltar decision that we’re expecting very shortly, where Gibraltar has had what is in effect an independent administration for a very long time, and where we can’t say that the UK has been setting its tax policy for years past, because it hasn’t been. Whereas this would be: one day, we give it the power to change its tax rate, and then mysteriously, a short time later the Assembly decides to change the tax rate. The coincidence may be too strong for Europe to accept; I think there’s a real chance of challenge as a result.

Secondly, I think we could not have a situation where it would just be one HM Revenue and Customs covering UK and Northern Ireland, administering two entirely separate tax systems, because we would have substantial transfer pricing issues going on. With the greatest of respect to many members of my own profession, I’m a chartered accountant, the opportunity to shift profits out of Great Britain into Northern Ireland-we could at this point separate the two in that way-would be too great to resist. They would be looking for every opportunity to do so. You would need to have two tax authorities who were basically able to negotiate with each other at arm’s length. You would therefore need to have transfer pricing arrangements in place for every single product, shipped, for example, from Sainsbury’s in the UK to Sainsbury’s in Northern Ireland, or Tesco, or whoever it was. Baked beans would suddenly become the subject of transfer pricing disputes across the border with Northern Ireland, because those sold in Northern Ireland would be subject to 12.5% tax rates, and those in the UK to 24 to 28% tax rates.

The administrative cost involved in that would be colossal. Look at it the other way round: if you have a Northern Ireland-owned business which has a sales office in the UK, it would then have exactly the same problem in reverse. It would have to be preparing transfer pricing documentation to prove this. It would be an impediment to trade across the Irish Sea between Great Britain and Northern Ireland, there is absolutely no doubt about that. You also have to have a political willingness in this place to devolve taxraising powers to Northern Ireland, and probably with regard not just to corporation tax but to other taxes as well.

Q205 Chair : That has happened in the sense of Scotland?

Richard Murphy: It has happened in the sense of Scotland, and so far, let’s be honest, they haven’t used it, although the Calman procedure is there and the processes are being considered. I don’t sense-and I was in Edinburgh last week talking to some MSPs on this issue-that there’s a strong appetite for taking that risk, but maybe I’m wrong.

Ian Paisley: It’s a fascinating argument, a really fascinating argument. What I can’t reconcile is that we had the chap from Invest Northern Ireland two weeks ago, Jeremy Fitch, who is not a radical Thatcherite, by any means, in terms of his approach-

Chair : What’s wrong with that?

Q206 Ian Paisley: I’m tailoring my comments for the person answering the questions. Is it as obvious as that? I’m sorry.

Jeremy made the point - I hope I’m quoting him accurately -that when he goes round the boardrooms of Los Angeles , looking for jobs and knocking on doors, and after the investment conference that they had with Secretary of State Hil l ary Clinton, the breakout session they had was about one thing and one thing only: taxation. He says that that is the hook and unfortunately, our competitors can go in and trump us on taxation.

Richard Murphy: Do you honestly think-perhaps I shouldn’t ask you a question, but I’m sort of going to ask myself a rhetorical question now. If, in a few weeks’ time somebody is trying to decide whether they want to go for the stability that Northern Ireland, backed by the UK, can offer, or the instability that the Republic can offer with regard to a population who are going to be seeing massive burdens placed upon them and significant incentives to leave Ireland because of the future tax burdens they’re going to face, and where the young are going to want to be leaving-I am astonished at the number of articles there are now in the papers saying "It’s time to leave".

Q207 Ian Paisley: You’re an economist: you know that people don’t look at it in isolation, and I wouldn’t look at it, and a business man wouldn’t look at it, in isolation. He’ll look at the youth workforce, at the employment skills, at a whole lot of bases. But if the other arrow in the quiver just also happens to be, "By the way it’s the lowest tax regime in Europe and it also has all those component parts-being part of the UK and everything else", it’s a pretty darn compelling argument.

Richard Murphy: I’m not arguing that it isn’t a good marketing tool; I’ve acknowledged that. The point is that when you look behind that marketing tool it’s rather like the big notice on the front of the shop saying "half price sale", then in the small print it says "on selected items only for this afternoon". Now, the point is that when you actually look behind what Northern Ireland could offer in comparison with what the Republic can offer, because Northern Ireland is going to remain for this purpose a region of the UK, it has no chance of replicating the current tax offering that the Republic has. So, yes, it would open more doors, but when somebody comes down and does the detailed comparison of taxes, they’re going to say, "The Republic is still going to win hands down". I say it in here: there is no chance of Northern Ireland beating the Republic on tax; it isn’t going to be possible, so it’s got to be something else.

Q208 Lady Hermon: Thank you. You made reference a short time ago to having been talking-I think it was last week-to some SMPs. Could I just ask, as a matter of curiosity, are you invited at all to brief the Finance Minister or the DETI Minister in the Assembly, because ultimately this will be a decision for the Assembly to make? I say that because this time last week we were taking evidence from both the Finance Minister and the very able Minister from DETI in Northern Ireland. When we asked whether there would be duplication of those Customs and Revenue collection officers they said no, they didn’t want any duplication, but we’ve heard quite clearly evidence to the contrary this afternoon-that in fact, that would be an obligation on Northern Ireland. Are you invited to brief Assembly Members?

