Corporation Tax - Northern Ireland Affairs Committee Contents

Examination of Witnesses (Questions 1-87)

Q1 Chair: Secretary of State, welcome and thank you very much for joining us for this session. As you know we are looking into the issues of corporation tax and enterprise zones. We have decided as a Committee that we are going to produce one report covering those issues, so your evidence session will be extremely useful. You are very welcome. Could I ask you to very briefly introduce your team? If you would like to make a very short opening statement on the issues we are considering, that would be very welcome. Thank you very much.

Mr Paterson: Chairman, thank you very much for kindly inviting me along. I am furiously trying to turn my BlackBerry off—it has finally cooperated. I am happy to introduce Alan Whysall on my right and Jon Donaghy on my left, who both worked extremely closely in helping to fulfil what was originally a Conservative election commitment and then became a Coalition commitment: to produce a Government Paper on rebalancing the Northern Ireland economy.

As you know I spent three and a half years as the Shadow Secretary, going to Northern Ireland every week. It became absolutely clear, and there was a very broad agreement, that Northern Ireland could not continue with such a high preponderance of GDP depending on public spending; according to one report it is 77.6%. During that time I came across some absolutely marvellous, world­class firms. Sadly, there just are not enough of them. It became our very clear policy that we should bring in some radical measures to rebalance the economy. We have worked extremely closely with the Treasury particularly David Gauke, the Exchequer Secretary, who I would like to thank personally on the record, and also with the Executive. So this is very much a joint effort.

It is a team effort: the First Minister, Deputy First Minister, Sammy Wilson and Arlene Foster have all been closely involved in the drafting. Now we have launched it, and it is up for consultation with a closing date of 24 June. I am delighted your Committee is looking into this because I really think that, by improving the private sector, increasing prosperity, we will filter wealth into every corner of Northern Ireland. It will be an enormous benefit, not just an economic benefit but a huge social benefit, and over the years we would really nail down the Peace Process. I am glad to say that last week we saw the first Assembly to complete its term for decades, but I think the other side of the coin is that balancing the economy will really put Northern Ireland on the route forward.

Q2 Chair: Thank you very much. You have already answered the first question I was going to ask. The Northern Ireland Office, particularly you and the Minister of State, have been closely involved in the preparation of this document, is that correct?

Mr Paterson: Yes. In fairness to the Treasury, they had an Emergency Budget to put through, and they then had the most difficult spending round probably for 50 years, so they have been more than occupied, but we had meetings with the Executive in August. I have to say that it did take longer than I thought, as the Paper is extremely complex; it is a thoroughly professionally produced Paper. The Executive finally got a Treasury draft, which we were reasonably happy with, in December, and they have had three and a half months to put in their ideas. So there has been considerable input from the Executive Ministers over recent months, and they have improved it enormously.

Chair: Okay. If we could ask some questions, that would be good.

Q3 Naomi Long: You are very welcome. It is very good to have you with us here this afternoon. I am aware that you personally have been very enthusiastic in your support for a reduction in corporation tax in Northern Ireland. The Government Paper, though, is slightly more guarded in its language and slightly less enthusiastic than you have been up to this point. Do you think that you personally have greater faith in the potential of the reduction in corporation tax to kick-start the Northern Ireland economy than your colleagues in the Treasury?

Mr Paterson: In fairness, the Treasury is an extremely professional organisation, and they are also bound by the rules of the OBR. This is a very cool presentation of the facts as they see them, but of course it is also an estimate. Nobody knows exactly how this will work.

The point I would make is that, going to businesses week after week, I saw the huge advantages that Northern Ireland already has. It has the English language; good communications, good air links to the rest of GB and Europe; Kelvin broadband—better broadband than pretty much anywhere else in the UK—an excellent education system with GCSEs and A Levels 10% better than the rest of the UK; two absolutely world-class universities; and huge international goodwill. But it just needs something else. We need something to trigger a step change, and sadly we have not got that at the moment. I am afraid I have lots of gloomy statistics on the Northern Ireland economy. We are lagging behind on productivity and there are some bad figures today on household income. We need something to lift Northern Ireland on to a different plane of economic activity.

Time and time again I go to businesses and ask what two things would really help their businesses grow. One I am told would be a reduction in corporation tax, and the other is a much swifter and more decisive planning system. So I then came up with the idea of an enterprise zone, because many of the competencies I would like to see brought in are actually local competencies. I am very pleased the Assembly has brought in a Planning Bill. So my idea of an enterprise zone was just a phrase for me to go to companies and ask them what would encourage them to invest, take on more people, and what would encourage their overseas allies to come and invest here as well.

Q4 Naomi Long: The language used by the Treasury in the report refers to this as being a "significant risk". Would you say that in your view, rather than in their view, it is a worthwhile risk? Would you share their view that there is a significant risk? It sounds to me that they have significant reservations about how effective it is likely to be in comparison with your enthusiasm.

Mr Paterson: Well no, they predict pretty massive gains. They talk about domestic investment increasing by £110 million a year, and foreign direct investment by £310 million. But it is a Treasury Paper and of course it is cautious; they are not going to come out shouting and whistling. Personally I think the risk would be to do nothing. To those who attack me and say I have got this wrong, I say, "Fine, that is absolutely fine. I might be thick, but I have been to all of these businessmen and business organisations and they all want this." We had an extraordinary event last week including the Secretary of State, a senior Treasury Minister, First Minister, Deputy First Minister, Justice Minister representing the Alliance—your party—leader of the SDLP, leader of the Ulster Unionist Party, and the Trade Minister, Arlene. It was an extraordinary event. I cannot think of another time when, the day before an election is about to start, there have been all five political parties completely united. I have been pressing this idea for over three years, and my question to those who do not like it is: what is your plan? What is plan B?

Q5 Lady Hermon: Secretary of State can I just ask something? Were all the political parties united on the proposal to reduce corporation tax, or were they united on the proposal that we rebalance the Northern Ireland economy, as the Treasury Paper talks about? What exactly was it that they were united on?

Mr Paterson: First of all, I think that nearly all of their election manifestos were united. They confirmed their unity, that they supported the idea that reducing corporation tax would bring in investment, increase indigenous investment, increase profitability and above all would increase employment. There was absolute, total unity on that.

Q6 Lady Hermon: Again, could I just pick up on the point that has already been made by Naomi Long? I am quoting from the Treasury document, paragraph 4.11—and I am not making this up; I am just reading directly from the Treasury document—and it says that "due to the large range of factors that determine investment levels, it is necessary to be cautious in assuming that a lower corporation tax would have the same effect in Northern Ireland as it had in the Republic." How do you respond to that? In black and white it states there is a need to be cautious.

Chair: That is the Treasury and not the political parties presumably?

Lady Hermon: Yes, of course.

Mr Paterson: I said that this is Treasury Paper and it is bound to be written in very sober and cool language. They are quite right to say there are no certainties. There is no certainty that we will pull this off; this is not in the bag. We need a very enthusiastic response. It would be a huge help if your Committee gave an enthusiastic response for a start. We need a deluge of enthusiastic responses to the Treasury before 24 June encouraging the Treasury that this has huge local support, not just amongst politicians but also amongst businessmen.

The guy I would like to quote was our host in Lisburn, John Cunningham. This was a guy who had set up a business, which he had sold very successfully and had retired aged 65. Bluntly, I think he found retirement boring, and within two years he had formed a completely new company. People talk about fat cats, but he has entirely invested the money he made in his business career and is now employing 150 people. He has a product with all sorts of world patents on it that has enormous export potential. Forget about what I am saying, but take it from him; a guy who has actually done it in Lisburn, employing Lisburn people. He said, "I think this is a unique opportunity to take a very positive step forward from a business standpoint. This money that is represented by corporation tax is the very lifeblood of businesses, that which is required for reinvestment in new products and expanding markets, and the reduction of it cannot be other than a very good thing." That is from John Cunningham from Kelvatek. Let him speak for all those businesses in Northern Ireland that have come to me asking for this.

Q7 Ian Paisley: I think it would be foolish to look a gift horse in the mouth, quite frankly, when something like this is on the table. Other businesses around the United Kingdom would break our arms for this offer, quite frankly. It is the sort of game changer that the economy requires. Could I ask you this: in terms of operation, do you think it would be possible that, if this consultation comes out directly, from 24 June 2011 until 1 April 2012 we could advertise this opportunity around the world? By April 2012, the new tax year, we could see new businesses coming into Northern Ireland, and give this benefit to existing businesses in Northern Ireland. Could we use those nine or 10 months to really promote Northern Ireland as the tax haven destination?

Mr Paterson: I will repeat what I said a couple of minutes ago: this is not in the bag, we will have to convince the Treasury and we will have to convince my Cabinet colleagues, but this was a Coalition commitment. There is complete understanding from the Prime Minister and the Deputy Prime Minister down that we really do need to do something radical for Northern Ireland. On that basis I am very positive and I will be pushing this very hard, but there is an enormous amount of complex detail, so I would not like to give any promises on timing.

There is a Finance Bill that comes round like a bus every year; we voted on it last night. Ideally, if I could do it, I would like to get something in an upcoming Finance Bill, but there are constitutional complications. This is a huge endorsement of devolution by the Coalition Government, so there might have to be a standalone Bill. To answer your question, I think the impact on business would very quickly be positive. That is why I am keen on the idea of phasing, and I think we will probably come to that in a minute. I think that once you have established the principle that this is going to happen, it would really rouse interest in foreign investment.

I was up in Portrush with the Chamber of Commerce a couple of months ago, and there were two guys there working for American firms. I almost had to hold them down at the table at dinner, as they wanted to dash off and tell their managing directors back in the States, who were looking for a site for a European headquarters, on the grounds that they would obviously like to centre the headquarters around the existing satellite business. I was saying, "Guys, you just cannot do that yet."

But there would be a huge positive influence, absolutely. I totally agree with you. If it was absolutely clear this was going to happen, the actual timing of it in some ways is not that important in triggering the interest in the investment. If you are talking Invest NI, it takes at least two or three years to get a project up and running.

