Corporation Tax - Northern Ireland Affairs Committee Contents


Examination of Witnesses (Questions 261-293)

Q261 Chair: Mr Simpson, thank you very much for joining us. Perhaps you'd like to give us a very brief background to your work, and I think you wanted to make a short opening statement. You're very welcome.

John Simpson: Thanks for the invitation, and if I may just make a short setting­the­scene statement since you kindly invited me and you didn't insist that I had to write something down in advance to test my literary skills, which would have been very defective. However, might I say that I have been listening to the discussion—not just here, but in Northern Ireland—about corporation tax for some time now and I am not entirely in sympathy with the strong apostles who are trying to convert the entire community to a simplistic step. My own belief is that the business community is now almost in a hypnotised state heading in a one-track direction without realising some of the side effects of what they wish for. I hope that, as time goes by, you may test me on that.

I am not against the thought that businesses would enjoy a situation where corporation tax was lower. If your Committee was just debating whether Northern Ireland would be better off with lower corporation tax, the short answer would be yes, as would other regions of the United Kingdom. But actually, I suspect that you're debating the consequences of giving Northern Ireland authority to levy its own rate of corporation tax. I think that comes in two steps. One, does your Committee wish the regional Administration, Stormont, to have that devolved responsibility? Second, how might that devolved Administration use that responsibility? I would respectfully suggest that your deliberations today would be misplaced if you were actually debating whether Northern Ireland would now implement 12.5% corporation tax. I would like to persuade you that if it is to be devolved, then we have another debate about the way we use that devolved authority as it comes into existence and the legislative constraints and the European constraints that would come with that.

I hope that I read your agenda correctly when I talk to you about whether to devolve corporation tax rather than how it might actually be used if it was in place. For example, I listened to your previous witnesses and I have every sympathy with the argument they made, whether they be a cost centre or a profit centre. If I was in their position, I would have given you those answers, but if I was administering the economy of Northern Ireland with a mixture of Government and business I would have said, "Is this a benefit that is costless to the rest of the society in Northern Ireland?" If the devolution of corporation tax goes through the Barnett formula, as I understand it might do, and if the consequence is, therefore, that Northern Ireland should rearrange its funding to replace or to displace—whichever way round it is—the money that would otherwise be available, then the argument of your previous witness is one side of the argument, but it's not traded off with, "What is the cost?"

If I can make a further point: if corporation tax is devolved and we have clients like those you've just been hearing—very persuasive—what proportion of the cost of devolution would actually go to encouraging new investment? As I understand it, if corporation tax is devolved across the board, 90% or more of the benefit would go to businesses that are already in Northern Ireland who don't need to do anything except what they're doing today, and many of them are doing it reasonably profitably. So, I ask whether your Committee could consider—and it's difficult—devolving corporation tax in a way in which the impact will not be generalised and lost, but might be specific. The danger at the moment is that a simple reduction of corporation tax will lead to huge deadweight effects in terms of the Northern Ireland economy, and it would be a great pity if we couldn't be more selective. I want to come back to that.

So the context, Chairman, is how do we think this through in terms of growing the Northern Ireland economy? That's on everybody's agenda at the moment; we want to grow it, but it only needs the Northern Ireland private sector to grow at 2% to 3% a year to correct the degree of imbalance. Your Committee might have heard arguments that the public sector is too large in Northern Ireland and the private sector is too small. Factual statement: the private sector in Northern Ireland provides 70% of the employment; the public sector, 30%. There is a big private sector. It is not as miserable as it is sometimes described. Therefore, we underestimate the degree of change we might bring about if we began to talk about a faster rate of growth in the private sector: raising productivity, getting new firms—all part of the same process.

I was listening the other day to a debate on the Northern Ireland economy and corporation tax in another political setting, and, in order to use the evidence of an expert whose judgment I respect, I was listening to Professor Fitzgerald from Dublin, who was asked the question, "Would Northern Ireland benefit from a corporation tax change as in the Republic?" His answer, quite quickly and quite straightforwardly was, "Northern Ireland is not yet at the stage where it is ready to have that change. We haven't done the other things that need to stiffen the economy, and if we rely on corporation tax on its own, it won't be enough." That was essentially the point he was making.

Can I just turn then, before I finish, to the application of the policy if it comes to Northern Ireland; the opportunity cost? The witnesses you've just been hearing were answering questions about, "Well, wouldn't lower corporation tax have been helpful?" or "Would it be helpful in the future?" I don't buy the distinction much between cost centres and profit centres, although I do understand what was being said. Let me put it this way: on the assumption that their labour costs are a very large part of their total cost because they're emphasising the use of skilled labour, the equivalent of corporation tax for them at 12.5% would be something the same as 4% greater efficiency in the cost of labour. If their labour costs in Northern Ireland happen to be more than 4% lower than elsewhere then if that was the trade-off, they would be just as well off. Of course, the advantage of the island of Ireland—north and south—has been labour costs; educated labour to the level that they are speaking of; be careful against assuming that they are going to employ postgraduates or PhDs in very large numbers. They are going to employ graduates; they are going to require skills, but they are not necessarily in the top rank. They are there to get the work processed in very large volumes.

