Examination of Witnesses (Questions 210-239)
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.[1]
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 has subsequently declined to 1.9 million.[2]
But the point I want to emphasise, both with respect to employment
and GDP,[3] 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 location, 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. The Finance Minister, when he gave evidence,
seemed to indicate 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 to say, "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 at 10%, and Moldova, I think, at 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 the rest 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 Lopresti:
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 feel 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.
1 Note from witness: The Economist, 16 January
1988 Back
2
Note from witness: Employment declined to 1.9 million by
the early summer of 2010. Back
3
Note from witness: With respect to employment, GDP and
even GNP. Back
|