Q8 Chair: The likelihood is, because of European Union rules, that the Government would give the authority to lower or vary corporation tax to the Assembly. So there are two stages: giving them the authority to do it and then them actually taking the decision to do it.

Mr Paterson: Absolutely. The decision by the Westminster Government would be a massive one. It would be a major constitutional decision and a major economic and financial decision. That decision would be for us to devolve the power to the Northern Ireland Assembly to have complete decision on corporation tax. The Azores judgment, which I think you have discussed in other sessions, is quite clear: there must be total control by the relevant democratic Assembly of the entire geographical area within its bailiwick. So Westminster cannot arbitrarily give a benefit to Northern Ireland; Westminster has to give the power to Northern Ireland.

The second part of the Azores judgment is that the decision must be entirely in the hands of the local Assembly, and there must be no interference from any other agency or local Government. That endorses what we would plan. Thirdly, there can be no compensating subvention from the national Government for any loss of revenue. You are absolutely right that the decision would be firmly in local people's hands. I said on the telly the other night that I personally think the sensible thing would be to sit tight for a year and see what comes in. Lady Hermon mentioned the doubts; let's just see exactly what comes in and run it as a sort of shadow operation, and then I think the sensible thing would be to phase. But the decision is entirely in the hands of the Assembly and the Executive.

Q9 Dr McDonnell: Thank you Secretary of State. I am sorry that you forgot to mention that I was sitting, cheering enthusiastically in Lisburn.

Mr Paterson: And you asked a very helpful question.

Dr McDonnell: Yes, and being very helpful and endorsing what you were doing. This Paper has been described as joint, yet the impression is that the Executive were not as involved as they would like to have been, or were led to believe. Can you give us a bit more detail of their involvement and their engagement in the process so far? You mentioned it earlier, but just to delve a little bit further.

Mr Paterson: First of all, the Treasury was immediately tied up with the Emergency Budget, so that put a delay in what I thought might be a programme. We then met, as I remember it, the First Minister and Deputy First Minister, and then the Finance Minister and Deputy Minister probably in about August, and we laid out the plans for writing this. It was agreed that there would be input. In our opinion this was always going to be a Treasury Paper—it is a Government Paper. But we wanted input from them. It was in the spending round which, as we all know, took up a huge amount of time, and it got delayed. I know Sammy and Arlene were irritated, and I do not blame them because it did take us longer to get a draft Paper to them as something to go on.

I had hoped we would get it done by the end of the year. By December they had a draft, and they have had three and a half months, we have had meetings again, all of us together, and I met with the First Minister and Deputy First Minister and we tidied up the final couple of details of it in Washington at a White House reception. So there has been very considerable involvement, from December onwards, with Northern Ireland Executive officials and Northern Ireland Executive Ministers sending in drafts and redrafts and asking an enormous number of questions. So in the last three months there has been very significant input from the Executive. I think that was shown by the response, and I repeat that it was an extraordinary event last week. You were watching it.

Q10 Dr McDonnell: One of the criticisms of devolution that you hear from time to time is that it has given the Regional Assemblies or Parliaments responsibility for spending money without a lot of responsibility for tax raising. Do you see this as the beginning of a step towards the Northern Ireland Assembly being perhaps more accountable to the electorate directly and obtaining tax-varying powers?

Mr Paterson: I see it as a unique tool to help rebalance the current asymmetry, where each citizen in Northern Ireland receives £10,662 from the state and in England it is £8,559—that is 25% more. Now we all understand why; everyone understands why there is this very high level of public spending, but we all know that is not sustainable long term. All the concentration is on what are actually quite modest sums coming off the block grant. I see a chance—exactly what you are suggesting—to grow the cake and to grow the revenue. This is actually a novel concept. Because Northern Ireland has been so heavily dependent on funds from the Treasury, there has been a thought that that is the main source of wealth. Now we are saying, "You get the projects in, you get the roads built on time, you get the planning permission done and get out there and sell Northern Ireland as a wonderful place to do business, you will get the projects up and they will generate the wealth and the tax revenue."

Q11 Mel Stride: Welcome Secretary of State. You quite rightly identified that there are two stages to this process: the devolution of the authority to vary tax rates and then the taking up of that opportunity by the Government of Northern Ireland. What do you say to the argument that there may not be the political will to seize this opportunity—that the parties will start to gravitate towards a position where they are arguing about not cutting back on expenditure, particularly at a time when the economy is difficult, and that they therefore will not push forward and seize this opportunity? I agree with you that this is a huge opportunity for Northern Ireland. That is the first part of my question. Secondly, to what extent do you think those arguments might damage this report even at this stage? In other words, having parties queuing up to say that they do not feel it is a very good idea, and we should not be cutting back in order to fund tax cuts?

Mr Paterson: I am delighted to say that there is absolutely no sign of that. If I quote Sammy Wilson, who obviously has said much on this, he said, "Everyone is agreed that it will help attract new inward investment and help local companies to invest and to grow to meet their full potential. That is an enormous prize." Peter Robinson was extremely supportive; Martin McGuinness was extremely supportive. Martin McGuiness said that "it is crucial we strengthen the private sector, attract new investment and increase economic growth while maintaining investment in the public sector." Margaret Ritchie of the SDLP said she is "100% behind the proposition." As you know, it was part of the UUP manifesto. David Ford said "this has the potential to completely transform the Northern Ireland economy."

I am delighted to say that I do not see any opposition amongst the political leaders. There may be party members or some Members of the Assembly who perhaps have their doubts, but if you are talking about leadership, which was your question, I see all party leaders taking a strong stance on this and I am absolutely delighted.

Q12 Mel Stride: Is that the case even when the argument starts to move on to not just the benefits of tax cuts but also how we are going to fund them? Do you think that consensus will hold even as the debate moves forward?

Mr Paterson: Well yes, do not forget that the First Minister and Deputy First Minister, Arlene and Sammy, have been very involved in some very nitty­gritty negotiations on the text with the Treasury. They are completely up to speed on the detail. I have to say that the funding is modest. The best table I can show you is table 4.A on page 38. This shows that if you phase this, every 2.5% drop in corporation tax requires a reduction of £60 million to £90 million. Now, the block grant is just under £12 billion. The UK state spends £19 billion in Northern Ireland, so £60 million is 0.5% of the block grant. This is a very modest risk for a potentially enormous gain.

Q13 Chair: One of the problems, and this is something that I will put to the Treasury Minister, is that whilst I can understand that future assessments have to be that—assessments—I was very surprised to find the Treasury does not know how much corporation tax it collects from Northern Ireland. That is amazing and that must have been a frustration for you. They do not know. They have used the 1.5% and the 1.25% as illustrative figures, but they do not know the amount.

Mr Paterson: Well I think it probably would have been an enormous exercise to go through every single address and postcode.

Chair: But to satisfy the European Union—

Mr Paterson: I think that is the sort of detailed question that, in fairness, you should address to David Gauke.

  Chair: I will ask the Treasury, but if it were to happen, they would need to know that in order to address European Union rules.

Mr Paterson: Yes. That is why I get back to Ian Paisley's question. That is why I cannot predict too much on time. We will get the responses in, but there will then have to be some very detailed work. You are quite right, Chairman: the first thing we will do is get a much more accurate picture on the tax take. In fairness to the Treasury, they have had an incredibly busy 10 months and they have been very cooperative with us. But the detail is the sort of question you will have to put to David rather than me.

Chair: Well, we certainly will.

Q14 Lady Hermon: I wonder, just to establish the facts, what percentage of companies in Northern Ireland actually pay corporation tax at the present time?

Mr Paterson: I do not think that is in here. Do you want to have a rummage?

Alan Whysall: I think we do not have that figure.

Mr Paterson: I think it is part of the question the Chairman put; it is a lack of absolute nail­down detail.

Q15 Lady Hermon: No, it is just a question about the number of companies in Northern Ireland that pay corporation tax. I thought that would have been calculated somewhere by now.

Mr Paterson: No, what has been taken is the percentage, which, as the Chairman said, is 1.25% or 1.5% of the total corporation tax take. That is what is in the Paper.

Q16 Lady Hermon: Yes, well my question is quite different. What percentage of companies pay corporation tax?

Mr Paterson: I don't think that figure is in here.

Q17 Lady Hermon: Could I also just ask for a slight clarification of what you described as "modest cuts" in the block grant. Rather than turning to the page, the diagram and the percentage out of a huge chunk, could you just tell us what the figure that you describe as a modest cut in the block grant would be?

Mr Paterson: Yes, if you look at page 38, box 4.A says that each 2.5% drop in tax costs you between £60 million and £90 million on both rates of tax. That is the standard rate and the small companies tax. So the quote I gave you just then is that £60 million is 0.5% of the block grant. So personally I think 0.5% is a modest investment; it is a 2.5% drop. If you look at what has happened in other countries like Canada, it has tumbled from 29% down to 15%, which they will go to next year. I think that, as I said on the television at the weekend, is probably the sensible route to go.

Chair: Okay, I think we are going to come back to that in a little more detail.

Q18 Oliver Colvile: Secretary of State, thank you very much indeed for coming as well. I just want to make absolutely sure that I understand this. What we are talking about here is giving the Assembly and the Executive the power to take this up if they want to. If, on the other hand, they decide not to, frankly it is giving the power to the Assembly and the Executive, rather than Westminster and Whitehall telling them that is what they have to do.

Mr Paterson: I do not think we would go through an immensely complex legislative and administrative exercise if they were not actually going to do it. Obviously we have to get agreement with the Executive on the exact manner in which the exercise would go about. Would you have a totally separate collection system in Northern Ireland, or could you do it as a satellite of the Revenue? There is an awful lot of detail to be sorted out, and obviously that has to be run past the European Commission. There is no point going to legislate if they are not going to seriously do it.

Q19 Oliver Colvile: The concern might be that they feel that if they actually do take those powers, all of a sudden they are going to see their block grant go down and that is going to be very concerning to them.

