Corporation Tax in Northern Ireland

Written evidence from the Government

1. Background to the forthcoming Government consultation document on rebalancing the Northern Ireland economy

The Government is committed to rebalancing the UK economy as a whole and specifically in Northern Ireland. The Coalition Government committed to publishing a paper on rebalancing the NI economy in the June 2010 Budget, "The Government will publish a consultation paper, in autumn 2010, on rebalancing the Northern Ireland economy. This will include examining proposals for economic enterprise zones, possible mechanisms for changing the corporation tax rate and other economic reform options. The Government will consult the Northern Ireland Executive fully as the paper is prepared". This followed on from a commitment in the Coalition’s Programme for Government to "produce a government paper examining potential mechanisms for changing the corporation tax rate in Northern Ireland".

The paper is due to be published by the Treasury in the late autumn after consultation with both the Northern Ireland Office and Northern Ireland Executive.

2. Current state of the NI economy and the need to rebalance

The Northern Ireland economy relies heavily on the public sector, which represents over 70 per cent of the economy. The increase in the size of the public sector began in the late 1960s, coinciding with the beginning of the Troubles. Over time successive UK Governments have significantly increased spending in Northern Ireland in order to strengthen security and assist the local economy, which saw a reduction in investor confidence and a slowdown in growth during this period. The Northern Ireland economy has traditionally been dominated by manufacturing industry and agriculture but there has been a shift over the last 30 years to a more service based economy including the public sector. There is, therefore, a clear need to take action that would help to boost the private sector.

Strengths

There is strong potential for growth in the Northern Ireland economy. The economy has benefited from the progress made under the Northern Ireland peace process. Northern Ireland has a number of strengths:

· a relatively young population and a good quality education system

· competitive labour costs , below the UK average

· scope for drawing on the large economically inactive sector

· a successful track record in attracting inward investment through Invest NI, building on increased investor confidence in recent years

· 100% broadband coverage

· good transport links and infrastructure

· a relatively low crime rate

· strong tourism potential and an attractive natural environment.

Challenges

In spite of these strengths there remain substantial challenges. Public expenditure per head in Northern Ireland is the highest in the UK. A large public sector may tend to crowd out the private sector, for example through distorting the labour market and high levels of public sector asset holding. The average salary in the public sector is also higher than in the private sector.

Currently total public expenditure on services per head [1] in Northern Ireland is 21per cent above the UK level, whereas GVA per head remains significantly lower than that of most of the other parts of the UK with GVA per capita in NI at £16k, slightly higher than Wales (£15k) but significantly lower than England (£21k) and Scotland (£20k). This can be attributed to low levels of productivity coupled with high rates of economic inactivity.

Northern Ireland tends to be over represented compared to the UK average in low productivity sectors such as agriculture while it is under-represented in high productivity sectors such as financial intermediation and business services. Private sector productivity is held back by a lack of basic skills, relatively low levels of enterprise and low levels of research and development plus a lack of large high turnover businesses. Northern Ireland also suffers from a high rate of economic inactivity including in the number of long term sick and disabled.

3. The main elements of the Government’s strategy to rebalance the UK economy

The Government’s strategy for rebalancing the UK economy was set out in the Budget and 2010 Spending Review. These set out the importance of reducing the deficit while promoting enterprise and maintaining a commitment to fairness.

The Government’s objective is to deliver strong, sustainable and balanced long term growth of income and employment. Delivering this will require the UK to increase productivity, its share of exports and incentivise greater levels of private investment, including making the UK more attractive to foreign investment. Key areas include:

· A phased reduction in the main rate of corporation tax from 28 per cent now to 24 per cent by 2014-15 and setting out clear objectives for improving access to finance, particularly for smaller businesses to support private sector business expansion.

· Focused Government that supports investment for the long term by concentrating spending on areas where it is needed and reforming public services to drive better value from spending. The Efficiency and Reform Group has the task of driving out waste and inefficiency in UK government departments.

· Providing the certainty and incentives for private investment by providing macroeconomic stability and policy certainty while ensuring the right incentives are put in place for this investment.

· Stimulating private infrastructure investment through reviewing new funding and financing approaches and reforming economic regulatory systems to ensure that more private capital is encouraged and can be used as efficiently as possible.

The Government is also committed to promoting balanced growth across the regions. The Government published a Sub-national Growth White Paper on 28 October which set out the approach to building a new, fairer and more prosperous economy. Although this paper mainly applies to England, the principles are relevant to Northern Ireland and certain policy proposals may also be transferable if they find favour with the Northern Ireland Executive. The three key themes are:

· Shifting power to local communities and businesses – those who understand their economies best should lead their development and enable all places to fulfil their potential.

· Increasing confidence to invest - create the right conditions for growth through Government allowing market forces to determine where growth takes place and provide incentives, which ensure that local communities benefit from development.

· Focused intervention – tackling barriers to growth that the market will not address itself, supporting investment that will have a long term impact on growth and supporting areas with long term growth challenges manage their transition to what is appropriate for the local area. Government policies should work with the market, not seek to create growth artificially.

4. Tax options in Northern Ireland

The Government has committed to explore options for developing Northern Ireland as an enterprise zone. The concept of enterprise zones as they were introduced in the 1980s would need to evolve to take into account devolution to the Northern Ireland Executive. This has increased the ability of Northern Ireland to set its own policies with regard to business investment, particularly in relation to its planning regime and business rates, which were two key features of previous Enterprise Zones. With the Northern Ireland Executive and the UK Government working in cooperation there may be scope for devolved and reserved policies to be harnessed to promote Northern Ireland as an area of enterprise and centre of excellence for innovation in the UK.

The consultation paper will also consider potential mechanisms for giving the Northern Ireland Executive the power at least to vary the corporation tax (CT) rate for trading profits in Northern Ireland. This would enable it to be brought more into line with the rate of CT for trading profits in the Republic of Ireland, which is currently 12.5 per cent and could have a significant impact on inward investment, although costs would also need to be considered.

The aim of this stage of consultation is to gain a full understanding of the costs and benefits that a separate rate would involve, for Northern Ireland and for the rest of the UK.

Both the economic and fiscal effects of a separate, lower CT rate in Northern Ireland will be examined as well as the legal and implementation issues.

5. Other options to strengthen the private sector in Northern Ireland

There are a range of non tax devolved and reserved options to strengthen the private sector in NI including welfare reform, public sector reform and supply side micro economic policies to promote skills, innovation, competition, enterprise and investment. In devolved areas it is entirely for the NIE to determine its own policies and priorities. Work that has been completed such as the Varney Review of Competitiveness in Northern Ireland and the NIE’s Independent Review of Economic Policy provide a wide range of options for consideration. The consultation paper and consultation process will also help to inform the updating of the NIE’s own economic strategy due to be published in the spring.

22 November 2010


[1] Public Expenditure Statistical Analyses 2010