If I come back to the applications of policy, you are debating what should happen in Northern Ireland. Some of you will have read already the arguments produced by the Treasury under Sir David Varney two or three years ago. The Varney Report is perfectly acceptable to me in terms of its intellectual content, and it did say a number of useful things, but Varney took the Treasury advice and said, effectively, that corporation tax being devolved was administratively too difficult or, alternatively, there was a hint in it I think that corporation tax devolved would have so many potential distortions or loopholes—I'll use only the term "brass name plates" as an argument. Whatever the Chancellor might decide about corporation tax, it will need to be very carefully worded, first to avoid capacity for distortions of that kind and then—and it's something of the opposite side of the equation—to satisfy the European requirements that we don't distort competition policy. Chairman, your Committee is faced with making a recommendation on an issue that is much more complex than just: wouldn't it be nice for companies in Northern Ireland to have lower corporation tax?

Q262 Chair: That's why we're having lots of witnesses, including, eventually, some from the European Commission when we can get round to that. Although you say the private sector isn't as small as perhaps is made out—there might be good reasons for it; 40 years of terrorism being the biggest—you would accept that it does underperform and has done for a long time compared with the rest of the UK.

John Simpson: In general, yes, I agree with you, Chairman. However, I wouldn't overstate it. I review the fortunes of the largest 250 private companies in Northern Ireland each year and what has happened is that their performances now and their profitability has generally been not bad at all. Therefore, to think of a private sector, and the smaller end of it, as being in some way crippled or trading at a disadvantage—I don't buy that argument.

Chair: Okay. Perhaps my colleagues can ask some more questions.

Q263 Lady Hermon: John, it is delightful to see you in front of us this afternoon. Thank you. Could I just ask you to reflect? It's not that long ago that an article was published in the Belfast Telegraph—it was 26 October—by your good self, and written extremely well; for those of us who are not economists, we can understand these things. There was in fact a sentence that I would just like you to elaborate on and I'm quoting from that, and that is, "A favourable corporation tax system, alone"—in terms of Northern Ireland—"cannot compensate fully for the other weaknesses." Would you elaborate on two things: the other weaknesses that you would identify in Northern Ireland, and have identified for some period of time, and the fact that you have said that a favourable corporation tax in itself "alone" wouldn't help matters? What do you see as those other factors that would, to quote you from earlier, "stiffen the economy in Northern Ireland"?

John Simpson: The line has to be drawn here between the responsibility of this august body meeting in this august Parliament, and another Parliament meeting on a hill not too far away and when I'm referring to the others, I am of course referring to the devolved responsibilities that are already in the house on the hill. The first one that I would mention—and I say it with caution—is that I don't think yet we have created a society in which we have sufficient political cohesion and sufficient assurance in the business community that the political system is likely to produce coherent answers in terms of major problems.

Take, for example, the issue of the budget to be settled now for the regional context. The very fact that that becomes so contentious, in contrast—for example, I've been reading today—with the Scottish Government's announcements, shows that we don't quite have political coherence as good as we would like. Secondly, we don't actually have our people development as much as we'd like. All the evidence is, despite the strength of the two universities in the right places—and it's not across the whole board—and despite the achievements of the teenagers, we are very much lacking in terms of what I will call the further education dimension to what we do. We have skills shortages occurring as soon as the economy begins to pick up. We are not ahead of the game. Thirdly, in terms of the other factors, I would mention infrastructure. We do still badly need a coherent infrastructure plan and, to use the word in another context, we need a coherent planning system that answers questions on planning without more than three months' delay. You know that there are several projects in Northern Ireland that at the moment we're arguing about—we are throwing away economic development.

Q264 Lady Hermon: So those are some of the weaknesses that you've identified. The second part of the question was how would we stiffen the economy? If corporation tax were to be lowered and I hope that you will have an opportunity to elaborate on the fact that you fervently believe, as I understand it, that in fact it's not a matter of reducing it as far as the Republic of Ireland; you have suggested, in fact, in one of your articles that reducing it to 19% might do the trick, so to speak. What are the other packages of events or circumstances that must be improved in Northern Ireland along with corporation tax if it were to be reduced?

John Simpson: I don't know how to be specific enough to answer your question, but I will start at the general level. We don't have the thrust of a coherent economic development strategy to which all the key stakeholders are signed up. There is nothing like sitting down with the business representatives to hear them saying what they think the Executive should do. Even between themselves, they're arguing about it. There is then the problem that the Executive, for the moment, faced with a prospectus from several of the business organisations separately, doesn't answer them. There isn't a debate taking place to give a coherent economic strategy across Northern Ireland. This is part of the political weakness of the fact that we're dealing with a compulsory five-party coalition.

To go beyond that, you see we have a programme for Government; you can find the right words. However, again I come back to my two favourite areas for criticism: one is planning in sense of town and county planning, where I think we're woeful, but the other is having an ambition for what we do for the rising generation. If you ask how many people we expect to go through further education at particular qualification levels next year and how that compares with last year, you will not be able to get an answer. If you read the Scottish document, you will see that they have a total: 35,000 more students will do this, that and the other thing next year. Our Department of Employment isn't capable of delivering that statement. They don't want to think that way.