Mr Paterson: I think we have got past that. When I first started raising this, certain senior figures were saying, "We will have it for free, and we are not going to knock it off the block grant." I am afraid that is not an option. Firstly I think it is wrong, but I am entirely happy with the rules of the Azores judgment. It seems a sensible way to go. There were all sorts of scare stories before we produced this Paper. Sadly the sums, because of the small size of the private sector in Northern Ireland, are quite modest.

Q20 Kate Hoey: Secretary of State you keep saying "modest". To follow on from Lady Hermon, maybe I should be able to work it out for myself, but could you give me a feeling of amounts in terms of modest cuts to the block grants?

Chair: Can I just interrupt and say that we do have a detailed question on that coming up? Could I bring you in at that point?

Q21 Kate Hoey: I just wanted a figure, that was all. Then I can sit quietly again.

Mr Paterson: Well it is in the Paper.

Kate Hoey: Yes I know.

Mr Paterson: If you go the full whack, to 12.5%—

Chair: We are going to come back to that

Mr Paterson: Do you want to come back to that? Okay.

Q22 Kate Hoey: I just wanted a straightforward answer.

Chair: I do not think there is a one-word answer, is there?

Mr Paterson: Well the paper says if you take 1.5% it is £270m, and if you take 1.25% it is £225m.

Chair: Right, well we will come back to that.

Mr Paterson: The one I am giving you, which I prefer to concentrate on, is the phasing, because that would be the sensible way to do it. I repeat again that a 2.5% cut in the tax costs between £60 million to £90 million. £60 million is 0.5% of the block grant.

Q23 Lady Hermon: It is an awful lot of hip operations and new schools. That is all I can say.

Mr Paterson: Can I answer that? I really want to head this off and absolutely nail this. This goes back to Alasdair's question—

Chair: Secretary of State, we are going to come back to this point in detail in a moment, but can we go through the agenda as we have it?

Q24 David Simpson: With corporation tax, there is an issue around finding the money for it. I think there is consensus that it is the way forward. Ian Jr made a very valid point that it would be looking a gift horse in the mouth. I would be in full support of it but I think that people more sensible and further up the ladder than me need to get around the table and sort it, because that is one of the components—one of them, not the only component—to drive it forward.

I want to touch on the question I have in relation to enterprise zones. I have questioned the Secretary of State on this before but I just want to get clarity. You alluded to it in your opening comments. The Chancellor has announced that there will be enterprise zones set up in and around the UK. Northern Ireland was not mentioned at that particular time, but he did say that he would be in touch with the devolved Administrations to work closely with them in relation to it. We have had people give evidence to this Committee in relation to enterprise zones, and they alluded to the 1980s. Capitus told the Committee that previous enterprise zones in other parts of the UK were relatively successful, whereas the zones in Northern Ireland failed to adequately benefit. They gave a number of reasons: corporation tax in the south of Ireland and the investment negative effort.

You may have answered this in your opening comments, but I would just like to put it on the record. When we talk about an enterprise zone for Northern Ireland, are we referring to the form that the Chancellor has outlined in relation to different parts of the United Kingdom getting enterprise zones and special concessions? Are we talking about the 1980s form of enterprise zones in Northern Ireland, or are we talking about the whole of Northern Ireland being an enterprise zone? I fear that if we go down the road of the 1980s, where enterprise zones such as North Belfast, West Belfast and different areas in Strabane were set up, there was a displacement of jobs. I just want clarification from the Secretary of State, for the record, once and for all, what was exactly meant by this enterprise zone?

Mr Paterson: Well there are two ideas here. There is my idea, when I was stomping around as the Shadow Secretary for three and a half years with a phrase that encapsulated my idea that the political process was delivering and was bedding down, and I wanted to make it our absolute priority to concentrate on the economy, which I thought would finally nail it to the floor, with all the enormous social benefits.

So enterprise zone encapsulated me going around, talking to businesses, business organisations, to accounting firms, lawyers firms, etc, just asking how they would revive the private sector. That was on the basis that a 77.6% of GDP dependence on public sector spending was wholly unsustainable, that we could not do anything too rapid or precipitate, because we would destabilise the political process. My phrase was that it would take 25 years to complete this process and rebalance the economy. Some people were disappointed, but I think I was being realistic. That meant increasing prosperity, productivity and employment in the private sector, with the multiplier effect of adding VAT and income tax, etc, and then steadily reducing dependence on public spending.

So that is what I meant by an enterprise zone, and I said that the whole of Northern Ireland should be turned into an enterprise zone. Time and again it boiled down to two things: corporation tax and planning. It was useful to have that phrase, because I said that a lot of these competences are now in devolved hands and nothing to do with me at all, although, as I say, I am very pleased that the Assembly has passed a new Bill on planning. So that was my idea on an enterprise zone, which goes back three and a half years.

Quite separately the Chancellor of the Exchequer last week announced his ideas of enterprise zones, and he has announced 20 for England, mirroring some of the ideas that worked in the 1980s—rapid planning and regulation and that sort of stuff—and there is a direct spin-off through the Barnett formula to Northern Ireland. So, should the Executive wish to set up their own George Osborne-type of enterprise zone, it would be up to them to use the extra Barnett money to do so. So the ideas are not incompatible; the two might work very well together, but they are two ideas that evolved in parallel.

Q25 David Simpson: Just for the record, again, your vision of an enterprise zone for Northern Ireland was what happened in the 1980s. The only difference is that it would be spread across the whole of Northern Ireland.

Mr Paterson: I would like to make Northern Ireland the most attractive place to invest, run a business and employ people in Western Europe.

Q26 Chair: So that may be one zone, not sections as zones?

Mr Paterson: That was my idea, to make the whole of Northern Ireland one zone. David, you know in your patch that you have pockets of deprivation.

Q27 David Simpson: Absolutely. I would like to put on the record my appreciation for the Secretary of State coming to my constituency and visiting companies. That is the message we were getting. But there is so much ambiguity out there at the moment about what the Secretary of State means by an enterprise zone. Is it an umbrella marketing tool? What is it? So your vision is that, if it were possible, there would be one enterprise zone across the whole of Northern Ireland, in the style of those that were initiated in the 1980s.

Mr Paterson: Well not quite. I think your idea of the marketing phrase is probably the right one. I needed something to encapsulate what I was doing, without going into long, rambly paragraphs. My idea of an enterprise zone encapsulated the idea that I really wanted to concentrate on the economy, but I had to take cognisance of the fact that large competencies were in devolved hands, and it is not for me to impose. So this was a marketing tool, if you like, to outline that I wanted to make the whole of Northern Ireland a place that was very business friendly. Quite separately, George Osborne has revived the idea of smaller enterprise zones, and he has announced 20 in England. As I said, this could be repeated by the Northern Ireland Executive, should they choose to do so.

Q28 David Simpson: Okay, I am sorry I brought up the word marketing. I thought I had the Secretary of State steered in a certain direction. As a marketing tool, yes that is fine, but just to clarify: one zone across Northern Ireland on the same basis as—

Mr Paterson: Yes, because the main subject in this paper is corporation tax, and that would apply to every business. State aid rules would make it very difficult to pick and choose, so I think that qualifies my idea of an enterprise zone. You would have a unique selling tool. Invest NI, when I was in Boston in October, the guys there said this would be a huge marketing tool for them.

Q29 Oliver Colvile: Thank you Secretary of State for clarifying it. Let me put on record that I would be very keen to make sure there is going to be an enterprise zone in Plymouth, which has similar issues in being too dependent upon the public sector. What I want some clarification on is that you most certainly have a vision and you have been very forceful in putting that forward. We certainly heard last week that the Treasury have a vision for what they want to do. Have you had discussions with the Treasury about how your vision for what should happen in Northern Ireland also fits in with what is going to happen in the rest of the country? Frankly, I think there will be parts of England, and probably Scotland and Wales as well, which will be looking and asking why Northern Ireland should end up having a much better deal than they will end up with. I am going to have constituents in businesses on the phone to me saying, "What about me?"  

Mr Paterson: I think that is more a constitutional question than an economic one. I think that everyone in the United Kingdom must be delighted that after 40 years of terrible, politically motivated violence, we now have a political process that has delivered an Assembly that has gone its full term. We are now looking forward to a new Assembly Executive that will be under pressure to deliver what voters want, which is all for the good. That is hugely in the interests of the United Kingdom. It is also massively in the interest of the United Kingdom that Northern Ireland is not just peaceful but also prosperous and generates wealth. I am very happy to look my constituents in Shropshire in the eye, or come and talk to yours in Plymouth—

Oliver Colvile: Great, please do.

Mr Paterson: —and say that we have stood by Northern Ireland and we are putting in this very significantly larger percentage of spending, 25% more than is spent on your or my constituents. I think we are absolutely right to do that and we all understand why, but it is not sustainable long term. Therefore we have to do something really special, a real game-changing move, to build on the advantages Northern Ireland has. I will rattle them off: English language, schooling, universities, broadband and so on. We all understand that and there is no absolute silver bullet, but this would make the difference. I am absolutely convinced of that. It is in the interests of everyone in Plymouth and everyone in Oswestry that Northern Ireland becomes not just peaceful but prosperous.

Q30 Chair: You have already been to Tewkesbury, so thank you.

Mr Paterson: I am sure they are very sensible in Tewkesbury.

Q31 Mr Benton: I would like to follow on from something Oliver Colvile referred to. I have had the experience of seeing an enterprise zone in Merseyside back in Lord Heseltine's day, so I am speaking with some kind of experience of it all. The unanimity that you indicated before is expressed across the whole of business sector in Northern Ireland is not surprising to me. It does not surprise me one bit that there is unanimity in this Committee, indeed with the Government, about wanting to do the right and proper thing for Northern Ireland. It is very laudable and I share that enthusiasm.

