1 Introduction
1. On 25 May 2010, the Coalition Government published
its programme for government which included an undertaking to:
Continue to promote peace, stability and economic
prosperity in Northern Ireland [...] We will work to bring Northern
Ireland back into the mainstream of UK politics, including producing
a government paper examining potential mechanisms for changing
the corporation tax rate in Northern Ireland.[1]
2. On 24 March 2011, HM Treasury, in consultation
with the Northern Ireland Executive and the Northern Ireland Office,
published the consultation paper Rebalancing the Northern Ireland
economy.[2] In his
Written Ministerial Statement accompanying the consultation paper,
David Gauke MP, the Exchequer Secretary to the Treasury, said
that the Government had introduced policies to rebalance the economy
across the UK and noted that many key economic policy levers were
already devolved to Northern Ireland. In addition, the Treasury's
consultation paper discussed particular aspects of the Northern
Ireland economy including:
- The benefits and costs of devolving corporation
tax varying powers to the Northern Ireland Executive;
- Implementation issues; and
- Other possible tax options[3]
OUR CURRENT INQUIRY
3. We agreed to undertake an inquiry into corporation
tax on 27 July 2010, and in September took evidence from Rt Hon
Owen Paterson MP, Secretary of State for Northern Ireland, on
general matters. He explained his main priority, working with
local politicians and the devolved institutions, was the economy;
specifically rebalancing the Northern Ireland economy. He suggested
that one way to boost the private sector in Northern Ireland could
involve devolving the competence to decide the rate of corporation
tax to the Executive.[4]
He also told us that this would be part of a forthcoming consultation
paper:
I am concentrating my main efforts at the moment
on working with the Treasury and with local Ministers. I had a
meeting with Sammy Wilson and Arlene Foster a couple
of weeks ago on the ideas we put into this Treasury paper on growing
the private sector.[5]
4. Since 2008, the Secretary of State had commonly
referred to the idea of turning the whole of Northern Ireland
into an Enterprise Zone.[6]
We decided to invite evidence on the broader issues that might
make Northern Ireland a better place for enterprise to flourish.
A list of those who provided evidence is at the end of this report.
In addition to informal meetings with interested parties in Northern
Ireland, we also held meetings in the Republic of Ireland to hear
about that country's experience with a low rate of corporation
tax.
THE NORTHERN IRELAND ECONOMY
5. The Northern Ireland economy under-performs in
relation to the rest of the UK, and despite recent improvements
in several respects, has done so for several years. Northern Ireland
has remained close to 80% of the UK average Gross Domestic Product
per head for several decades and improvements in employment rates
have been offset by declining productivity relative to the rest
of the UK.[7] The current
Gross Value Added (GVA) per capita in Northern Ireland was £15,795
in 2009: compared to England £20,400, Scotland £19,744,
and Wales £14,842.[8]
Northern Ireland has the highest rate of economic inactivity:
28.4%, compared to the UK average of 23.4%.[9]
Northern Ireland's economic weaknesses have been attributed to
a number of unique factors, not least the legacy of over 30 years
of conflict, demographic structure, the peripheral location of
Northern Ireland, and issues of deprivation and rurality.[10]
Private sector
6. The Secretary of State told us that from his conversations
with businesses in Northern Ireland:
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, world-class
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.[11]
7. Substantial resources have been directed at the
Northern Ireland economy to try to create jobs and attract foreign
direct investment (FDI). New jobs have been created, but often
in low value-added activities[12]
and without being able to narrow the overall productivity gap
with the rest of the UK.[13]
This is partly attributed to the amount of support the Northern
Ireland public sector has received,[14]
and while the average salary is higher than in the private sector[15]
the public sector does not have the same productivity drivers.[16]
The result is an economy that receives public sector spending
25% per capita higher than in England.[17]