Chair: We'd love to get into that argument; it's perhaps slightly beyond the remit of the Committee, but I think we understand what you mean by an overall economic strategy. This inquiry really I suppose forms a part of that, but we'll take your point.

Q265 Mel Stride: Welcome. Thank you for coming to see us. Three questions, if I may. First, if we had devolved the power to alter corporation tax rates—so imagine that's the world we're in now.

John Simpson: That's done.

Mel Stride: Under the Azores judgment, any lowering will have a cost to Northern Ireland. The first question: what would you do? Could you talk us around this argument, perhaps 19%, etc, and where you would invest, rather than lowering the opportunity cost? Where would you put the money saved? Would it be in education, skills, infrastructure and so on? Secondly, do you have any feel for what the cost of going all the way down to 12.5% might be in the short term? There are various suggestions and I would be interested to hear yours. Thirdly, a very specific point: you made a very interesting point in your opening remarks about the fact that companies should take into account productivity rates in the labour force as being a counterbalance for perhaps lower corporation tax rates. That, if you are entirely rational, must surely be what companies will do, but do you believe that corporations are rational in that sense and do you not accept that this headline rate of corporation tax is something that, perhaps irrationally, companies actually are still drawn to when, perhaps, they might not be otherwise? Sorry, there are a few questions there, but I thought I'd get them all out on the table.

John Simpson: I'm absolutely sure that companies think about the structure of their costs. I'm absolutely sure they have something in their private thinking about how their labour costs and particular skills compare in one place compare with another, how their raw material costs compare, how the transport costs compare and how taxation compares. All of that will go into the decision on whether or not to locate to Northern Ireland or south of the border, or wherever it might be.

Q266 Mel Stride: Just on that specific point though, what I'm sensing is that these companies, when they look at the various options around the world, one of the early things they do is shortlist. That shortlisting process often focuses on things like the headline corporation tax rate rather than the other detail that you're referring to.

John Simpson: It will of course include the tax rate, but I think that I would try to persuade you that they would put the tax rate down the list because high on the list would be, "What will it cost to get the skills we want? What is the labour market like?" They're not going to go to an area where they can't get the skills, but equally if the skills are available at a price that compares favourably with elsewhere, then that is part of the argument, let it be said, for some of the locations in Northern Ireland compared with England—Northern Ireland versus the south-east of England. It's a factor. So, I would put that into the equation higher up than your question implies.

Then, the first part of your question—I've forgotten the middle one—was about the so-called 19%. When I think about how accidental the use of the number 19 was, I now begin to see the consequences. Nevertheless, the principle was an interesting one. If authority to levy corporation tax was devolved, the question would be: should Northern Ireland go for the 12.5% or are there other ways of using it to create more profitable businesses? The short answer to that is, in theory there are. We could, in theory, make R&D expenditure 100% tax deductible; we could make training expenditure 100% tax deductible; we could make market expenditure 100% tax deductible. We could, in fact, envisage a situation where we used the tax deductions to make a new business virtually tax free for a pretty long period, and that would answer my problem of how we avoid using the reduction of corporation tax to benefit people who don't need this. This is the displacement effect or the deadweight effect. There are a lot of businesses in Northern Ireland that are making good profits; do I want to lower their corporation tax? I don't mind them having a lower rate, but I don't want to lower their corporation tax if I can keep that money to use it to get new business.

I've forgotten your middle point.

Q267 Mel Stride: It was just simply: did you have any estimate yourself as to what you think it might cost in the short term?

John Simpson: I'm working on about a couple of hundred million.

Mel Stride: A couple of hundred million.

John Simpson: Through the Barnett formula, but the Treasury no doubt will do something much more mathematical.

Chair: They're going to report in due course. We're trying to get that report from them as soon as we can.

Q268 David Simpson: John, you're very welcome. Especially when you've a name like that, you should be all right.

John Simpson: Should we declare we're not related?

David Simpson: Yes, I think we should, just in case. I also noted in the research papers they've credited a lot of comments to me, so I'm very pleased because I think I should be sitting at the other end of the table if that was the case. John, you are very welcome, and I have to say that we've had a lot of economists at home; we have a lot of meetings with economists. As I said to Esmond Birnie last week: put 20 economists into a room and you'll not get an agreement among one of them. I have to say though, you are well respected in Northern Ireland, not only for your TV appearances, but certainly for your knowledge and your experience over the years as an economist.

A lot of the points that I wanted to touch on have already been mentioned. We can talk from now to this time next year about what benefit corporation tax will be, what it will not be or whatever, but in all your years of experience—and I'm not making you too old now—given a blank piece of paper, from 1 to 10, where would you put corporation tax and what would you put above it?

John Simpson: Forgive me for not jumping in with a quick answer.

David Simpson: No, we don't want a quick one.

John Simpson: If the corporation tax were available singly, on its own, at no cost—yes, let's have it.

David Simpson: That's right.