However, I see problems, coming back to the point when Oliver referred to Plymouth. I would make the same point for Merseyside; I would make it for Newcastle and the North East. There will be difficulties encountered about giving preferential treatment in terms of corporation tax. We do not do enough for Northern Ireland and I want to see what is best for them, but I could feel totally justified—all the justification in the world—if this comes to fruition in making the same argument then for Merseyside and so can other people in other depressed regions. It is your views on this, or the Government's views on that particular situation, that I am interested in. If there are benefits and this is going to be so good for the economy, then I can see any reason in the world why the same cannot be applied to Merseyside, the North East or to Scotland, and even the other devolved ones. So this is really a follow-up to what Oliver referred to, but I think it is a very valid point and I think it has to be given a lot of thought.

Mr Paterson: I entirely agree with you. I represent North Shropshire, which is not a very wealthy part of England. I worked on Merseyside for 25 years and I am fully aware of the need for more prosperity across the UK. First of all, in the Budget last week I think we took some major measures to do that. We are dropping the whole of the UK rate by an extra penny. We came down from 28 to 26 last night when we voted, and we are going to go down to 23 by the end of the Parliament, and there are a whole lot of other measures. So that is going to benefit all our English constituents.

What I would say to your and my constituents is that there is already a huge asymmetry in spending. Tax and spending are two sides of the same coin. Your constituents are contributing to a massively higher rate of public spending in Northern Ireland, 25% more than your guys and my guys get. Now, we all understand why, and your constituents and mine have stood by Northern Ireland through some terrible times. The point I am making is that Northern Ireland does not want to be dependent like this. The First Minister himself said this last week. By giving them this tool we will grow the economy, we will grow tax revenues in Northern Ireland and we will reduce the dependency on the taxes of your constituents.

I think we have a very valid case that our English constituents will gain. Our English constituents have stood by Northern Ireland through 40 years of violence, and you have this unique problem of a common land border with the Republic with 12.5%. There is also geographical isolation; you can only get to Northern Ireland by boat or by air, and fuel costs are higher, etc, due to the geographical isolation—that is bound to be the case.

So I think we have a perfectly valid story to say that we have stood by Northern Ireland through all the problems with security, we have stood by Northern Ireland in bedding down the Peace Process, and the political process is now settling down. We have to stand by Northern Ireland on a stage further with this very special arrangement to help Northern Ireland grow its economy, become self-sufficient and then be able to look the rest of the UK in the eye.

Chair: We will want to come back to regional policy in a minute.

Mr Benton: I will leave it at that.

Chair: We will look at the EU situation next.

Q32 Gavin Williamson: Secretary of State, what discussions have you had with the EU Commission on the legality of doing this?

Mr Paterson: We are very confident that our proposal, as set out in the Paper, conforms exactly to the Azores judgment. I did rattle through it earlier, but that means complete control by the democratically elected Assembly, which is quite separate from the Westminster Assembly, over the geographical area of Northern Ireland. Secondly it means complete independence of decision making by that Assembly, with no interference from central Government. Thirdly it means no compensating subvention for any reduction in revenue. So we do not foresee any major problem, but there is no point in going to the Commission for formal talks until we have a serious proposal.

There are an awful lot of mechanics to go into this: who is going to do this? Are we going to set up a separate revenue collection system in Northern Ireland or is this going to be a satellite of the existing system? We do not want to waste the Commission's time by going to them with a vague, woolly proposition. We want to go with a proper proposal that is fully worked out. From our discussions with the Treasury, and interestingly I thought a couple of your witnesses were pretty clear, as long as we conform to the Azores judgment, we do not foresee a problem.

Q33 Gavin Williamson: Secretary of State, we have all discussed the issues that Northern Ireland faces, but have you explored the possibility that has been raised by other members of the Committee about some of the sacrifices that would have to be made in Northern Ireland in order to put a corporation tax cut through? Has anyone looked at or explored the idea that there could be some mitigation from the Treasury in terms of putting some money towards the Northern Ireland block grant or suchlike in order to ease that transition?

Mr Paterson: I would go back to the figures I was giving you earlier. If you phase it in, £60 million to £90 million for every 2.5% on a block grant of £12 billion is a very modest investment. The CBI report said that, if public administration in Northern Ireland was run more efficiently, you would save £1.1 billion. The Alliance Party has also done work on Shared Future, and I know these are not easy areas to get into, but as the political process beds down and as the Executive begins to get a real grip, I think you will see politicians in Northern Ireland able to deliver savings. I really do not think this is insurmountable.

Q34 Gavin Williamson: I do not disagree with you. The question was more about whether you have explored the idea against whether it is right or wrong.

Mr Paterson: No, because this is not for us to impose on the Executive or on local politicians. It is up to them to decide what the priorities are.

Chair: Okay, we have waited patiently to get on to the issue of the block grant. Oliver, would you like to ask the first question on that?

Q35 Oliver Colvile: There are obvious concerns about the reduction in the block grant as a consequence of lowering corporation tax, and its impact on public services in Northern Ireland. The consultation paper shows a reduction of between 1% and 2.6% of the block grant over the first five years. Are you not inviting the Northern Ireland Executive to accept an arrangement that, as stated in your paper, is uncertain in the outcome and contains risk that could prove significant?

Mr Paterson: I think we have covered quite a lot of this already. You are quite right: if you take the figure from table 4.A on page 27, it is £270 million, which is 2.6%, or it is £225 million if you take 1.25%, and that is 2.2%. But that is if you jump in with concrete wellington boots on and go straight in. I think it would be much more sensible to phase this in. If you talk to Invest NI, as I said, they say it takes two or three years to get a project up and running. If you look at the Canadian model they have had dramatic success. If you look at the contrast in British Columbia over the past few years, where they have reduced corporation tax, they have brought in a lot of investment from America. The sensible thing is to phase this, but this should be seen as an investment. This terrible old nil sum game that it is a slug of money from the Treasury that either goes out as a cancer centre or goes out as a tax reduction is incredibly outdated, Soviet thinking. You grow the cake. If you take a narrower slice of the cake, you get more revenue. It is wonderful to say this in the Thatcher Room. It is highly appropriate we are in this room.

If you reduce taxes, you grow the amount of business and you bring in new businesses. Anecdotally we know perfectly well from local businesses that they will increase. When I have asked businesses where they would be in 10 years if they had a lower corporation tax, comparable to the Republic, time and again businesses have said they would increase their turnover and often their workforce by 50%. Many, perhaps equally many, say they would grow by 100%. So they are going to double business. All of those people are going out, not just paying corporation tax but paying VAT on goods in the shops and paying income tax. You grow the revenue, and you have two cancer centres.

Q36 Oliver Colvile: Do you think this is going to be the issue that is going to dominate the Assembly elections over the next month or so?

Mr Paterson: I would be absolutely delighted if it did. We have moved Northern Ireland on to talking about the economy, and I am absolutely delighted. At the Conservative Party conference we had Martin McGuinness and Alex Attwood—whose views on the economy are not the same as mine—and we had a really good ding­dong argument just outside the secure zone. I thought that was a real sign of progress: that there we were talking solidly for an hour and a half about the economy.

Q37 Lady Hermon: I just have a quick question for the Secretary of State. We were all present for the Budget last week. As Secretary of State, did you have a little reflection the following morning when you heard Sir Martin Sorrell, the Chief Executive of WPP—the world's largest marketing services group—announce that WPP was actually moving from Dublin? They are moving from the Republic of Ireland, where they have such a low corporation tax, back to London. Did the Secretary of State not for a moment or two think that maybe corporation tax and a lower rate of corporation tax is not actually the whole solution to the problems of Northern Ireland?

Mr Paterson: No, not a bit, because I am wholly unaware of the circumstances of that particular business, which perhaps may see great opportunities as the UK economy expands following the very positive Budget we announced last week. What I do know, and I repeat myself again, is that time and again I have been to Northern Ireland businesses who have said that they will invest and that they will employ more people. I am also absolutely clear from talking to those who work for subsidiaries of many foreign businesses—not just American; I had the German Ambassador bringing a number of senior German businessmen to Hillsborough last year—who categorically all say that they would invest.

It is an incredibly simple question: if you are a businessman, are you going to invest in a place with lower taxes or higher taxes? In the general run of things, you are going to invest in a place with lower taxes.

Q38 Lady Hermon: Yet Sir Martin Sorrell decided to leave the Republic of Ireland, which is often quoted as the reason why Northern Ireland should have the same or perhaps even a lower rate of corporation tax. Yet such an experienced businessman has decided, the day after the Budget, to move from the Republic of Ireland back to London, with a much higher rate of corporation tax.

Mr Paterson: Okay, that is one business. Why don't we look at the deluge of foreign investment into the Republic of Ireland when they reduced tax? There was an enormous increase. I want to ask Lady Hermon this: when the negotiations settling the IMF­EU loans on the Republic were going on, why did they fight like tigers to defend their right to set tax. Why did their Finance Minister and the Head of the IDA say it was a "cornerstone" of their success? Because it is critical. They will not trade out of their current difficulties if they do not keep that low rate of tax. I am very proud that our Government is defending their right to set their own tax.

Lady Hermon: Since the Secretary of State has reversed the order of things and asked a Committee Member a question, let me just say that from my perspective I actually think it was an issue of sovereignty for the Irish Government, but there we go. We will leave it at that.

Q39 Chair: I do not know whether that company is a trading company or a non-trading company. That would make a difference.

Mr Paterson: I have been told by a source that on the Today programme Sorrell said that the reason they were coming back was because of the business tax announcements in the UK Budget.

Q40 Mel Stride: That is correct; it was the 1% reduction.

Mr Paterson: So perhaps that is the reason they left Ireland.

Q41 Naomi Long: Just on that point. A 1% reduction in taxation here through the Budget was enough to lure them back, so it would suggest that there are other factors at play that are not perhaps being given sufficient weight in the discussion we have had to date. I have to say that I think a reduction in corporation tax is a good thing. I think it is an important hook to get people's intention internationally and to get them focused on Northern Ireland as an investment opportunity. But if it is the only opportunity that we create and the only selling point that we have, I do not believe that will be enough to attract the kind of investment that we would wish to see. For example, you mentioned things like a skilled workforce. You also need the opportunities and the sites that are available; you need to look at things like fuel duty; you need to look at the remoteness of the region and address those issues. There is a tendency to be either completely negative about the impact of corporation tax or to be so overly enthusiastic that we lose sight of the broader picture.