Richard Murphy: I’m not at the moment, but I’d be delighted to brief them if they wish to have me go. I read their evidence from last week and I thought that Mr Wilson’s evidence was first-rate; I was impressed by it. I had to go and read his background. I was impressed. I’m not as familiar with his background as clearly some of you are, and I was very impressed by what he had to say.

Peter Bunting: I was being criticised in The Irish Times yesterday.

Chair : Gavin, this may well be the last question, we will be voting in a few minutes.

Q209 Gavin Williamson: I do very much apologise because I’ve missed some of the evidence session, and I hope this doesn’t go over what’s already been discussed. The Republic of Ireland has developed as an economy massively over the last 20 years. If you go back four years ago, there was talk about everyone in Ireland being so much wealthier than virtually everyone in Germany. How much do you think is that the true economy, as against just the fact that profits are maybe being shipped in? We all know how money can be shifted around the global economy. How much of that wealth was actually the true wealth that’s really been benefiting the Irish economy, and how much of that true wealth is down to corporation tax reduced rates?

Richard Murphy: I can give you a simple answer to this: look at the difference between GDP growth and gross national product growth and they’re fundamentally different. GDP includes profit flow, and GNP will exclude profit flows, and I suspect you’ll find that they’re substantially different. The people in the Republic do not feel nearly as wealthy as their GDP figures might suggest they are, and that is absolutely consistently true of all the tax havens that I have studied around the world, where you look at very high apparent GDPs: the Cayman Islands, Jersey, Guernsey and so on. They are vastly higher than the UK, and yet the local population do not see the benefit. This is profit flow; this is not local earnings, and they are fundamentally different.

Peter Bunting: Just to finally answer that, in the previous six years back from 2008, both the Bank of Ireland and the Allied Irish Bank paid their shareholders a dividend of 40% of the profits; we now realise that it was spurious profits. So that’s the answer.

Gavin Williamson: That is very useful.

Chair : Okay; that’s probably a good place to finish. It’s been a very lively debate, and I think very useful; a very good evidence session. I thank you very much for joining us. I think there’s going to be a vote again so we will suspend until 4.15.

Sitting suspended for a Division in the House.

On resuming-


Examination of Witnesses

Witnesses:  Dr Esmond Birnie, Chief Economist, PwC Northern Ireland, gave evidence.

Chair : Dr Birnie, welcome to the Committee. I’m sorry you’ve had a difficult journey, I understand that was largely because of the bad weather in Northern Ireland.

Dr Esmond Birnie: That’s right.

Q210 Chair : I’m sorry to hear that, but thank you very much for joining us today. Perhaps you’d be so kind as just to briefly introduce yourself and tell us just a little bit about your work.

Dr Esmond Birnie: Thank you very much Chairman, and I’m very pleased to be here. I’m Esmond Birnie; I’m Chief Economist with PricewaterhouseCoopers in Northern Ireland, and I’ve been in that post since the end of January. I suppose in terms of relevance to today’s consideration, for roughly 12 years, between 1986 and 1998, mainly at Queen’s University Belfast I was part of research looking at the comparative productivity, competitiveness and efficiency of the Northern Ireland and Republic of Ireland economies compared to Great Britain, Germany, other continental European economies and some of the former Communist economies. As some members will know, I also spent a period in politics; I was a member of the Northern Ireland Assembly from 1998 to 2007, and then a special adviser between 2007 through to the start of this year.

Q211 Chair : Thank you very much for that. You’ve obviously looked into the issues we’re studying very closely, so I won’t go over what the inquiry is into; you obviously know that. Having looked at it in such detail, what conclusions did you draw about the performance of the Irish economy? How much was that based on the low corporation tax that it had, and still has?

Dr Esmond Birnie: Okay. In terms of the Irish economy, by which I mean southern Ireland-the Republic of Ireland-commentators often veer between two extremes. I can remember in the late 1980s the cover story in an edition of The Economist newspaper. It had a picture of a beggar on O’Connell Street, Dublin and it was entitled "the poorest of the rich". That was one extreme view: that post-independence Ireland had been an utter economic failure. About 20 years later-about 2006-07-the same newspaper had a cover story with picture of Ireland, and it said, "Europe’s brightest light".

So, in a sense, commentary has often veered between irrational optimism and irrational despair, and I think at the moment we may be very much in the latter space. Setting aside even today’s events, which are obviously ongoing-the European Finance Ministers and the possible onoff bail-out, etc.-in the longer term it is striking how, during the 20-year period from roughly 1998 through to the onset of the current recession, which in Ireland struck around about 2007, a bit earlier than it affected the UK, the southern Irish economy made remarkable improvement, and economists and others would typically focus on at least two indicators. One would be comparative living standards in terms of GDP per head-the usual measure of income per head of the population-compared to the UK average. Whereas throughout most of the 20th century the Irish figure had languished at about 50 to 60% of the UK average, by 1986 it had reached 70%. By 2007-08 it was well in excess of the UK figure.