John Simpson: But if it's available at a cost, let's study it, and if it's a question of you're going to deprive Northern Ireland of say £200 million for other forms of expenditure, how would we justify spending it on just a lower rate? Can you target the way in which you use it? Now, I acknowledge that when you talk to the European Commission officials about targeting the change, they will have constraints that they want you to accept, but I'm trying to encourage you to push them around the edges and see what you can get. If corporation tax was on its own, I would still put skills, the cost of people with skills and the other costs of operating in Northern Ireland higher on the list. Bearing in mind tax on profits: suppose your profits are £10 in every £100 of turnover, that's high. Suppose the tax is 25%, so it's a quarter of 10: 2.5. You're talking there, in terms of the total cost structure, of a small element of the total; your wage bill will be £40 of that £100; your raw materials could be £20 or £30 or £40 depending on the type of industry; your transport costs will be a certain figure—so, with corporation tax as a simple mathematical sum, altering it is small.

David Simpson: But you still haven't told us from 1 to 10—in the middle?

John Simpson: It's 6 or 7.

David Simpson: 6 or 7. Okay.

Chair: You can drive material costs down anyway. That's nothing to do with the corporation tax rates.

John Simpson: Chairman, material costs ought to be even, if you're in one national territory or one national trading area, yes.

Q269 Chair: The other point is that skills, of course, are hugely important and we heard that very eloquently expressed earlier, but a higher skilled workforce is a more expensive workforce. So, don't you have to counter that in some other way?

John Simpson: Yes, the more we can make our labour force more highly skilled, the better.

Chair: But they're also more expensive.

John Simpson: Yes, but the idea being that you can get greater return from pushing the skills up. Don't forget Northern Ireland has operated in my lifetime consistently at something like 15% to 20% lower GVA per head. Every effort to lift Northern Ireland higher in the league table hasn't produced a change.

Q270 Oliver Colvile: One of the big issues for anybody running a business is making sure that there is a significant amount of certainty as far as planning is concerned because what you don't want is suddenly to find that you've made some decisions, and someone ends up by pulling the plug on it and changing the whole story. Then we all sit there. Having run a business, I have to tell you I am somewhat aware of all that. One of the things that the British Government is doing in the United Kingdom is to introduce corporation changes and reductions in a phased manner. Do you think if we were to recommend—because that's all we're doing here—that the Treasury actually allow the Northern Ireland Assembly to have powers about corporation tax, that they might actually consider that as a way of doing things? One of the lessons that I think I've learnt from you today is that the corporation tax just appears, at this stage of the game, to be one club in the golf bag and actually you need to do significantly more stuff. It would be helpful at this stage if you could talk a little bit about employment regulation too and whether you think that is having an impact on all this today.

John Simpson: I appreciate the one club metaphor, and I've argued that with my colleagues, saying that to argue corporation tax on its own is actually not to describe what the game should be at all. Would Northern Ireland, given the authority, choose to phase in a change? I'm not sure. This takes me back, and I didn't answer the earlier point, to the so-called 19%. What I was arguing with 19% was that a small difference within the United Kingdom might have a disproportionate impact. Colleagues argue "Go for it," for lowering corporation tax in Northern Ireland, to which my answer is, if there are companies in England—if that's a separate territory still—that are motivated by tax rates, they might be motivated to come to Northern Ireland for a 19% rate because that's going a bit ahead of where the Treasury is going. That was the reason for introducing 19%; to say the incentive doesn't have to be to go to 12.5%.

Q271 Mr Benton: Good afternoon, Mr Simpson. I was very interested in that latter point, and your earlier remarks, because one of my concerns has been, representing the sort of constituency I do, which is Merseyside—and there are other deprived areas such as the ones in the north-east—whether the next step would be the regional governments and so on and so forth. I was interested in your remarks when you talked about the negative points to devolving corporation tax powers—variations all over the place and whether devolving such powers would really have beneficial effects. One of my concerns throughout this inquiry has been that, given the desire of everybody as far as I can see to try and help Northern Ireland bring about a healthy economy, increase jobs and so on, if this was granted, people, not just from my area and the north-east, would have every justification in the world to apply for the same rate. That would be morally indisputable. You'd have to give recognition to this. Could you elaborate a bit more on what you've done so far about the dangers of that?

John Simpson: I accept your line of thinking, Sir, and the conclusion it points to. I come at it from this direction: if the Irish hadn't gone to 12.5%, so much lower than any neighbouring country, we might not have been here today. If the international bailout for the Irish currently being negotiated had said, "You must put your company tax up," you would probably have called off today's meeting—well, I'm not sure about that. However, the spirit of a European Union where there is fair competition isn't helped by one state having a corporation tax rate that is designed to distort competition. It is not just marginally different; it's significantly different. I well understand why the Germans and the French were saying what they were saying in Dublin last week; I'm just surprised that they didn't win the argument. So, the spirit of your question is fine. One of the interesting things is—I'll come back on your question—I've been watching what's being said in Edinburgh. If the corporation tax argument has weight, and it does have some, though I'm doubting how strong, I would have expected to see the Scottish Parliament discussing the same issues. The Scottish Government is at the moment facing the prospect of introducing the recommendations of the Calman Commission, and if you go back and read the papers where they have debated what they should be doing to help Scotland, in the early days—probably 18 months/two years ago—they got no papers suggesting that Scotland should go for a lower corporation tax rate. In fact, I read the paper from the Scottish CBI and, quite remarkably, it was not mentioned. They were much more interested in personal tax rates and, of course, the Calman Commission is going down that road, although the minority Government in Scotland doesn't like it. Has that confused matters a bit?