I would imagine that any businessperson making a balanced judgment about where to invest will not simply go on the basis of corporation tax but will actually look at the wider picture of the skill-set available to them in the location where they are going to go, the kind of property opportunity that there is for them to locate there, and also the costs of doing business out of that region. Taxation is one part of that, but it is not all of it.

What I wanted to ask was, in terms of the other opportunities, are you confident that there is enough of substance within this catch-all term of an enterprise zone for Northern Ireland, in addition to corporation tax, to ensure that once we have people's attention and they get down to the crunching of the detail, they still feel as enthusiastic as you clearly are about Northern Ireland investment opportunities?

Chair: Can I just interrupt there? I am being advised there may be a vote fairly soon. If there is I will suspend the Committee for 15 minutes. Are you able to return Secretary of State?

Mr Paterson: Absolutely.

Chair: Thank you.

Mr Paterson: I entirely agree with you. There is no single silver bullet that will bring an investment in. The point I made earlier is that we do have huge advantages in Northern Ireland. There is a stable political process now. I will go over it again: English language, good education system, good training, broadband. Those are all very good foundations, but you need something extra to bring people. Just to correct your first point, we did not drop by 1p, we dropped by 5p—we are going down from 28p to 23p. That is a very significant drop in corporation taxes overnight, right across the UK.

Q42 Naomi Long: I have to congratulate you. As a salesperson for Northern Ireland, you do a great job, and I would not wish you to do anything else. For example, you highlight the fact of elevated levels of attainment at A Level and GCSE, but you ignore the fact that we also have one of the longest tails of underachieving young people. We have a higher rate of people not getting any qualifications at all, so there has to be some balance to the argument. I accept that is not your responsibility as Secretary of State, but it will be a factor that will influence those that get up close to Northern Ireland and start to scrutinise the detail when they come. That is my concern: is there enough else in the paper, in addition to corporation tax, to keep them interested?

Mr Paterson: I think your point on the tail is a very good one, because we have not quite touched on the social consequences of this. I think there is an enormous social gain. We know we have a very good education system, and we know that those who have invested recently in Northern Ireland are very happy with the local workforce. But you are quite right that they are mainly at the top, they are mainly graduates, and they are doing extremely well and people are very happy with them.

I am acutely conscious that we have what you call the tail. What I see is that this will create a higher level of prosperity, which will wash into every corner of Northern Ireland. It will help the tail because there will be an incentive for what you call the tail to get a skill and to learn a trade.

I was with the Prince's Trust about a month ago, and they cited a very significant number of people, who I think would qualify for your tail, who are not skilled. One of them said he wanted to drive a BMW. What was his ambition? "I want to drive a BMW." And, okay, "Yes, I want to become a paramilitary ex-prisoner," because that is the way he gets to drive the BMW. Now, what I want to do is to work with the Executive, because many of these competencies are in devolved hands, to create a Northern Ireland where you go out there and set up a gardening business or a painting business or you become a joiner or work in a garage, and you buy your own BMW. That is what I see; I see an enormous social and, down the road, political gain to this.

Q43 Ian Paisley: Secretary of State, I would like to go back to this issue of phasing or not phasing—that is the question. When I look at the options on the table and look at our responsibilities as UK-wide politicians, employers and employees are voters, potentially, and Northern Ireland plc is our combined interest. All of this would benefit from a reduction in corporation tax. My conclusion is that it is a no-brainer, therefore, we should be doing something good for them. I have never been able to grasp the argument of why we should be doing something bad for them.

Do you agree that there is a lot of local waste in our local institutions? If we reduced the size and number of our departments, if we reduced the waste that goes on in local government, we would probably make the £200 million savings per annum anyway. Instead of phasing this in, is it your view that we should go for the whole shebang up front: a 12.5% or even 10% reduction? Or, if we are phasing it in, over what period of time do you think is the ideal period to phase this in? I think that a half-hearted approach is probably the worst thing to do. We really need to make a clear statement of what our intentions are, and if it is phased in, what period of time should it be phased in over.

Mr Paterson: I entirely agree with you that there are major savings to be made, and I do not think anyone denies that. The CBI came up with this figure of £1.1 billion savings. If you took one figure, for example if you had absenteeism in the public services paid in the same rate it is in the private sector you would save £45 million and you would be two-thirds of the way to saving one of my figures of 2.5% straight off just on absenteeism. So I have no doubt about the fact that the next Executive will be under much more pressure to deliver, and they will have to get stuck into these details, including what Alliance has been going on about, Shared Future, £1.6 billion there. It is not easy; this is incredibly difficult territory to get into, but we know that there are enormous savings to be made.

Personally I think the phasing idea is the route to go because there will be nervousness, as Sylvia has shown and she is representing a significant proportion of the opinion. If you phase it in, you will send a very clear signal to business that you are going to do that.

Q44 Ian Paisley: Are you talking about three years, five years?

Mr Paterson: I would say that four or five years would do it, being realistic. It will take time to get this message out, but I think that the fact it is going to happen is quite enough to get people to invest. Of course, local businesses will crack on immediately. But this is not for me to decide; this is entirely a local decision. It may in fact emerge from the consultation paper and it may be very interesting. We may get a deluge of responses from businesses saying we should crack on and they want this next year—the sooner the better. But having spent some time talking to a lot of people, I personally think that the graduated approach, which has worked extremely well in Canada, would be sensible.

Q45 Oliver Colvile: This is on slightly broader issues, do you feel that one of the great benefits of relocating to Northern Ireland is not only what potentially might happen with corporation tax and the enterprise zone, and a good skills base, but the other thing that is very helpful is the exchange rate. The fact that we here in the United Kingdom are much more flexible and are not part of the eurozone, does that make it a more attractive thing to come here?

Mr Paterson: Undoubtedly, yes. You get an extraordinary bonus of being part of the UK economy, which is one of the top half-dozen economies in the world, with a stable finance system. We have this appalling deficit that we have inherited, about the worst in the G20—worse than Greece and Portugal and everywhere else as a percentage—but thanks to the very robust measures we have taken we have stabilised the position, we have given the world markets confidence and we have interest rates similar to Germany's. So that is a huge gain for every business right across the United Kingdom. Then you talk about exchange rates: yes definitely having a free floating exchange rate outside the euro has been a massive advantage, as I think you and I would probably agree.

Q46 Oliver Colvile: One of the great benefits is that Martin Sorrel might have said to himself that moving to Northern Ireland is an example of somewhere where he can be much more secure in his investment and what he is trying to do.

Mr Paterson: Yes.

Q47 Chair: Could I just ask something on the block grant before we move on? There will be a knock­on effect on the block grant if there is any reduction—that is a European practice. But how is it going to be calculated? Because if this does attract business and the actual take goes up eventually, and if there is a spin­off effect of more people employed paying more in income tax and national insurance, how is that going to be calculated? It is hugely complicated.

Mr Paterson: It is extremely complicated and it is explored in the paper. There are suggestions that some of the other gains could be shared with the Executive, and there will basically be a negotiation between the Executive and the Treasury to decide exactly how this will be done. I see it as a gain right across the board. There is a huge gain for the UK. There is an enormous welfare bill in Northern Ireland. One in 10 people in Northern Ireland are on DLA; one in five in West Belfast are on DLA. So the UK Treasury has an enormous incentive here to make Northern Ireland more prosperous. It is Naomi's tail. There are massive economic gains if we can get prosperity into these disaffected and deprived areas.

Q48 Chair: If the tax take in Northern Ireland goes up, does Northern Ireland get that benefit?

Mr Paterson: There are suggestions in the paper, and it is surprising that the Treasury has put that in, that other taxes could possibly be divided up. You are quite right that there will be an increase in VAT and there will be an increase in income tax, etc. The other bonus for the Treasury is to do with this enormous welfare bill, all this dead money in unemployment and all these people parked on DLA, and that comes down.

Q49 Jack Lopresti: I want to talk about the potential administrative burden. I just want to say on the record that I am hugely and wildly enthusiastic about the prospect of reducing corporation tax in Northern Ireland. Going on from what Ian said about phasing, there are clearly significant technical administrative hurdles to overcome if we do this thing and get it moving. Assuming the Executive want to implement a significant reduction all in one go, how soon do you think it could be put in place—from deciding to do it, taking a big chunk in one go and actually making it happen?

Mr Paterson: The honest answer is that we do not yet know. We do not go far in this paper on the exact mechanics. The basic problem, which I think we have touched on, is: who will actually raise this? Will we set up a completely stand-alone tax-raising agency in Northern Ireland, or can we do it as a Department of the existing arrangements? Then we have to get into the actual legislation. Will this require a stand-alone Bill or can we make it part of a regular Finance Bill?

I do not see this as insurmountable. We have seen this extraordinary goodwill, with all five party leaders gunning for this. If we get some good responses, and I say very publicly to the businessmen and the people of Northern Ireland, wherever they are on the telly, we want a huge response to this. The Treasury will want to know how much extra you will invest in your company, how much extra turnover will go up, how much extra profit you are going to make, and above all, how many extra people are you going to employ, because then we will get a much better feel. On the timing I cannot give you a straight answer. It is not absolutely clear, but I do not see this requiring an enormous delay.

Q50 Jack Lopresti: Going back to your discussions with business people, have any mentioned that they feel there may be additional administrations at all or any additional burden with their tax keeping and general admin of running their business? I do not wish to sound negative.

Mr Paterson: No, honestly, no one has raised that once.

Jack Lopresti: Great, thanks.

Q51 Mel Stride: I just want to quickly come back to this interview with Sir Martin Sorrell, if I may. My understanding of it was that he was saying that the fact the Budget had indicated a further drop of 1% in corporation tax, i.e. ultimately down to 23%, was a major factor in determining him relocating his business. This would imply that it is not a lack of competitiveness per se on the part of Ireland having a low rate, but that a marginal drop in a tax rate in one jurisdiction can be enough to shift a business from one place to the other. So that is the lesson that I have taken from that. Is that something you would agree with or do you see that differently?