Similarly, with respect to employment, immediately following independence, in the mid-1920s, there were 1.2 million people employed in Ireland. That figure actually shrank over the following three to four decades as the Irish economy pursued a very extreme protectionist policy. By the 1950s and 1960s the employment figure was round about 1.1 million. Then, in the early part of the last decade, it began to grow, and it actually peaked at 2.1 million, just before the onset of the current recession. Now, of course, it had subsequently declined to 1.9 million. But the point I want to emphasise, both with respect to employment and GDP, is that even given the tremendous knock which the Irish economy has undoubtedly had over the last two to three years, which to some degree may continue now through to 2014, there’s still been considerable progress made in terms of extra jobs and extra wealth creation.

Sorry, that was an extended preamble, but in a sense it has to be done to put it into context. Your question then was: what was the role of corporation tax in all of that? Clearly it plays some role. So in a sense, I’m not going to agree with the view that was, I believe, presented by the previous speakers this afternoon-I’ve read some of Mr Murphy’s papers and so forth-who would say it had nothing to do with corporation tax. Equally, I wouldn't adopt the position adopted by some of your other evidence-givers-for example, the Economic Reform Group, Eamonn Donaghy, Victor Hewitt and others-who tend to say that maybe it was 90 to 100% due to corporation tax. I think it’s somewhere in the middle; corporation tax was one factor, but in a sort of complex of interacting factors.

Q212 Chair : What are the other factors?

Dr Esmond Birnie: Education would be extremely significant. I suppose if you look at the development of education policy in Britain, or more specifically England, 1944 is a key date in terms of the Education Act and the move to state-funded, compulsory secondary level education. What you’ve got to bear in mind about the Irish economy, or Irish schools, is that state-funded secondary-level education came in about two decades after England; it didn’t really happen until the early to mid-1960s. The economic consequence of that is that all the economic benefits which undoubtedly flow from having a more generally skilled work force were felt in Ireland, but they were felt much later than in Britain. In a sense, that was part of the explanation for the acceleration in growth in the 1970s and 1980s and even more so in the 1990s.

There are maybe two other principal factors, over and above the corporation tax. One you could loosely describe as geography, by which I mean Ireland has the advantage of being an Englishspeaking location within Europe, next to Britain, within the European Union. That, in a sense, was helpful in terms of encouraging inward investment by Americans and others who wanted easy access to either the UK market or the continental European market.

Q213 Chair : But it’s on the periphery of Europe, though, isn’t it?

Dr Esmond Birnie: Yes. But what you’ve got to bear in mind is that for most modern manufacturing activities, and perhaps even more so for technologydriven manufacturing, and even more so tradable services, geography may not be that significant. The fact that you’re on the edge of Europe may not matter that much provided you can produce your product or service in sufficient scale and bulk. Having an Englishspeaking, reasonably wellqualified work force, and obviously the impact of corporation tax and other grants, is certainly significant to that.

The last additional point I would point to, over and above corporation tax-this might be of particular interest to an audience like this-is the role of political leadership and consensus. Earlier I said that for a long period in the middle of the 20th century, the Irish economy languished because it adopted a very inward-looking, anti-investment, anti-free trade approach, and that broadly happened from the early 1930s through to roughly 1958. The opening up of that economy largely happened because it was pushed by two individuals; one was a senior civil servant called TK Whitaker, who ironically enough actually came from the North, and the other was the then Irish Taoiseach Prime Minister Sean Lemass. It was particularly ironic in the case of Lemass, because he had been the Industry Minister in the 1930s under De Valera, who had been the architect of protectionism, but he did a volte-face towards encouraging multinationals, be they British, American, German, whatever.

So the corporation tax, in a sense, was only part of a much bigger process of opening up the Irish economy and society, pushed by Whitaker and Lemass as far back as 1958. Also, significantly, about 23 years ago, in a sense, during the administration Charles Haughey, the Republic stood at a point very similar to the one at which it is today. They had a deficit of about 12 or 13% of GDP; their debt to GDP ratio was about 125%. At that point they introduced ferocious fiscal consolidation, to use the jargon we now have in our context. But significantly, and this is my point, the opposition at that time-the Fine Gael leadership, Alan Dukes-took the view that he would support measures which, however painful, were in the national interest. So in addition to corporation tax, I would point to education, location/geography and the role of political leadership and consensus in underpinning it all.

Q214 Lady Hermon: Esmond, it’s very nice to have you here this afternoon to give us evidence. Sitting in the hot seat just before you came in we had two witnesses, and I just want to ask for your views really on evidence that was given to the Committee by Mr Richard Murphy, particularly in relation to the Azores agreement and what he expects to be a new Code of Practice from Europe. It’s not a judgment from the Court of Justice; it is a Code of Practice. One particular aspect of his evidence was that he felt that changing the corporation tax within a part of the UK-within a region, obviously of Northern Ireland-might be contrary to the Azores agreement, particularly if the original decision to do so were made by the national Government, by Westminster, handing it back to the Assembly: that in fact, it would not look as if the Northern Ireland devolved Government were doing it initially and spontaneously themselves. He felt that that would not pass the Azores test, and he was also warning us, I think, as a Committee that we need to be careful and pay attention to the new Code of Practice that’s coming out. Could you just enlighten the Committee about the impact of the Azores agreement on the potential of reducing the corporation tax through a devolved Assembly at Stormont, bearing in mind that you have both political experience in the Assembly and experience as an economist.