Q272 David Simpson: John, on that point, and taking what you said previously about the blank piece of paper, 6 or 7 or whatever it would be, why is it then that the Republic of Ireland is so adamant that 12.5% corporation tax is paramount, and they won their argument?

John Simpson: You've put that in two phrases, but it's the same question. The short answer is they moved to 12.5% from a situation where after they joined the European Community they had a 10% company taxation for companies on the export proportion of their turnover, and they had a normal—I can't remember what the figure was—say, 25% company taxation for what they were doing in indigenous business. The European Commission said, "No, that's distorting; you must go for one." The Irish Government at the time went for 12.5%. They were allowed to do it and of course it has now become a very symbolic thing for them that, even under the Lisbon Treaty, the Commission has no right to alter.

Why did they do it? One argument, which I find credible, was that they were in a position where the marginal incentive to get in-flowing investment was much higher than any incentive to do more for home industry. The arrival of new investment was a much greater proportion compared with domestic investment than in other countries. Therefore, the more they could make this a very strong incentive for an inflow of investment, the better it worked for them. This was the argument I heard at the time.

Q273 David Simpson: But then the other point is that, while they have the 12.5% corporation tax for inward investment or whatever, those that, I understand, are exporting can be as low as zero corporation tax in the Republic. Is that right?

John Simpson: That would not be my understanding for it just as a straightforward profit and loss account. There might be some other provisions that they can claim.

Q274 Chair: If I may say so, you've made a very persuasive argument for the 12.5% or the retention of it. Doesn't that give some justification to our inquiry?

John Simpson: Of course it does, yes. The European Commission and the International Monetary Fund have given your inquiry purpose.

Chair: We were in Dublin two weeks ago now, I think, and they were absolutely determined they were not going to change it. Joe, Gavin, who has left now, and I were in the British Irish parliamentary assembly just a couple of days ago and it isn't just a sovereignty issue—they've given their currency up, for goodness' sake, so this would be a small step—but they are absolutely determined they need to keep that.

John Simpson: They actually do believe that it's a very powerful economic incentive, yes.

Q275 Naomi Long: Just on that point, one of the arguments that we've heard in the Committee when we have asked this question is that essentially this is totemic for the Irish Republic; their belief in it is almost greater than its actual effect. Their commitment to it is distorted on that basis. That's one argument, but the other side of the argument has been that to some degree their belief in it isn't entirely misplaced, in that it is a huge advert for the Irish Republic for foreign direct investment. I suppose the question that we're trying to answer is, given our land border with somewhere that has a much reduced rate of corporation tax, given the fact that we're trying to make Northern Ireland more competitive for foreign direct investment—some people who would shock you came in and said we should reduce to 10% because actually having the advantage over Ireland would be much better than being equal—but is there not an argument for having it up in lights that Northern Ireland is as competitive, for foreign direct investment headline figures just to say, "Look at us; we can do it too." Okay, you have to get everything else right; no one has come in and said it's the only thing, but there has been a significant number of people who have said that as a way of flagging up we're competitive and we're serious about bringing business in, it would work, and that that's why the Irish Republic are clinging to it because to shift it would almost be an admission that they're not out there fighting for that investment any more.

John Simpson: I wouldn't wish to argue against your flow of argument there at all. That's it precisely. It is that you can display it, and they've displayed it around the world and they add the phrase, I believe, "This is one of the lowest, if not the lowest rate in Western Europe." That they're using as a selling point. Also, they'll give the selling point that they would expect their labour costs to be lower than some of the more developed European countries. That will be there, but it's not advertised. The short answer, then for Northern Ireland is yes, there's no escaping the fact that we need something to give a similar push and this is why I was searching for the 19% model, or the model that said, "We will have a different set of allowances that has an even better effect." I'm not particularly inclined to the view we should go for 10% to compare with 12.5%; that seems to me to be a beggar my neighbour rush to the bottom, if that's a mixed metaphor. Nevertheless, something is needed and I would like you to find a method of doing it so that it isn't actually very expensive in terms of the results. I worry about only a small part of this £200 million being applied to attracting new investment. When they get their profits back again, Chairman, the thought of giving the Northern Ireland banks 60% or 70% of the benefits of the reduction in corporation tax rather worries me.

Chair: Your argument does assume though there won't be a pickup in the tax take over a period of time.