Mr Paterson: Yes, I think it is a very good example, but it also confirms Naomi's point that there are other costs. When we were in America, we were citing $22 a foot for rent in Belfast, $110 a foot in Dublin. So there is competition between economies attracting businesses the whole time. The Republic has done extremely well bringing in business with corporation tax, but in parts of the Republic the costs are still high. The fact we have produced a really entrepreneurial budget that has encouraged Sorrell to move is absolutely tremendous.

Q52 Mel Stride: There is a suggestion that you have made in the consultation document that there might be a tapering or phasing in of the reduction through time of the corporation tax. Much of the evidence that we have heard has enforced the view that it is very important that the business community has a very clear view and certainty as to what the tax regime will be going forward. Is it therefore your suggestion that this taper, if it is in there, really has to be set in train for some lengthy period into the future with that certainty?

Mr Paterson: No, I think that is Ian Paisley's impression. Personally I would do it as the Canadians did, over four or five years. I think the key point you make is about certainty. There has to be absolute clarity to indigenous businesses and potential foreign investors that this is going to stick. There has to be an absolutely clear commitment from the Executive. So once we have taken a decision here, and I have to repeat again—it is very important, of course, as we do not want to run ahead of ourselves—this is not in the bag, but should we take the decision in agreement with the Executive devolved for power, I think when the Executive make their decision on how far and how fast it reduces, they will have to give an absolutely clear commitment that this is going to last. That commitment will have to be over the minimum of a decade, preferably over two decades, because that is the certainty and the knowledge that will bring in businesses.

Q53 Kate Hoey: We might come back to this later, but would you also like to give the Northern Ireland Assembly the right to reduce air passenger duty, which is incredibly difficult, incredibly expensive and is a huge disincentive.

Mr Paterson: There is a consultation—

Q54 Kate Hoey: I know, but are you in favour of it? You travel back and forth, presumably quite a lot, but probably not on easyJet.

Mr Paterson: I am very conscious of the value of the continental—

Q55 Kate Hoey: Just out of interest, do you ever travel on easyJet? It is a very good service.

Mr Paterson: A rival airline unfortunately had a cancelled flight, and it cost me £147 by easyJet from Liverpool two weeks ago—cash.

Q56 Kate Hoey: But seriously, would you like to be promoting this as much as you are promoting corporation tax? We have to pay a ridiculous extra amount of money going to Northern Ireland when you would spend two days getting there by boat and train.

Mr Paterson: There is a consultation going on now and this is critical. We have seen the change on the flights, with flights being reduced; the ones to Heathrow are absolutely packed. It is absolutely vital we keep the continental connection, so I would be in favour of all sorts of imaginative measures to ensure that we increase the number of destinations. Don't forget that there used to be only one destination; I think it went from Aldergrove to Amsterdam. It went up to about 41 and I think we are back down to about 30 destinations now, or a little bit below 30.

Good air connections for Northern Ireland, being the top of an island in the Atlantic, are absolutely vital. So I would be in favour of all sorts of imaginative solutions to resolve the air passenger duty problem. The consultation on that was announced in the Budget, and the possible devolution of the power was one of the suggestions.

Chair: Right, we will suspend for 15 minutes and will come back at 15.56.

Sitting suspended for a Division in the House.

  On resuming—

Q57 Mel Stride: One of David Varney's chief objections to the tax reduction proposals we are looking at is that it would potentially displace businesses from the rest of the United Kingdom to Northern Ireland. How much of an issue do you see that as being?

Mr Paterson: I think the paper does acknowledge there will be some movement, but Northern Ireland is not a very big place. There are 1.8 million people there, and there is a limit to the number of businesses that will want to up sticks and move. They will be well embedded in other parts of the UK, their markets are there, their workforces are there, and I just do not see every dentist in Bootle legging it to Belfast because their business will be in Bootle. So I think there will be a modest movement but there is movement the whole time within the economy. I do not think it is something we should be too alarmed by.

Q58 Mel Stride: Okay, thank you. Can I specifically ask if you favour these rate changes only being applied to trading profits of these companies? Is that the focus?

Mr Paterson: Again, I think that is a question for the Executive to explore with businesses and with foreign investors. My personal opinion is that the wider the tax benefit, the more people we will collect. So the more people who will gain from this, the more we will help local businesses and the wider we cast the net for foreign investors.

Q59 Chair: In the Republic, the non­trading tax rate—is it still 25%?

Mr Paterson: Yes, that is the way they achieved it there. We are getting slightly ahead of the game. The first step is to agree to do it, and then it is for the Executive to explore this in detail.

Q60 Naomi Long: On the point of displacement: you said that if your business is in Bootle you would not relocate to Northern Ireland for the lower tax rate. I would have thought that would be an easier sell than Boston to Belfast in some ways. It would be a near­shore opportunity to get a lower tax opportunity, and Northern Ireland, as you know, is a great place to live. So therefore there might be advantages to bringing your workforce with you, which might actually be practical if you were talking Bootle to Belfast, rather than Boston, which requires a lot more relocation effort. So I do not think we should dismiss the potential for displacement. I think that is a potential issue. I have to say it is not one that I would be concerned about. Obviously as a Northern Ireland elected representative, if people wish to come and live and work in Northern Ireland, I think that is a good thing.

Mr Paterson: Yes, I do not think there is anything to be alarmed about. I think there probably will be some movement. If people are attracted from parts of the UK where there are pressures on property or skills, I think that is also not a bad thing. It could relieve some pressures in other parts of the UK.

Q61 Naomi Long: In terms of the issue then around the dead weight and the potential for people to be carried to some degree if it is introduced, and how that would be handled, you mentioned there that it would be a matter for the Executive to look at the issue of trading profits, non­trading profits and so on. Is that not where agreement is really going to hang? That was the fraying around the edges at the very united front at the press conference. When the press started to explore the views of individual members who were there on the trading and non­trading profits and so on, for example there was an issue raised about the banks getting some kind of a bonus out of this, and so on. Is that not likely to be where you might meet some resistance? It would not be about the principle of a reduction in corporation tax, but about some of the details about how those hard issues would be handled when it is transferred. Once it is transferred the momentum becomes almost irresistible, and therefore people want that result before it is transferred.

Mr Paterson: Yes, I think quite a lot of this has to be resolved before it is transferred. I think it is recognised that, if there is sufficient political will and leadership, the broad principle of establishing a lower rate as a step change in galvanising the private sector in Northern Ireland is probably worth some people not getting everything they would like through. Obviously there will be a debate amongst the members of the Executive.

Q62 Lady Hermon: Could I just clarify two points that are related? Secretary of State you have made it quite clear repeatedly this afternoon that what you favour is a phased introduction of a reduced rate in corporation tax in Northern Ireland, accepting that the decision is that of the Assembly. Could we just clarify whether the main political parties, who you indicated to this Committee at the beginning of the session were unanimous about the reduction in corporation tax, are unanimous in their agreement about a phased introduction of a reduced rate of corporation tax. Specifically, is Sammy Wilson, who is the Finance Minister of Northern Ireland, in favour of a phased introduction of a reduced corporation tax?

Mr Paterson: Actually I have a rather good quote from Sammy Wilson: "Practically speaking we would have to look at how we could manage these, making the options where the reductions would be deferred or phased in over several years after any decision vitally important to minimise any impact on public services." So that would suggest he is in favour of phasing. The fact is that phasing came up as part of the preparation of the paper and it is clearly stated in table 4.A, which I read out earlier. That is for negotiation amongst the various parties.

Q63 Lady Hermon: At this stage would it be accurate to say that there is not unanimity about a phased introduction of corporation tax?

Mr Paterson: No, I don't think they have got that far. This Paper was only published last week, it was only finalised a few days before. We were very keen to get the paper published before purdah started, but that is exactly the purpose of getting it done now, so that these matters are discussed at a very political time, when the Assembly elections are on. That is exactly what we are doing. So I very much hope that items like phasing, which type of income is taxed, etc, will become part of the public discussion.

Q64 Lady Hermon: Could I just raise one additional question? One of our key witnesses before us on a number of occasions has been John Simpson, a very highly regarded economist. There is a small point that he made in a very good article published in the Belfast Telegraph on Tuesday 29 March. It is just the final point that I would like you to address if you would. This is a quote from John Simpson: "There needs to be a challenge to the ill-founded statement that rebalancing is a long-term objective for the next 25 years. That is neither necessary nor helpful." So why the 25 years and why is that repeated as a mantra?

Mr Paterson: It is not a mantra; I just think I am being realistic. When you have an economy that has gone through the appalling devastation and physical damage that was imposed on Northern Ireland through the terrorist campaign; where what the Germans call the Mittelstand was literally blown out; where you have a huge discrepancy between very large, successful businesses such as Bombardier and FG Wilson, and then lots of micro-businesses; you just do not have the strata of solid family businesses employing 50, 100, 200 people that you have across the Western world. You are not going to turn that around immediately. I said "25 years" through my stomping-around visits to businesses and business organisations when I was talking about the enterprise zone because I thought I was being sensible. I think that is a sensible estimate.

This dependence is absolutely enormous. 77.6% of GDP is dependent on state spending. If we could do it in five or 10 years I would be absolutely delighted, but sadly I am just being realistic. I think that is the length of time it will take to rebalance the economy. If I had said it could be done any more quickly, there is the danger it would look unrealistic, and I think there is a danger possibly that people like you would be alarmed that there would be too drastic and too quick a reduction in public spending. That would be very dangerous, and to do that would destabilise Northern Ireland very rapidly, and we do not want that. John Simpson has been to see me. We had a very good chat. I am sorry he does not like my cautious projection of 25 years but I actually think that is realistic. If we could do it in 10 or 15, that would be great.

Q65 Dr McDonnell: One of the things that struck me was that some of our witnesses advocated that we should even cut corporation tax below 12.5% to 10% and deliberately undercut the Republic. The suggestion was that some countries pay a lower rate even than 12.5%. So, while we accept that the Assembly will ultimately decide on the detail of this, what would you see as being the advantage for Northern Ireland of going beyond the 12.5%?