Dr Esmond Birnie: The Azores judgment laid out three criteria in order for there to be a variation in terms of corporation tax within a national unit within the European Union. They said you have to have a regional administration; there has to be a devolution of fiscal powers to that administration; and thirdly, and lastly, there should be no subvention by the central governing body of the nation state to that devolved body for any taxes forgone because they choose to have the lower rate. Now, those were the criteria that followed from the Azores case. There was also the case involving Gibraltar. Both Azores and Gibraltar, as it were, managed to continue with their position. I know that Mr Murphy, in his paper Fool’s Gold, has made the point that there has to be some question mark, because, as you say, Lady Herman, in this case the power is being passed down from Westminster at a certain point in time. I obviously can’t judge what view the European Court might take, or the Commission might take about this in due course, but I suppose a view could be taken that, given the experience relating to Portugal and the UK relating to Gibraltar, there’s still a fair chance that Northern Ireland would be allowed to pursue it.

Lady Hermon: A fair chance.

Q215 Chair : How much would two aspects-the fact that it’s the only part of the UK with a border with another European country, and the almost four decades of terrorism which Northern Ireland has suffered from-play a part, supposing they wanted a derogation from Azores? Would those two issues be significant?

Dr Esmond Birnie: It’s very hard to judge, but I suppose what you’re really saying is that there are certain things which the UK Government and the Northern Ireland Executive could plea in aid of their position, and say to the Commission, "Look, we are something of a special case".

Chair : Okay. Right, shall we follow through on this point?

Mel Stride: I want to seek clarification on this point of it being Westminster that’s giving the Northern Ireland Assembly the ability to raise taxes, deal with the tax jurisdiction and so on. As I understand it, the part of that which might, as Mr Murphy is suggesting, fall foul of the Azores judgement is to do with the timing, not the fact that it’s Westminster devolving the authority; it’s the fact that the devolution of the authority is shortly followed by the change in the tax rate. Is that correct? That’s the argument, as I understood it earlier. The one quickly following the other makes it feel like it’s a construct-that the Government in Westminster are effectively changing the tax rate in another part of the jurisdiction.

Dr Esmond Birnie: Yes, that would be the case and it might be construed as a weakness, but is there any other way in which it could happen? In a sense, I’m not speaking here as somebody who’s wildly enthusiastic about going down the corporation tax route. Mr Murphy has certainly raised a number of very technical questions about tax law and European law, and I wouldn’t claim competence fully to judge how valid all his points are.

Oliver Colvile: The Republic has had problems with brass-plating. Do you see that a reduction in corporation tax is likely to produce the same kind of problems for Northern Ireland if that takes place?

Dr Esmond Birnie: It could do, and for sure it seems to be what the sort of traditional Treasury view against this has been, as exemplified in the two Varney Reports in 2007 and 2009. They very much stress a fear about that, so there’s clear potential for it. Theoretically there are mechanisms that could be put in place to try to minimise the extent of socalled brass-plating, and some of your previous witnesses-Eamonn Donaghy and my colleague Martin Fleetwood, for example-did refer to this. For example, there could be some sort of test, a condition as it were, for getting the new lower rate corporation tax that would be linked to the number of employees in the operation actually working within Northern Ireland, so that you have an indication of a genuine commitment, or genuine economic measurable impact, on the ground.

Gavin Williamson: Does that cause great problems in the actual administration of that, because generally speaking the most effective taxation is simple taxation? When you start getting to that point surely the administrative cost and-

Dr Esmond Birnie: Of course; there could be. However, my colleague Martin Fleetwood thought that, for example, that test of scale of employment would be a relatively easy one to measure, and therefore, yes, there is a certain administrative cost. In a sense, you would have to accept that, but perhaps that cost would not be overwhelming.

Q216 David Simpson: You’re very welcome Esmond; good to see you again. When we listened to the discussion with the previous gentlemen, the old cliché came to mind: put 20 economists in a room and at the end of that you’re not getting an agreement among any of them. It is very difficult to establish the facts; the guys that gave the previous evidence stated clearly that it wasn’t-I think I’m correct in saying this-the lower corporation tax that created the Celtic Tiger. That’s their view, and I would ask for your opinion on that as well. On the overall brass-plating issue that Oliver raised, have you any evidence that companies did go from Northern Ireland to the south and vice versa in relation to that?

Dr Esmond Birnie: Well, to take your last point first, there is evidence that UK companies have moved, and recently there was, for example, the Cadbury case; they moved a substantial part of their operations, obviously mainly from England to Ireland. In terms of Mr Murphy’s Fool’s Gold paper, yes, he is saying it had nothing to do with corporation tax. As I said earlier, I think he perhaps exaggerates the point, but broadly where we’re coming from at PwC, we would agree the corporation tax change in itself is not the magic bullet. It wasn’t the sole determinant of the so-called Celtic Tiger. What you have to bear in mind is that Ireland had low corporate taxation from as early as 1958, and the very rapid growth of the Irish economy began around 1989, so there is a three-decade period where presumably other factors, such as increased spending on schools, development of the universities, joining the then European Economic Community, and so forth, all had an impact as well.