Q276 Naomi Long: Chairman, that was one thing I was going to come on to in comparison. You've mentioned obviously the problem with windfall gains for companies that continue to do what they do now and they benefit, and also brass-plating and others might come to that. The assumption is that this £200 million reduction is a recurrent reduction. In the Republic, when they reduced to 12.5%, revenue on corporation tax in 2002 was €4.8 billion. They changed in 2003 to the new regime: in 2003 it was €5.2 billion, and it peaked in 2006 at €6.7 billion. I'm not saying it was the only thing that changed, but the reality is that they increased foreign direct investment, they increased profitability of those companies and, therefore, they actually increased the amount of money they brought in through taxation. Is there not an argument that Northern Ireland could do the same? They might have to take a hit in the first year in the £200 million, but if you're able to grow profitability and grow additional companies and attract new investment, you could essentially not be in that situation in a year, two years, or three years' time.

John Simpson: I admire your optimism.

Naomi Long: I'm simply putting a question.

Chair: There is evidence to support the argument.

John Simpson: The evidence, as I have been able to read what other people have been saying, I think ultimately becomes a subjective judgment as to whether the flow of international business, particularly across the North Atlantic or from other places, would be the same in 2011 and 2012 as it was in 2004 and 2005. I think there is reason to doubt that the search of businesses to locate in Ireland, north or south, was much stronger in that period than it is likely to be in the next four or five years. Hence, I don't mind you being optimistic that this could eventually pay its way. I just wouldn't like to go to the bank and ask for the overdraft on the basis that I would be repaying it in three years' time.

Q277 Naomi Long: So, the others who have given evidence, for example, and have suggested that the payback period on this could be anything from 10 to 20 years.

John Simpson: More likely.

Naomi Long: But you do think there is a payback period?

John Simpson: There will be some payback of course, but I reserve the position and I'll come back to you in 20 years to debate whether or not we got all of it.

Naomi Long: With the benefit of hindsight? Absolutely. That's what we'd like to do, too.

Q278 Mel Stride: I just want to come back quickly to the Republic vociferously defending its 12.5% corporation rate and the implications of that. One could argue, as has been suggested, that this means that it works and that's why they want to defend it. Equally, could one not argue, just to take your argument a bit further, that actually we've ended up in a position where it is totemic? It sends a very strong signal to the markets and there is a huge downside if they step back from it, which of course is not a factor when you're considering going down to 12.5% from where you are at the moment. My second supplementary point would be: is it not also the case that Ireland, having occupied that space in terms of getting there and defending that position, and having been so well known over decades for having been a low tax position, that space is not actually open to Northern Ireland in the same way. If you were to drop the rate, you're a "me, too"; you're playing catch-up and it's a rather different situation. I'd value comments on those two thoughts.

John Simpson: You're right on both counts. The position has been occupied. You don't have the unique advantage since you are number two. By definition, it's not unique any more. Equally, having gone to 12.5%, if I were in Brian Lenihan's position with his tax rates, never mind his political position today, I would utterly say, "Don't push me around now; you will disturb something that is now serving us well. Maybe you could've argued some years ago we shouldn't have gone that low, but we did. We have it. It would look very odd in the face of an economic crisis if we now had to retreat on that particular point."

Q279 Lady Hermon: It's a real sign of sovereignty.

John Simpson: Yes.

Lady Hermon: It's something retained of our national sovereignty that we will keep our corporation tax.

Q280 Oliver Colvile: But there is a package, Mr Simpson, of other activities as well, which the Southern Irish Government now has to bring into play. My understanding is that VAT is going to rise to 24% and so on. Do you think that the package of other activities will make Southern Ireland look less competitive against Northern Ireland? What do you think the impact is going to be?

John Simpson: The Irish Government now, for some months, if not longer will be living with a very large international question mark over the stability, the survival and the regeneration of the economy. There's no reason why their economy shouldn't regenerate, but the international markets looking at the Republic of Ireland today are saying the Irish Government is in a very unstable position. The level of borrowing to cover not the Government's debt but the consequences in the banking community has come up more strongly than anyone outside the Dublin Government had imagined in terms of the risks of bank failure. Once you start putting that in the international press, people stand back and say, "Oh."

Oliver Colvile: "We're not going there."

John Simpson: Well, let them prove themselves and come out of this first before we do anything, in case it gets worse.

Q281 Oliver Colvile: So is it fair to say then that Northern Ireland actually has a window of opportunity to maximise its ability to be more attractive.

John Simpson: It's one of those occasions when we're all Irish, unfortunately.

Oliver Colvile: I'd like them to come to Plymouth because I desperately need more investment to Plymouth. That sounds lovely. So if only we got that.

Q282 Kate Hoey: My problem is that, in a sense, the argument now has changed, even in the last week, particularly because we have a coalition Government now that is looking to lower corporation tax throughout the United Kingdom, admittedly over a period of time and we're not bringing it down to your 19%. With the particular state of what's happening in the Republic of Ireland—and I'm disappointed that there wasn't some more levers put up, given the situation of us helping to bail them out—are we in a situation now where actually all this fervour, argument and discussion about corporation tax in Northern Ireland is not as relevant now and that we could be taking up the point of the whole question of it's our opportunity in Northern Ireland?

