Corporation Tax - Northern Ireland Affairs Committee Contents

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

previous page contents

© Parliamentary copyright 2011
Prepared 9 June 2011