8. John Simpson, visiting professor at the University
of Ulster, suggested the private sector was not "as miserable
as it is sometimes described" and pointed out it provided
70% of the employment in Northern Ireland.[18]
There was, however, broad agreement that the private sector in
Northern Ireland is dominated by small companies: 94% of Northern
Ireland's VAT registered enterprises have fewer than 10 employees;
and 10 large companies account for 50% of all Northern Ireland
exports.[19] It has the
lowest level of business formation and business growth in the
UK,[20] and the private
sector has greater reliance on low value-added sectors, such as
agriculture, while it is under-represented in high productivity
sectors such as financial services. Private sector productivity
is held back by a lack of basic skills, relatively low levels
of enterprise and low levels of research and development.[21]
9. Our witnesses agreed that the Troubles had acted
as a serious disincentive for investment, and even now affects
the willingness of potential investors to consider Northern Ireland
as a location.[22] Victor
Hewitt, Director of the Northern Ireland Economic Research Institute,
and member of the Northern Ireland Economic Reform Group,[23]
told us:
At the height of the Troubles, we were bringing
in less than 100 jobs a year at one stage. So the public sector
consciously expanded and that has unbalanced the economy to some
degree.[24]
Peter Bunting, Assistant General Secretary, Irish
Congress of Trade Unions, agreed:
We had 40 years of mayhem and conflict, ridiculous
stuff, which held us back from developing as an economy. So we
lost out for 40 years, and we're playing catch up.[25]
Several witnesses pointed out that the years of unrest
had contributed to loss of talent from Northern Ireland. Terence
Brannigan, Chairman of CBI Northern Ireland, believed that:
One of the things that we really, really need
to focus on is ensuring that we keep our young people. This is
my biggest single fear if we do not do this. I go back to the
time when I had just come through my education and, like a lot
of my friends and colleagues, left Northern Ireland. Why? Because
there was nothing there for them to do in terms of a career. We
lost a generation of people.[26]
Aubrey Calderwood, from Capitus investment incentives
consultant, agreed:
I think over the years as well, obviously with
the well documented Troubles [...] we definitely have had a brain
drain that has led to not so many entrepreneurs being available
in Northern Ireland. [...] Some come back, but most do not.[27]
10. Thankfully, Northern Ireland appears to have
reached a period of political stability, welcomed by the Secretary
of State:
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.[28]
11. Largely on account of a long period of terrorist
activity, Northern Ireland's economy has underperformed by comparison
with the UK as a whole. However, in relatively more peaceful times,
taxpayers in the rest of the UK might expect Northern Ireland
to improve its economic performance and to take steps to enable
it to do so.
The work of Invest Northern Ireland
12. Invest NI is the business development agency
for Northern Ireland and, sponsored by the Department of Enterprise,
Trade and Investment in the Northern Ireland Executive, aims to
help new and existing Northern Ireland businesses compete internationally,
and to attract new investment to Northern Ireland. It currently
markets Northern Ireland as a destination for foreign investment
because of cultural advantages (English speaking, functioning
legal system, advanced education system), competitive on costs
(low wages and low property prices), and accessible to markets
(strong links with US and Europe).[29]
13. Invest NI is able to provide grants to firms
wishing to invest in Northern Ireland. Jeremy Fitch, Managing
Director, Clients Group and Business International at Invest NI,
told us they had paid about £367 million over eight years
to attract in, or safeguard, 35,114 jobs—about 2,500 to
4,000 jobs every year at a cost of about £10,500 per job.[30]
He argued that for there to be an increase in the number of jobs
created, including different and sustainable types of employment,
then there needed "to be a paradigm shift of some description".[31]
14. Several witnesses predicted the forthcoming reduction
in the ability of Invest NI to offer Selective Financial Assistance
[SFA] grants because of restrictions on state aid under EU law.