John Simpson: I think your point can be answered by saying we're not sure now quite how much the strengths of the argument have changed. However, it's still possible that if corporation tax authority was devolved, it might be used in constructive ways. Today, I'm uncertain about using it for 12.5%, but others will argue other options. By the time the Treasury allows it to go through Westminster and become a new devolved subject, can we have permission please to review the landscape and decide how to use it? If we just choose not to use it, it won't cost a penny. So, you can create a potential part of the economic armoury.

Q283 Kate Hoey: But how long afterwards is it going to be that, if Northern Ireland is given the opportunity to do that, Scotland will want it, Wales will want it, parts of my London—why shouldn't London—will want it? The whole thing opens up and Northern Ireland then is being treated very, very differently from the rest of the United Kingdom, and that is something that I personally don't support.

John Simpson: But that is precisely why we're in the room.

Kate Hoey: Exactly.

John Simpson: And if I was the MP for south of the Thames anywhere, I think I would say that as well. It's still Bermondsey, is it?

Kate Hoey: No, Vauxhall.

Q284 Chair: You might make that argument if you live south of the Thames, but with absolutely great respect to Members of Parliament from Scotland, Wales and Northern Ireland, I get letters, and other English MPs get letters saying, "Why is the spending per capita in Scotland, Wales and Northern Ireland so much more than it is in Tewkesbury?" Now, if I were to forward you those emails, how would you advise me to respond?

John Simpson: I would put on my Northern Ireland hat and say, "Social need, dear constituent."

Lady Hermon: Add to that 40 years of violence that Northern Ireland had to endure, which Tewkesbury didn't.

John Simpson: Indeed.

Lady Hermon: And I wouldn't wish it on Tewkesbury.

Q285 Chair: Indeed, but if we're moving forward, if we're saying that's coming to an end, and we have to start the economy going again, how would you then respond?

John Simpson: Chairman, there is a level of this debate that I think you're moving towards, that actually the financial relationships that govern Scotland, Wales and Northern Ireland are, at the moment, relatively generous, by any standard, to Northern Ireland. If Northern Ireland is to be as productive a part of the United Kingdom, with the skills and the ability to produce value added in a peacetime set of circumstances, the challenge should be thrown down to Northern Ireland, "Now get on and do it." My colleagues from Northern Ireland will forgive me if I'm at this stage a bit pushy. We are inclined to argue that somehow or other we're in a position where we badly need this public sector the size it is; "We're not ready for the pain." We'll never be ready for the pain. Get on and do it now.

Q286 Naomi Long: Just on that specific point, you might be surprised to know that I don't necessarily disagree with what you're saying in terms of trying to find ways of turning the economy around that are constructive rather than always encouraging people in Northern Ireland to see themselves as reliant, because I believe that seeing ourselves as reliant is part of the problem; we need to change the culture and the aspirations in Northern Ireland so people don't believe that reliance is an option. I don't disagree with you in terms of the culture change; I maybe disagree with you in terms of how quickly you can do it. But is this not a case of invest to save? Essentially, what this is doing is providing a potential spur to the local economy; a potential investment. The quid pro quo is it has to be paid out of what we already get, so we're actually not asking people for more. It's not that on this occasion we would be coming saying, "Please sir, can we have some more?" We're actually saying, "Give us the freedom to do what we want with what we already have." I feel that's a completely different cultural approach to changing the economy in Northern Ireland from our previous approach, which generally, I have to say, has been, "We need more" because we have not been in a position, I think, until this point to have this kind of conversation. To me, it almost answers your point that it's not about reliance; it's about saying, "Given what we have, can we do something different with it to make a change?"

Q287 Lady Hermon: Could I just double check another piece of your evidence, John? It's twice I think that in fact you've mentioned this, and I think it is a very important point to the Committee: if the ability to the reduce corporation tax were in fact devolved to the Assembly and then the Assembly were to decide, "Well, actually, we won't cut it to 12.5%, we might go 19%, but on top of that we will do additional things like the 100% no tax if it's R&D investment, retraining and all that." That I find very attractive. However, while I might find that very attractive, could we just double check with you would that be compatible with EU legislation on State aids, on the Azores judgment and those technical things that they must take account of?

John Simpson: At this stage, I become even more an amateur than the professionals sitting around the table.

Lady Hermon: Never, John, no.

John Simpson: My understanding, as a lay reader of the Azores judgment is that if it were a territorial responsibility of the Northern Ireland Administration, the particular quirks of the way in which we administered would be our business.

Lady Hermon: As long as it goes right across the board.

John Simpson: As long as it's applied uniformly within Northern Ireland. We wouldn't be allowed to apply corporation tax in Northern Ireland on the basis we're to give 12.5% to new inward investors, but existing businesses will stay with the 28% or whatever it is. It has to be the same rate right across the board.

Lady Hermon: Thank you. That is really very helpful as well.

Mel Stride: Just on that point: that would include the R&D credits and tax breaks?

John Simpson: Everybody would have to have the same R&D rules, but not all of them would use them.