Mr Paterson: Well, I think it might make it more attractive to businesses. You have seen quite sharp tax competition between New Zealand and Australia, who have been driving their tax rates down. You are seeing that in Canada, not just as a nation but amongst the provinces—they have varied rates amongst their different provinces—and as a result of that you now have Mr Geithner, Obama's key man on this, talking about America reducing taxes. So whoever starts reducing taxes sets in train competition. All credit to the Republic of Ireland, they have shown the way ahead and they have been immensely successful at helping local businesses and bringing in foreign direct investment. I am very happy to say, on the record, that low taxes will bring in investment, increase prosperity, increase profitability, and above all for Northern Ireland, they will increase employment.

Q66 Dr McDonnell: When we started out on this journey, the journey was to create a level playing field. Do you feel that the cost of going beyond the 12.5% would—

Mr Paterson: We have not really investigated that; the whole paper is built on the premise of 12.5%. The message has to go out to world investors that Northern Ireland is the place to do business. I was in Boston in October with Invest NI, and we went to a brilliantly successful IT company, and they were kind enough to see me but we were very much bottom of the list; we were not really on the radar. I have not heard how far that particular project has progressed. If this was done, we took the decision to devolve and local politicians were brave and went for a radical programme of reducing corporation tax, as I said I would go for phased myself, that would absolutely guarantee that when any major world investor was looking at Europe you would have to have Northern Ireland on the map. You would have to be on the list. A project manager would get shredded if he went back to Seattle and he had not looked at Northern Ireland. We are not in the game at the moment.

The other thing that is very important, which none of us has mentioned, is that one of the main marketing tools that Invest NI has is going to be radically reduced by the European Commission, and that is grants. So they have been bringing in businesses with significant grants over the years, but in 2013 that is going to come right down. Now there may be a brave attempt to stave it off and have a derogation, but that is only going to be temporary. Talk to the guys in Invest NI on the ground. I was in Chicago a couple of weeks ago, New York and then Washington, and the staff of Invest NI who are trying to bring in these foreign investors are really enthusiastic. They know that if we did this it would open up a whole tranche of investors who are currently not looking at Northern Ireland at all.

Q67 Gavin Williamson: I would rather be in favour of 12.5% UK flat rate. That is what I would always aspire to. But with the Chancellor lowering the rate of corporation tax and assessing that plan out over the next five years, do you think that is going to deaden the impact of a further lower rate in Northern Ireland? Inevitably, part of the attraction of the 12.5% rate in Northern Ireland would be to maybe attract business even from within the UK to be investing more in Northern Ireland.

Mr Paterson: I am absolutely delighted we are going down from 28% to 23%. That is a huge move by George Osborne. For those who have looked at the transcripts of the Sorrell interview, apparently it is one of the main reasons why he made his dramatic move, so it works. But we do have this special circumstance of a contiguous border with the Republic of Ireland, which is 12.5%, and 23% is still quite a long way from 12.5%. So I think we do need to get down to the level of the Republic. I would like to say on the record that the politicians that I have spoken to in the Republic, the political establishment—and I am going to Dublin next week—are very supportive of this. They are very keen that Northern Ireland builds on the political process and becomes a stable, prosperous place. They are very keen that measures are taken to make the economy expand. Of course, there are spin­offs for them because there is considerable north and south trade, perhaps you were getting at that. I have never had a hint of churlishness or anything in Dublin about this. There is real enthusiasm that we should take serious, radical measures, really imaginative measures, to help move Northern Ireland on, particularly on the economy.

Dr McDonnell: That was the feedback that we got Committee­wise—that there was support for a reduction in Dublin.

Chair: I do not know if the present Dublin Government does, but the one then certainly did. They did not approve of the 10% proposal, but they certainly did approve of the 12.5% proposal.

Ian Paisley: I wonder why.

Q68 Naomi Long: Secretary of State, talking about the Republic of Ireland leads to comparisons between their rate, our rate and so on, but their corporation tax system is different in more ways than just the headline rate, and that is something that has repeatedly been flagged to us by supporters and detractors of this proposal. They have an entirely different system of tax relief allowances, very significant differences in the rules they have around control of foreign companies, transfer pricing, then capitalisation and all sorts of other issues. This means that the effective corporation tax rate is actually less than the 12.5% headline rate. That would not be the case for companies relocating to Northern Ireland.

So I suppose I am asking whether, in the enthusiasm for 12.5% and this direct comparison with the Republic of Ireland, those factors have been thoroughly thought through and considered and also, whether there are other factors that allow the Republic of Ireland to gain a lot of foreign direct investment that we would need to accept will never be part of the mix in the Northern Ireland scenario. Are we making a fair comparator? As I say, their corporation tax rules are much more lax than they would be in the rest of the UK.

Mr Paterson: Yes, I am aware of that. The net effect is quite different across Europe on all these rates because of different capital allowances. I think that the very broad, simple principle is that the lower the tax, the more attractive the environment for business, and that is the message I would give to the Executive when they come to take their decision. So my clear advice would be: be brave and be bold.

Q69 Naomi Long: I accept the argument and I am in favour of the reduction. I am slightly concerned that blind enthusiasm can be offputting to those who are wavering. I think that in order to look at this carefully there needs to be a subtle consideration of the different factors. To suggest that by simply dropping the tax rate we will replicate the boom that there was in the Republic of Ireland is not an accurate reflection of what will happen. I do believe that we can grow our private sector through reducing corporation tax, and I think it is probably the most effective tool that we have available to us. I am slightly nervous if we do not look at the subtle differences between the two pictures and try to assume that we will replicate what happened in the Republic of Ireland, because I am not convinced that will be the case.

The only other thing I want to go back on, and it is not directly related, was a comment you made with respect to Disability Living Allowance. This is a point I have raised with you before, but I would ask you again, Secretary of State, to be sensitive in your reflections on Disability Living Allowance. The higher rates in Northern Ireland are obviously something that would be of concern to us, but they do need to be taken into consideration in the context that we are often dealing with people who carry with them the emotional, physical and mental scars of having lived through 30 years or more of violence, and I think we need to be sensitive in how we talk about wanting to reduce those levels of Disability Living Allowance and that disparity. Even with additional employment, some of the people you refer to are simply not fit to work because of their experiences during the Troubles and the problems that they have faced since. So I would simply ask for some sensitivity on that particular issue and some balance around the arguments in favour of corporation tax. I happen to agree with you that it is important that we do it, but I am concerned that we get overly enthusiastic and put other people off.

Mr Paterson: I do not think it is putting people off by talking about it. Everyone in business I have talked to is enormously enthusiastic. There is obviously a lot of detail to go into. The issue of the different arrangements in the Republic is actually mentioned in the paper. I think you said yourself that there are a lot of other factors—there is no silver bullet. The circumstances of the United Kingdom, being one of the top world economies with its own free-floating exchange rate, is very different from the Republic of Ireland, which is part of the eurozone. That is the most basic difference.

Q70 Naomi Long: Have those been weighed against, for example, their more business­friendly tax regime generally?

Mr Paterson: Not in the paper, no, because this is specifically on particular measures to help rebalance the economy in Northern Ireland, but it is against a background of the fact that everyone in Northern Ireland has the huge advantage of being part of the United Kingdom economy, which has sterling, has sadly Greek and Portuguese levels of debt, but has German levels of interest rates, thanks to what we have done.

I will pick up on your DLA point. I am absolutely in no way casting aspersions on anyone. I am just pointing out that it is very sad that large numbers of people for all the circumstances we understand are on DLA, and I am absolutely confident that if we really did revive the economy and the private sector many of those people would get off DLA. All the work Iain Duncan Smith has done and all of the stuff that the Centre for Social Justice has done—who did a report on Belfast—shows that if people get into work, there are enormous benefits, not just financially but socially: marriages are stronger, children do better at school, less alcoholism and less drug dependency. There are massive gains in getting people off benefits and into work.

Naomi Long: We are agreed on that point, but I think it is important to note that you are either fit for work or not fit for work. The availability of a job is not the issue.[1]

Mr Paterson: I think we probably agree.

Chair: I do not think we need to go too far down that road. Joe did you want to come in on regional policy? I cut you off earlier.

Q71 Mr Benton: I would like to pose a question to the Secretary of State. It is hypothetical in one sense, but it would not surprise me one little bit if, in the best interests of Northern Ireland it was decided to lower the corporation tax, there were a flood of applications from deprived areas all over the UK and Assemblies, I suppose, for likewise treatment. This goes back to the previous question I posed to you. I do not know; I would hate to be in the shoes of the Government Minister who has to deny those things. How will that be handled? I hope I am making the right comparison or posing the right type of question, but it is going to be very difficult in other words. I am not advocating one tax right across the UK, but the point is that all the criteria that have been referred to in justifying this for Northern Ireland, with the exception of the so-called Troubles, can equally be applied—all the social indices and everything else—to Merseyside, the North East and so on and so forth. So it is a hypothetical question of how would you, as Secretary of State, and Government Ministers deal with a very valid and justified application coming from other regions of the UK?

Mr Paterson: I think I touched on that earlier. It is enormously in the interest of the UK that we consolidate the political progress that has been made in Northern Ireland and bed it down by creating a prosperous and successful economy, which will give much more remunerative employment to more people. Now that has to be in the UK's broad interest. Northern Ireland does have unique circumstances: it has had 40 years of paramilitary violence; it has a land border with a state with 12.5% corporation tax; and it is remote. So those are three unique things that do not apply to Shropshire or Liverpool.

The other point is that our constituents, both yours and mine, are not all that well remunerated, and they are financing a much, much higher level of public spending; because of reasons we understand, it is 25% higher in Northern Ireland. So it is in our constituents' interests that over time that is brought down as we bring up the private sector in Northern Ireland and create wealth, so Northern Ireland begins to stand on its own. That is in all our interests, so that after a period of time we level up.

