Monday Blog: Why Northern Ireland needs a real fresh economic start

While economic recovery is evident in both jurisdictions there has been a worrying acceleration in job losses in Northern Ireland with some very significant losses expected in JTI Galagher and Michelin Tyres, both in Ballymena as well as 100 job losses in the US Engineering company, Caterpillar.  Reflecting trends elsewhere in the retail sector, Dunnes Stores have announced a closure of part of a store in Belfast. In recent weeks, Bombardier has announced 20% cost reductions next year which will have significant implications for staff including agency workers employed by them. HM Revenue and Customs have announced office closures in Craigavon, Derry, Enniskillen, Lisburn and Newry while services will be centralised in one of its Belfast offices. 

Taken together, the continuing haemorrhaging of jobs in manufacturing, the pressure from low-cost stores and online business as well as the tightening noose on public sector employment will impact on the Northern Ireland economy more than other areas of the UK. Moreover, areas outside Belfast such as Ballymena are likely to take a disproportionate hit with implications for local demand and business.  The absence of a coherent strategy to develop local manufacturing enterprise is not helping. Finally, UK fiscal austerity policies and withdrawal of tax credits and welfare reform will impact adversely on the North.

While the unemployment rate, in Northern Ireland fell to 5.9% in the quarter ending September of this year, the employment rate decreased to 67.9% compared to 68.5% a year previous (the latest UK estimate is 73.7%). The youth unemployment rate in the North was 18.1% compared to 13.3% for the UK as a whole.

Data on gross hourly earnings in Northern Ireland were released last week (see press release here  ). They show a very significant recovery in wages for the year ending April 2015 in Northern Ireland. Average weekly earnings rose by 5.4% over the 12 month period with an increase of 6.7% in the private sector and 1.6% in the public sector.

All of these developments are positive but still far short of what is needed to reverse the impact of the recession over recent years.  Moreover, there has been a significant increase in precarious work as well as a long-term trend towards wage inequality well documented by researchers.

The indication or agreement to cut the headline corporation tax from its current level of 20% to 12.5% in the case of Northern Ireland is not as clear or certain as might be thought. To start with, the document (A Fresh Start – The Stormont Agreement and Implementation Plan  ) is vague on a number of key issues including the following:

1. The amount of revenue lost as a direct consequence of cutting the headline rate is not known. It could be anywhere in the region of £200-£300 million per annum in a full year once the rate has been cut.
2. The timing of the cut is not entirely clear – the document seems to indicate a one-off cut in April 2018. However, this could be phased in over a number of years (see below).
3. The cut in the tax rate is conditional on the Executive  taking ‘all the actions necessary to demonstrate that its finances are on a sustainable footing for the long term including successfully implementing measures in the Stormont House Agreement, this Agreement and subsequent reform measures’ (paragraph 1.18 of the ‘Fresh Start’). Paragraph 1.18 could, therefore, be interpreted as a ‘get out’ clause if the UK government considered Northern Ireland’s public finances to be not in order.
4. It is clear that any loss in corporation tax (for example by £200-£300 million per annum) has to be made good by means of an equivalent reduction in the UK ‘Block grant’ (this is the money that Westminster transfers to Northern Ireland to cover day-to-day and capital spending by NI departments). This is to ensure compliance with the ‘Azores criteria’ – that governments cannot give direct state aid to regions.
5. The so-called ‘second round’ effects of changing corporation tax via additional income tax, national insurance and VAT and excise duties will not be retained within Northern Ireland  (see paragraph 6.2 of ‘Fresh Start’).
6. The so-called ‘behavioural costs’ of reducing the corporation tax rate in Northern Ireland (the loss in UK government revenue as a result of companies relocating from Britain to Northern Ireland as a result of a lower tax rate in Northern Ireland) will be reviewed in 2022.  In other words, there is no guarantee that this particular potential gain for Northern Ireland will be retained for use in Northern Ireland by the Executive.
7. A report in the Irish Independent (‘Scotland and Wales push to be allowed compete on tax’) suggests that, not surprisingly, Scottish and Welsh politicians will press for similar tax devolution in their jurisdictions. Taken together with corporate tax competition across Europe and the world Northern Ireland is at risk of joining a slow race to the bottom with implications for local public services and this against a background of self-defeating competitive advantage as others get in on the act.
8. Finally, the administrative and compliance costs of implementing a differential tax regime for corporations in Northern Ireland have not been considered or quantified. Given that analysts do not know the extent of corporation tax actually paid at the present time in Northern Ireland how easy will it be to separate out profits earned on trading activities in Northern Ireland in the case of companies operating across jurisdictions? Identifying company profits at national level is already extremely challenging for tax authorities and government statisticians alike never mind at regional level.

In summary, the proposal to cut the headline corporation tax rate is unclear with respect to its timing and implementation and the claimed benefits to Northern Ireland including the implications for Northern Ireland public finances leave more questions than answers. This is why it is time for fresh thinking on a new departure for public policy and enterprise policy in Northern Ireland with a long-term strategy to invest in skills, management, research and capacity building. The NERI will be devoting attention to these areas in 2016.