Low corporation tax may not be North's 'magic bullet'

BELFAST BRIEFING:There is an element of obsession about the South's corporation tax rates in some quarters

IT MAY be the start of a new year but the same old arguments are still raging among businesses in the North. Top of the gripe list is the seemingly inexhaustible debate about corporation tax levels versus those in the South.

Thanks to David Cameron and his pals the issues surrounding corporation tax have got a fresh lease of life.

Once upon a time under Gordon Brown’s regime any change to the rate of corporation tax – currently sitting at 28 per cent in the North as opposed to the Republic’s 12.5 per cent – was firmly ruled out.

But then Cameron turned that on its head when his government promised in the last British budget to “examine mechanisms for changing the corporation tax rate” in the North.

Cameron’s new approach to the issue has sparked an investigation by the Northern Ireland Affairs Committee, an influential House of Commons organisation, as to how a different rate of corporation tax would impact and work in the North. This inquiry has caused more than a certain frisson of excitement among the local pro-low rate brigade.

Many of this brigade seem to view the fact Northern Ireland shares a border with a country that has a lower corporation tax rate as tantamount to a human rights violation.

A casual observer might be forgiven for thinking there is an element of obsession about the South’s corporation tax rates in some quarters.

Perhaps it stems from the fact that the North never had the opportunity to enjoy the excesses of a Celtic Tiger economy even though we all know how that particular “tail” ended.

There is little doubt that those in favour of lowering the rate of corporation tax to bring it into line with the South have a persuasive argument.

The pro-low lobby claim it would attract new foreign investment, help generate new jobs and also stimulate local businesses. In the current dismal economic environment there is nothing that Northern Ireland needs more.

Yet new research suggests a lower rate of corporation tax might not prove to be a “magic bullet” for some of the region’s most pressing problems. In fact some experts believe lowering the current rate of corporation tax to the Republic’s might cost the Northern Ireland Executive around £280 million a year.

According to the latest research carried out by business advisers PricewaterhouseCoopers (PwC) reducing the rate alone “is unlikely to attract significant volumes of new, overseas investment”.

Martin Fleetwood, a partner with the business advisors, said evidence shows that from the 1950s Ireland had three decades of low corporation tax but comparatively little new investment. In his opinion a variety of factors – of which low corporation tax was only one – contributed to the rise of the Celtic Tiger economy.

Fleetwood believes the debate over corporation tax has focused too closely on the rate rather than the powers the North’s Executive would need to implement any such cut.

He is urging political leaders to be mindful of the fact that the Republic used a “wide range of flexible tax incentives” as the tools to target new investors to locate and create jobs.

Overall PwC advocates that a “cocktail of financial incentives” might be the best option in persuading new investors to locate in the North rather than just the “relatively blunt instrument” of lowering the headline rate of corporation tax.

If Northern Ireland learns just one thing from what has happened south of the Border it is that there are no economic certainties anymore.

The North’s economy is in much too fragile a place to barter its long-term security on the unpredictable promises that a lower rate of corporation tax may or may not deliver.