Jeremy Fitch admitted:
The SFA changes are what keep me awake at night
at the moment; that is my big fear. At the moment, the state aid
rules allow companies in specific regions within the UK, of which
Northern Ireland is one, to offer a contribution towards eligible
investment costs. So at the moment for large companies, all of
Northern Ireland can offer 30%. On average, we are probably doing
about 20%; we are trying to get the best value for taxpayers'
money, so we are not using the full 30%, just 20%. From the first
of January [2011], that drops for large companies in Belfast to
10% and for the rest of Northern Ireland to 15%. So our armoury
for going out to win inward investment is going to be severely
damaged.[32]
Victor Hewitt, from NIERG, explained that £100
million a year is currently spent on direct grant aid and once
this goes: "That will obviously leave the development agencies
with nothing in the quiver."[33]
The Independent Review of Economic Policy said that offers of
assistance through SFA were associated with 28,000 new jobs, had
15,000 safeguarded jobs, and £2.4 billion of investment between
2002/03 and 2007/08.[34]
The Northern Ireland market, in itself, is not large and attracting
new FDI is seen as a way to attract high skilled, high wage and
sustainable jobs, increase the productivity of the economy, and
make a significant dent in the unemployment rates in Northern
Ireland.[35]
15. We acknowledge the forthcoming reduction in
the ability of Invest NI to use Selective Financial Assistance
grants to attract foreign direct investment. There is a need to
develop other incentives if Invest NI is to continue to attract
foreign direct investment and bring new jobs to Northern Ireland.
1 HM Government,
The Coalition: our programme for government, 25 May 2010, page
28 Back
2
HM Treasury, Rebalancing the Northern Ireland economy, 24 March
2011. Referred to as the 'Treasury's consultation paper' Back
3
WMS from HM Treasury, Consultation
Paper on Rebalancing the Northern Ireland Economy, 24 March 2011 Back
4
Oral evidence taken before
the Committee on 8 September 2010, Session 2010-12, HC 442-i,
Q1 Back
5
Oral evidence taken before
the Committee on 8 September 2010, Session 2010-12, HC 442-i,
Q 26 Back
6
For example, Owen Paterson
makes commitment on capital funding, 15 October 2010, www.bbc.co.uk/news/
or Heat on Owen Paterson to reveal his plans to revamp our struggling
economy, Belfast Telegraph, 10 February 2011 Back
7
Ev 217 Back
8
HL Deb, 10 March 2011,
Col WA 431. Gross Value Added is the difference between the value
of goods and services produced and the cost of raw materials and
other inputs which are used up in production Back
9
Northern Ireland Economic Outlook, March 2011, See pwc.co.uk/ni
Back
10
HM Treasury, Rebalancing
the Northern Ireland economy, paras 2.2-2.3 Back
11
Q1[ResponsibilitiesoftheSecretaryofStateforNorthernIreland] Back
12
HMTreasury,RebalancingtheNorthernIrelandeconomy,paras2.2-2.3 Back
13
Q3 Back
14
Ev 192 Back
15
Q 17 [Northern Ireland as an Enterprise Zone]. See also Ev
27 Back
16
Q4 Back
17
Q29[ResponsibilitiesoftheSecretaryofStateforNorthernIreland] Back
18
Q261 Back
19
Ev 202. See also Q 195 or Q 236 Back
20
Ev 202 Back
21
Ev 217 Back
22
Q36 Back
23
The Economic Reform
Group is small group of economists, accountants and business representatives
in Northern Ireland: Eamonn Donaghy, KPMG; Neil Gibson, Oxford
Economics Ltd; Dr. Graham Gudgin Centre for Business Research,
University of Cambridge; Michael Hall, Ernst and Young; Victor
Hewitt, Director ERINI; Sir George Quigley,Chairman, Bombardier-Shorts;
and Michael Smyth, University of Ulster. Back
24
Q 4 Back
25
Q 195 Back
26
Q 115 Back
27
Q14[NorthernIrelandasanEnterpriseZone] Back
28
Q 29 [Responsibilities of the Secretary of State for Northern
Ireland] Back
29
Q 34 Back
30
Q 44 Back
31
Q 48 Back
32
Q 49 Back
33
Q 12 Back
34
DETI and Invest NI, Independent Review of Economic Policy, September
2009, para E.16 Back
35
Q 30 Back
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