Q217 David Simpson: As I think Ian Paisley mentioned, we had a gentleman in from Invest Northern Ireland and I thought he was excellent; he was very motivated in the job. He made it very clear that the lower corporation tax would be a massive tool in their armoury in order to attract jobs to Northern Ireland. Do you agree with that?

Dr Esmond Birnie: Well, in a sense it would be something nice to have-I think that was Mr Fitch from INI. I know where they’re coming from, because they would probably say it would be tremendous, almost like a neon sign stuck up there in the world economy, saying "Northern Ireland, open for business; we are very receptive to inward investment", and so forth. I would counsel some caution and say that it is always certainly more complex than a headline rate of corporation tax, be it, as in the UK, 28% down to 24%, or the Southern Irish 12.5%, or, indeed, many parts of eastern and southeastern Europe, where it is now at 10%; in some parts of the world it is even 0%. Maybe we also need to look at other tax incentives, tax allowances and tax credits, which may well be just as effective as the headline rate of corporation tax. That isn’t to deny that it would be a signalling device, having a reduction in corporation tax-a psychological impact.

Q218 David Simpson: I’ll finish with this . T he Finance Minister, when he gave evidence, seemed to indicat e that it may be a better route to go down the route of different categories, like pharmaceuticals, or whatever. In your view, from PricewaterhouseCoopers, do you think that’s a better, easier-managed way, or a blanket-

Dr Esmond Birnie: I certainly know where the Finance Minister is coming from in that, because the problem with a blanket reduction in corporation tax is that everyone gets it, and economists would say there’d be a lot of dead weight-in other words, firms that weren’t adding much to wealth creation, or innovation, or exports, would get it like everyone else. In principle, theoretically, the Finance Minister or whoever argued for that is correct, but then we run into the European rules about not favouring particular sectors, so it does seem that we are constrained; you have to have a rate across the board.

Q219 David Simpson: Okay. One final point. A lot of concern has been raised in Northern Ireland that the automatic winners in this would be the banks and the utilities, and the public opinion at the minute is very much against banks, but they will have a windfall.

Dr Esmond Birnie: Yes. It’s raising the same point again: that existing enterprises that are making large profits-obviously at the moment the banks haven’t been, but they will no doubt return in due course-would reap the benefit as much as inward investors coming in for the first time.

Naomi Long: Apologies for having to step out at the beginning, and I missed the start of what you had to say. You’ve given a very considered and balanced view in terms of the impact of corporation tax levels in the Republic of Ireland on their economic growth. I’m just interested, given the situation they find themselves in at the minute, and the fact that they have clung to those low corporation tax rates, even in the face of significant pressure, do you think that it has become, if you like, for them, an almost mythical factor in their success? Or do you think that in practice they have found it to be hugely beneficial, and that’s why they’re guarding it so preciously? I’m just interested; if you were sitting in their situation and you felt it was one of three, four, five factors, you might be concerned, for example, about cutting education budgets when skills are a big factor; yet they seem to be happy to do that, and yet cling to corporation tax?

Dr Esmond Birnie: I’m tempted to say both views are true to an extent. I think there is an iconic, totemic aspect to it, and that’s why they are fighting for it; it’s almost like Charles de Gaulle and the French veto for agriculture subsidies for France, and the common market of the 1960s. They are going to fight for this whatever happens, regarding any possible potential bail-out. You’re right at the same time; if you drill down there were other factors explaining the high growth during the 1990s and the previous decade, and they do need to perhaps look to that as well. What we would also stress is that the Southern Irish corporate tax system is complex, because it’s dealing with complex entities, multinationals, global conglomerates, and it includes many other elements, like tax allowances for R&D, tax credits for R&D, tax allowances for intellectual property. Last year, 2009, half of the inward investment listed by the Southern agency, IDA, was research and development-related. You talk about their tax incentive armoury; there’s much more in it than simply the 12.5% rate.

Q220 Oliver Colvile: My understanding is it’s the whole package which actually needs to be done, so you’re talking about skills, training, all of that.

Dr Esmond Birnie: Yes.

Q221 Oliver Colvile: You then have to develop also the product which you’re going to sell, and then you need to identify where you’re going to sell that into. My argument has been for some while in all of this that we need to be looking at China and we need to be looking in India, because those are going to be the new emerging economies, which we actually need to get right there. Is it your feeling as well that one of the problems that Northern Ireland has had, and potentially Southern Ireland as well has had with all this, is that the constraints that maybe the European Union has placed upon it, in the form of regulation, and those kind of things as well, has been damaging, and would it be better for Northern Ireland if it actually had a much more flexible ability to be able to operate in?