I am absolutely prepared to look anyone in the UK straight in the eye and explain that. I stuck my neck out on this as the Shadow Secretary and now as the Secretary of State. It was our Party's policy in the election; it was a key part of the Coalition Programme. We are determined to do something that will be a game changer for the Northern Ireland economy, because that is in the interest of every single citizen in the UK.

It is quite notable that these enterprise zones are quite heavily concentrated in the North, and you saw quite radical measures last week on the economy—a major drop in corporation tax across the UK—and projects like enterprise zones and the NI measures we have taken will help businesses in Liverpool, in Shropshire and in Plymouth.

Q72 Mr Benton: I totally accept the motivation behind it; please do not misunderstand me. That is fine, but you could use statistics if you go to Merseyside, the North East and so on, that would point to approximately, I should think, the same level of dependence on the public sector in pockets. I am not even knocking the merit of trying to effect the changeover from public sector to private sector; it is probably a very worthy thing to try and do. The point I am trying to make is that no matter what was enclosed in the Budget last week or was the effect of the Budget, that will go right across the UK and you will still be left with pockets in the UK that will have, in every sense of the word, the same criteria applicable to those regions as there is to Northern Ireland. All I am saying is that there is an argument there, surely, for a unified rate across the region. I cannot see how you could possibly then ignore a plea from the regions that have the same criteria you are using to make this preferential rate for Northern Ireland.

I envisage that as a huge problem. I would not go so far as to say I would see it as a breakdown of the United Kingdom, but at the same time it is a stepping-stone. We have heard witnesses give evidence to this Committee who raised the wisdom of dis­unifying the rate. My question is: how will Government and how would you as Secretary of State respond to a legitimate request from Merseyside, Newcastle, the Assemblies or wherever?

Mr Paterson: I do not want to repeat myself. I would look your constituents in the eye and say it is very much in their interest that we create a thriving, prosperous Northern Ireland that is much less dependent on the taxes of your constituents, who contribute to this enormous extra public spending. We want to create conditions where wealth is generated in Northern Ireland and where taxes are increased in Northern Ireland, some of which might end up going back to your constituents, because we will reduce benefit dependency and unemployment benefit and all that sort of thing. So I think you have to face them down. As to the fact that there is an imbalance, we know that devolution was never going to be a uniform process, and Northern Ireland has quite extraordinary and unique circumstances. I would say that it is also quite small—1.8 million—and it is not going to be a real threat, but it is in the interests of the whole of the 60 million who live in the UK to do this.

Q73 Mr Benton: It would be quite small if it was applied to the regions as well.

Mr Paterson: Well let's see if it works.

Q74 Ian Paisley: Those are the various reasons why I want it for Northern Ireland. I would be jealous as well.

Mr Paterson: I think I asked this earlier—what is plan B? If this is not going to work, how are we going to revive the private sector in Northern Ireland?

Chair: Well just on that, there were one or two other bits to it that Naomi was touching on earlier.

Q75 Naomi Long: The plan B that has been picked out by those who are not as enthused about reductions in corporation tax has been about incentives to encourage research development­led activity, skills development, clustering of competitive firms, and all of those things that those who are not convinced by these arguments have said would be as effective. What is your response to those arguments?

Mr Paterson: I think those are all nice­to­haves, there are passages on training credits and things like that in the back of the paper, but they all cost money. We are currently borrowing £280,000 a minute. We are spending £120 million a day on interest. That is the real conundrum. Virtually every other measure that other people suggest costs money.

Q76 Naomi Long: Corporation tax reduction costs money too because you have to forgo part of the block grant. So you could, for example, choose to invest the estimated £200 million to £400 million, however it is estimated.

Mr Paterson: £400 million? We have not got near £400 million.

Q77 Naomi Long: Well it was three hundred and something.

Mr Paterson: £270 million.

Q78 Naomi Long: Well you could choose to invest that instead in those other activities. That is the argument.

Mr Paterson: You could, but it would not grow the cake as fast. I am absolutely confident that corporation tax is the best place to invest this money. You already have a very substantial block of public money in the block grant. As I said, it is just under £12 billion out of the £19 billion. That is a significant slug of money, and there is 25% more spent per head than on Joe Benton's constituents. I am suggesting you take a very modest proportion of that and that will grow the cake. It will grow the wealth and it will grow the economy faster than any other measure. There is a key marketing element in this. It is just not the same to stomp around Boston and go to Cambridge Massachusetts and say, "Look, come to Northern Ireland we have x tax credit."

Q79 Naomi Long: What evidence would you present to those that say those other factors would be as important?

Mr Paterson: It does not create this step change; it does not send out this dramatic signal that Northern Ireland has really moved on and is now really looking for business and is the place to do business. They are all highly desirable and I would not underestimate the benefits they bring, but they do not deliver the step change.

Q80 Lady Hermon: Just before I come on to a slightly different subject, could I just make absolutely sure here that I am hearing the Secretary of State correctly? Do you, as Secretary of State for Northern Ireland, accept at any level that it is a bit of a gamble to reduce corporation tax in Northern Ireland? There are no guarantees that it is going to increase jobs in Northern Ireland. At a time where we already have significant cutbacks being taken through the Executive, agreed in a four-year plan, do you accept that there is any hint of a gamble with this, or are you just so convinced this is the single most significant factor to turn Northern Ireland's economy around?

Mr Paterson: I am totally convinced that this is the key measure on top of all the existing benefits that already make Northern Ireland an attractive place to do business.

Q81 Lady Hermon: Such as?

Mr Paterson: I have rattled off the list before, but this is the key measure in making the step change. So that is what I personally think, and that comes from all my travels when I used to be in business for 25 years. If you go to countries where there are lower rates of corporate tax, they tend to be more prosperous than countries with higher ones. It is not just me. Look at this group of businesses that did the jobs plan: CBI, Construction Employers Federation, the Centre for Competitiveness, the Northern Ireland Chamber of Commerce, IoD, Momentum, Northern Ireland Food and Drink, and the Northern Ireland Independent Retail Trade Association. They all said emphatically that the key thing they wanted was a low and competitive rate of corporation tax. It was top of their list. Despite all the travails in the Republic, do not underestimate the impact it is still having. According to the United Nations, in 2009 about $70 billion came into the UK as foreign direct investment and $24 billion went into Ireland. That means that 35% of the direct foreign investment into the whole of the British Isles still went to the Republic of Ireland, despite all the problems they had.[2]

Q82 Lady Hermon: Thank you so much for a very lengthy reply, but could I just ask the question again: do you think reducing corporation tax is a gamble?

Mr Paterson: Emphatically it is not a gamble. A gamble is doing nothing. I really mean that deadly seriously. The gamble is relying on the constituents of Messrs Williamson, Benton and Colvile continuing this very high level of expenditure indefinitely over the decades. Nothing is going to change on public expenditure in the short term. It is going to be stable. To think this will continue, with the political process delivering stability, I think is a very dangerous gamble.

Q83 Lady Hermon: I wonder, Secretary of State, if you will just take this opportunity to put on the record that the very high level of public expenditure is to a great extent due to the continuing threat from dissident republicans, and therefore the huge increase in the budget that was absolutely rightly made to the Chief Constable and to the police in Northern Ireland.

Mr Paterson: Well I would also get on record that we have given them a considerable sum of extra money; they have another £200 million.

Q84 Lady Hermon: Yes you have indeed, absolutely, and we are enormously grateful for that.

Mr Paterson: You are quite right that there is higher expenditure on security in Northern Ireland, but that still does not make up the 25% extra that is paid to every Northern Irish citizen over that which is paid to every English citizen.

Q85 Lady Hermon: You will be happy to know that we are moving on to a completely different subject, Secretary of State. We understand that the Deputy Prime Minister is setting up an informal devolution Ministers network, with the aim of strengthening existing Whitehall devolution-related structures. What does this new network hope to achieve that cannot be achieved through existing channels, for example through the NIO and with the individual Government Departments? In particular, does the setting up of this new network indicate and herald the demise of the Northern Ireland, Scottish and Welsh Offices as discrete departments?

Mr Paterson: No, I think this is a perfectly sensible, practical idea. The idea is that there will be a Minister in each UK Department keeping an eye on matters that might have an impact on the devolved regions. So we have an absolutely classic one in the Department for Transport, which was the idea of introducing a lorry vignette, which would have quite a major impact on trucks coming from the Republic, particularly carrying quarry products, I think, in from Fermanagh and Tyrone. Now that was missed entirely. None of us spotted it, and it obviously has quite a significant impact for Northern Ireland. So the idea is that there is a longstop keeping an eye out for matters that might have a particular impact on a region that the UK Minister and his civil servants, through no malice at all, might not have known about. So I think it is a totally sensible idea.

Q86 Lady Hermon: So rumours of your demise—or rather the demise of the Northern Ireland Office—not yours particularly Secretary of State, I do not wish that to be the case at all—

Chair: Are greatly exaggerated.

Lady Hermon: Exactly. Those are completely unfounded?

Mr Paterson: I think you would have to address that question to the Prime Minister, but from the information I have at the moment, they are exaggerated, yes.

Chair: Maybe we will at some point

Q87 Chair: I have one very final point. When Her Majesty visits the Republic of Ireland, will she take the opportunity to visit Northern Ireland?

Mr Paterson: As I understand it, this is entirely a state-to-state visit. She is invited by the President of the Republic, so she will spend her time in the Republic. As you know, she comes to Northern Ireland on a regular basis. I think it will be a huge moment, and I think she will get a tremendous welcome from the Republic. I think it will be a wonderful way to seal the Presidency of the current President as she comes to the end of her term, and I can see only huge good coming from it.

Chair: Thank you very much. Can I thank members of the public and media for attending and can I ask them to leave the room now? We are having a brief private meeting. Thank you.

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1   Note from Naomi Long: The availability of jobs is not the issue when it comes to levels of DLA claimants. Back

2   Note from Mr Paterson: In 2009, $45.676 billion of foreign direct investment came into the UK and $24.971 went into Ireland. The total for the British Isles is therefore $70.647 billion, with FDI into Ireland accounting for 35% of that total. Back

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Prepared 9 June 2011