Q288 Mel Stride: You're saying that you are antipathetic—if that's the right word—to the idea of lowering the tax, but you're arguing that maybe we look at these specific areas like R&D and training tax reliefs, etc. You're also saying that one of the weaknesses of the tax approach is that it applies to everybody—the deadweight argument—which I totally accept. So, I'm therefore interested in whether you feel there would be a distorted impact of going the R&D tax relief route in as much as it might naturally favour new entrants—I suppose it might, arguably because they're coming here to invest, aren't they—and if that's the case, what kind of level of impact do you think that might be, in terms of every pound that is then spent not on tax reduction but on tax credits actually getting to the end objective of bringing people in? I've probably not phrased that very well, but I think you're just about following me. It's a way of increasing the bang for the buck on the inward investment? Isn't that, in a way, what you're arguing?

John Simpson: Yes.

Mel Stride: Can you quantify that in any way for us?

John Simpson: I don't think we can quantify it, but what we can say is that, if this was available, who are the people likely to be doing R&D or innovation expenditure? Would they be encouraged to do it in Northern Ireland if that became a tax allowance? To answer this: yes, in both cases, this would be worth having. I hypothesise, but only hypothesise—and I can't spell it—that ultimately you could be offering incoming businesses a set of circumstances in which, if they were doing the right things, their tax liability might be very low indeed, if not zero.

Q289 Mel Stride: So what you might call the multiplier effect of doing it that way as opposed losing it through deadweight the other way might be very significant, mightn't it? The impact might be two, three, four, five times through spending the pound in that way on the inward investment.

John Simpson: Yes. The Irish advertise, "We have the lowest corporation tax rate of 12.5%." The Northern Irish advertise, "Come to us and we'll probably make you tax free for five years."

Q290 Oliver Colvile: That comes back to a question that I asked our previous witnesses about the whole concept of actually reducing taxation as a whole because it makes it much more attractive. When we had Richard Murphy here, he said, "No, no," and that this was quite the wrong way of going about it, but I think there is some evidence to suggest the lower the taxes, the greater the amount money that Government ends up receiving into its revenue. Would you agree with that?

John Simpson: It can be right. It's the same point Ms Long was making: would it repay itself? Given the right circumstances, there will be a plus or there will be a movement in that direction, but none of us sitting around the table can quantify it at this stage.

Q291 David Simpson: Just to wind up from my point of view, John, what I'm taking out of your evidence today is that corporation tax is really an element, but without fast-track planning, R&D, skills and all of that, it is not a silver bullet to do the job on its own. What is your understanding, finally, of what the Secretary of State has said about Northern Ireland and either an enterprise zone or enterprise zones. We haven't really got to the bottom of it; what's your understanding of that or what do you believe it could be?

John Simpson: Won't we know something about that in a week's time?

David Simpson: I don't know. Normally you know more than I do. Tell us what you think.

John Simpson: Aren't we expecting high and mighty visitors to arrive to speak to the business community some time next week?

David Simpson: Yes, I think the Chancellor and some others or whatever; some of his officials.

John Simpson: The short answer is that whoever invented the phrase, "We'll make Northern Ireland into an enterprise zone," didn't ever specify what that meant.

David Simpson: Yes, that's the problem.

John Simpson: It might mean, "We're actually talking about corporation tax"; that's what it means. I'd like it to be a bit more than that, but then the next line of retreat would be—or the next line of advance—enterprise zone, "Yes, we could spend £100 million more on x and y." Are you coming to finance that particular problem? I think the short answer at the moment is that it would be a dangerous expectation that the enterprise zone was going to come with Treasury largesse—never mind the Presbyterian Mutual Society for the moment—so that I'm in the dark. I don't have a ready set of suggestions as to how to make an enterprise zone something very significant without it meaning spending on doing something different.

Q292 Oliver Colvile: Do you think there is quite a good case now for Southern Ireland and Northern Ireland to be working much more closely together in trying to present a much more coordinated case for inward investment in both parts?

John Simpson: I have no difficulty with cooperation between the state agencies—Invest Northern Ireland and the IDA. I am, at the moment, and have been for the last four or five years, working in parallel with Padraic White who was the Chief Executive of the IDA until he retired and is now involved with me in terms of some of the things in West Belfast and on the Shankill, and the language is the same, but don't expect that the agencies will, as it were, put all their cards on the table as if it's one pack of cards. They do have to play different suits in a cooperative manner and the two suits, and cooperation, must be the metaphor—if you're allowed to mix suits on cooperation. It depends what card game you play. There you are.

Oliver Colvile: Okay. That's really helpful.

Chair: Has anybody else any final questions?

Mel Stride: Can I just, Chairman, make one point, which is that I have found your evidence extremely helpful? It was very kind of you to come and give it.

Lady Hermon: Very helpful indeed. Thank you.

Q293 Chair: Thank you very much. A final point: what I'm hearing is you say tax in its wider sense is important; not necessarily just one tax, but the whole the tax system. Would that be correct?

John Simpson: Yes. This is tax and incentives, and now, with incentives being trimmed by the changes in the European legislation on state aids, which I'm not opposing, but for that package of the things you do to incentivise—partly tax, partly aids—but partly the wider setting in which you ask business to operate.

Chair: Thank you very much indeed for your evidence.


 
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