Dr Esmond Birnie: Well, thanks for that question. I entirely agree that it’s a package, and we need to look at what the Republic of Ireland has done, not just with the headline rate, but intellectual property and R&D. I also agree that targeting the socalled BRIC economies, or more specifically India and China, because they are the high growth areas, is crucial. In 2009 China was the third largest source of foreign direct investment into Europe; India was the eighth largest. Yes, we need to look at the whole range of regulations, and so forth, and whether any of those, in a sense, are slowing the adaptation of the Northern Ireland economy, and this idea that really over a very long period of time we need to see the socalled rebalancing of the economy between public and private sectors.

Q222 Oliver Colvile: And reducing the unit costs as well? That’s going to be important.

Dr Esmond Birnie: Well, unit costs matter; they are partly determined by the exchange rate, and certainly Northern Ireland, like the rest of the UK, has benefited from the very substantial slide in sterling over the last two years. Although, up until now it’s perhaps been disappointing how little apparent response there has been in terms of manufacturing exports, but maybe that will only be filled after a time lag. The other key point about unit costs that I would stress is we need to raise our productivity levels. I don’t see any future, either economically or socially, in trying to race to the bottom in terms of cutting wages, and so forth, because obviously we cannot compete on low pay, we cannot compete with India, China, Vietnam, Malaysia, etc, on those terms.

Gavin Williamson: As Naomi said earlier, you’ve presented a very balanced view of this. If you could implement three things for Northern Ireland that you think would actually lead to a difference, not next year, but over a five, 10, 15-year period, what would those three things be?

Dr Esmond Birnie: That’s a hard question. Certainly we need to encourage research and development-any incentives which encourage research and development, because at the moment the rate of R&D spend in the Northern Ireland economy is about 1% of regional domestic product, whereas the OECD average is 2 to 3%. So it’s very low; we need to encourage that. Secondly, we need anything which encourages what business experts would call "clustering" of firms, because the evidence from successful national and regional economies suggests that successful, competitive firms at the world-market level are rarely successful by themselves; they’re part of a cluster or network of suppliers and so forth, so incentives to encourage that too.

Q223 Gavin Williamson: On the clustering, Mr Murphy was saying that the idea of creating a financial cluster in Northern Ireland would be completely unviable, because there’s Dublin to the south and London, obviously in the UK. Do you agree with that?

Dr Esmond Birnie: I wouldn't be as downbeat as all that. Clearly there are certain types of financial activities which are going to stay in the City of London, because of the advantages of being close together. Where Northern Ireland has begun to have success, for example, in terms of previous investment, and even last month there was announced investment by Citibank, we are beginning to get financial back office; we’re also beginning to get some of the IT servicing to the financial sector. I suppose what we can offer, even without the Southern Irish tax advantages, we do have lower salaries and we do have lower property costs, albeit those in Dublin have been dropping rapidly. I wouldn’t write it off completely, but we’re certainly not going to develop Canary Wharf in the Titanic Quarter, but we can have a cluster of financial service firms there.

Chair : We’ve not heard the third yet. Okay.

Dr Esmond Birnie: I think it would be nice to have the headline rate at a lower level, as a signalling device, as a shop window sign that we’re open for business, that we’re certainly competitive with our nearest land neighbour. I stress it needs to be put in the context, as Mr Colvile’s question put it, a total package of financial incentives. So, R&D; clustering; and perhaps corporation tax in that context too.

Lady Hermon: Perhaps. Thank you. That’s very helpful.

Q224 Ian Paisley: We’re looking through a prism in all of this, because we don’t have a baseline in terms of what is corporation tax, if we get it what it is going to cost. Have you and your organisation group done any baseline research on what it really will cost? We’ve heard from half a billion downwards; how stark do you think that figure really is? I suppose the question is: how affordable is corporation tax?

Dr Esmond Birnie: It’s a good question, because that really is the third Azores criteria, that the executive in Stormont has to take the hit, and the honest answer is we don’t know, because the taxes currently are not administered or collected and recorded at the regional level. I believe it was in the earlier 2007 Varney report that it was suggested that the total revenue from corporation tax from within Northern Ireland was of the order of £500 million. I can’t really give you anything more sophisticated than that, and typically what commentators have done is said, "If we reduce the rate to 12.5%, approximately half that, the yield up front would drop by approximately £200 million to £250 million". So it is somewhat "back of an envelope", but probably roughly right.

Q225 Ian Paisley: If that is the rough calculation, if we had corporation tax at a lower rate, how quickly do you think we could make up the difference?

Dr Esmond Birnie: There is the modelling done by the Economic Reform Group, and they suggest that in terms of the corporation tax yield itself that would take about a decade for the line to come back up to where it had been before. In terms of all taxes, when you allow for income tax and national insurance contributions, that would take about six years.

Q226 Mel Stride: You mention the restrictions that the EU would place upon either targeting lower taxes or applying taxation to new businesses rather than existing ones, etc. I think, quite rightly, you’re focusing also on these R&D tax credits, capital allowances, IPA allowances, etc., as an important part of the package. Could you tell us a bit about the kind of restrictions that might apply to changes in those particular areas, whether EU or otherwise?

Dr Esmond Birnie: Well, interestingly our judgment would be that a lot of this could be done under the current conditions. We don’t need permission from the European Union; we don’t need legislation. A lot of the change, such as introducing tax credits for research and development training, marketing, and so forth, we believe could be done fairly readily.

Q227 Mel Stride: Thank you. Getting back to the headline rate of corporation tax, do you feel the fact that Ireland has been doing this for a long time, and other economies have been doing the same thing, right down to 0%, as you pointed out, that effectively that there may be a diminishing effect, now, of another tax jurisdiction coming forward, and saying, "Here is my shop window; I’ve got a low rate of corporation tax". Do you think it would be blunted in that way?

Dr Esmond Birnie: I think there is an element of that. Interestingly the very low tax regimes in continental Europe seem to be concentrated in the Balkans-so you’re looking at Serbia, Bulgaria, and also Cyprus, Moldova-and, I think, are 0%. You’ve got a cluster of emerging economies in the south-east of Europe with extremely low rates of corporation tax.

Q228 Mel Stride: My final question on this would be, it’s been suggested in previous sessions we’ve had that perhaps if you’re going to go to 12.5%, you might as well go to 12% or 10% in order to get a competitive edge in that sense. I’d value your comments on that; do you think that’s something that would make a big difference, or is it just an additional expense?

Dr Esmond Birnie: I don’t think it would make any big difference, the 2.5%. That would come down largely to a psychological thing; that you’d be saying, "Our regime is undercutting our nearest neighbour", and it’s what degree of importance you put on that. In terms of the impact on investment, the impact on revenues, moving from 12.5% to 10% is neither here nor there; quite small, almost certainly.

Mel Stride: Thank you.

Q229 Lady Hermon: I wonder could I just take you back just a moment or two. In response to my colleague’s question about how long would it take the economy to catch up and to make up the shortfall if the corporation tax were reduced. You estimated in fact that there was a model that showed that would come up in 10 years, but without taking into account income tax, etc. Could we then look at the present context in which Northern Ireland is currently operating, and that is a context in which, through the Comprehensive Spending Review announced in October, Northern Ireland’s Executive, has already taken a huge hit, and we’re going to have to work through that for four years. On top of that, to take what you reckon would be about £250 million out of Northern Ireland, in terms of reducing corporation tax, is it at all the right time, and would that timescale of recovery be modified by the present Comprehensive Spending Review figures?

Dr Esmond Birnie: To take the second part first; I don’t think the impact of the Spending Review would affect that. Admittedly it’s a modelling exercise, so like Mr Simpson talked about 20 economists and 25 conclusions; all economic forecasts have to be treated with caution. In terms of, is this the right time, obviously the fact that in four years’ time the Executive in Stormont will have £1.4 billion less to spend across 12 departments, taking both current spending and capital spending together, to ask them to take out a further £200 million is a big ask. However, the contrary view would be one of, and I know it’s easy to say this and much harder to do it, it’s the classic dilemma of taking butter today to have jam tomorrow. To the extent that reducing corporation tax does lead to accelerated growth in the private sector, then it leads to benefits, but benefits 10 years down the line, not an upfront benefit to compensate for the pain of the Spending Review. That would really be a dilemma, a political decision, for the Executive to make. Do they want butter now in the hope of getting jam in six to 10 years time?

Q230 Ian Paisley: Just for contextualisation then; if it were to cost £250 million, if that’s what it worked out at, what percentage is that of our overall subvention?

Dr Esmond Birnie: Actually Mr Paisley it’s a tiny percentage in the sense that, again, a bit like corporation tax, nobody knows exactly how big the subvention is, but there have been estimates, including by the Department of Finance in Belfast. The most recent official estimate a couple of years back was that the subvention was £7,000 million. Some commentators, independent economists, would now say that it’s closer to £9,000 million. So 200 divided by 9,000-it’s 2 or 3%.

Q231 Ian Paisley: 2% or 3% of £9 billion. So really, would you agree with me Dr Birnie, that ultimately this comes down to a judgement and a political call by leadership as to whether they want to take the risk of this, and it might add something, and take the right of what it might cost? But ultimately it costs a very tiny amount of the subvention.

Dr Esmond Birnie: Yes, you are right, and it is the classic dilemma about investing in the future. You face the pain upfront, you’ve less funds to consume now in terms of paying for schools, roads maintenance, hospitals, whatever, but the hope is, to the extent that it does incentivise inward investment, you get higher growth, and presumably higher tax revenues, but not for five, 10, 20 years’ time. It’s a difficult choice; that has to be accepted.

Q232 Naomi Long: There’s been some kind of talk about the interplay between the current CSR and the impact of that on Northern Ireland, and then the, if you like, additional hit that would have to be taken up front by the Executive in order to implement this. Given that this would be a stimulus, particularly for privatesector growth, and given that the reason that Northern Ireland is particularly hit by public sector cuts is because of that proportionate overreliance on the public sector, is there not an argument that in some ways this, if it works, and there is always that caveat. If this works in terms of actually generating private sector growth, it not only has the potential to raise additional revenue down the line, but to protect Northern Ireland from any future public sector cuts in that the economy would also be more balanced, and therefore less dependent on public sector subvention?

Dr Esmond Birnie: Yes. I entirely agree with what you’re saying. That really is the optimistic way, but perhaps it’s the necessary way to look at it; if you make sacrifices now it is part of rebalancing the economy and therefore making it less vulnerable to public sector adjustments in the future. I suppose it’s an interesting question whether the Northern Ireland economy is now at a decisive moment of choice; a bit like the Irish economy was at in 1958, or arguably again in 1988, or perhaps is now again today, in terms of saying, "Look, we’re going to have pain for a certain number of years, but if we get it right, if we invest in the right ways…". I would stress, I am not saying corporation tax by itself is necessarily the answer, but a wider set of fiscal incentives; perhaps in the context of the enterprise zone, which has been heralded, and the Government paper that we’re waiting for.

Q233 Mel Stride: A bit of a tough question, and you might not want to answer it, but I’ll ask it anyway. We’ve had a very interesting session with the ICTU; do you believe that underpinning many of their objections to lower tax rates might be something to do with this rebalancing of the economy and moving away from a protected large public sector, freeing up the private sector? Do you think that’s part of the agenda from where you sit on this?

Dr Esmond Birnie: It might be, but not necessarily so. I think a much greater consideration, as it were, philosophically, about where Mr Murphy’s Fool’s Gold paper is coming from, is that he regards tax planning, the legitimate measures by which corporates, and, indeed, individuals seek to minimise their tax liabilities, he regards that as, per se, a bad thing in all cases. Whereas, of course, others would say it’s a legitimate part of business activity.

Chair : Thank you.

Q234 Oliver Colvile: How much flexibility do you think the Northern Ireland Assembly will have in the way of deciding criteria as to the level of corporation tax?

Dr Esmond Birnie: Well, in a sense, my answer to that came up in the previous discussion; in terms of picking sectors: pharmaceuticals; IT, very little, because of European rules.

Q235 Oliver Colvile: Lack of flexibility in the European Union, it seems?

Dr Esmond Birnie: But where there might be would be as exists at the moment, the UK has a lower rate for smaller companies, so we could have 12.5% for bigger firms and whatever-5%-for those with a turnover less than whatever level. So, not much flexibility is the answer.

Q236 Oliver Colvile: Do you have any idea as to what the proportion of business that currently is taking, is claiming headline tax, corporation tax?

Dr Esmond Birnie: What proportion of enterprises in Northern Ireland pay the 28% rate as opposed to the smaller firm one?

Oliver Colvile: Yes.

Dr Esmond Birnie: Well, I can’t give you a precise answer to that, but in broad terms the total number of registered businesses in Northern Ireland is about 55,000 or 60,000, so that’s a very large number of enterprises. However, only around about 2,500 have any significant scale, for example, the Industrial Development Agency, Invest Northern Ireland, INI have about 2,500 clients, so they’re significant firms in terms of employing probably at least 50 people and having more than, say, £20 million turnover. If you took it as a percentage of the 55,000 VATregistered enterprises the percentage of that paying 28% is probably quite low, but then most of those are sole traders, or employing one, two, three, up to 10 people.

Q237 Oliver Colvile: Okay. Do you have any idea as to how we might actually be flexible?

Dr Esmond Birnie: Well they would have, as I said, the option of having an even lower rate for the microenterprises, but then the question should be asked whether a corporation tax rate is the best incentive for very small firms. You might wish to look at other things, like the R&D or industrial rating, which has been an important issue over the last 10 years.

Q238 Oliver Colvile: I’m sure everyone’s going to get rather bored with me talking about this, but in my constituency I have a really big problem to do with exactly the same kind of issues Northern Ireland have got, to do with the number of people employed in the public sector, and all of that. I’ve been looking at how we can rebalance it, and my key idea is to actually come across with the University, building upon that, and doing the same kind of things as Cambridge did in the 1990s, to do with research into genetics, and they then were able to sell that into SmithKline Beecham and Glaxo, and pharmaceutical companies like that. Is that the kind of way which you actually think might be an acceptable way.

Dr Esmond Birnie: That is certainly a way to go, and what we do need to do. Yes, to be fair, there are many exemplars of good practice, both in the Northern Ireland universities and here in Great Britain, but we do need much more commercialisation of university research. So I agree.

Q239 Jack Lopr e sti: Not at all. Thank you for coming. Do you think that there is a compelling argument to give the Northern Ireland Executive the power to vary corporation tax, even if they don’t immediately felt able to use it.

Dr Esmond Birnie: I wouldn't say it’s compelling. What I would like to see them do, and I’m sorry, in a sense I’m repeating myself, but I would like them to design a package of incentives, which might include lower corporation tax, but doesn’t necessarily need to, but certainly elements of tax credits, tax allowances for intellectual property and R&D.

Jack Lopresti: Okay. Thank you.

Chair : Okay. On to Mel.

Mel Stride: I think Chair I asked the question earlier on actually, so I don’t think I need to ask, thank you.

Chair : Right, anybody else-any other points they wish to raise? Okay. Dr Birnie, again, thank you very much for coming to see us, especially seeing as you’ve struggled so badly with the transportation, I hope you have an easier journey home. Thank you very much indeed for coming.