Despite some improvements in recent years, Northern Ireland has under-performed economically in comparison to the rest of the United Kingdom. The turmoil of the Troubles acted as a deterrent to investment and contributed to a brain drain of talent from Northern Ireland. Over this time the public sector received a considerable amount of financial support. However, the result is an economy that is seen as being dependent upon the public sector, with a private sector whose potential for growth, innovation and exports needs to be further boosted. Unlocking this potential should be the Government's priority.
The Government published a consultation paper, Rebalancing the Northern Ireland economy, which included proposals to devolve corporation tax to Northern Ireland. In addition to the impact of the Troubles, Northern Ireland is the only part of the UK with a land border with another sovereign state, which has a headline corporation tax rate of 12.5%. The Republic of Ireland has used the 12.5% rate as a banner to attract foreign investment and, alongside other business friendly measures, has been very successful in attracting foreign firms to invest in the Republic. Throughout its own recent economic problems, and under considerable pressure from other EU Member States during the bailout negotiations, the Republic has doggedly held onto the 12.5% rate.
We have heard from business people, trade unions, economists and politicians in Dublin, Belfast and London. On balance, we believe there is a convincing case for reducing the corporation tax rate in Northern Ireland, not least so it can better compete with the Republic of Ireland. In this Report we have used 12.5% as a benchmark. On the basis that the decision is devolved to the Northern Ireland Executive they may, in due course, choose a lower rate. Maximising Northern Ireland's competitiveness must be the goal of the Northern Ireland Executive and the UK Government.
However, this is not as straightforward as it first appears. There are considerable implementation issues. First, the UK tax system is not the same as that in the Republic of Ireland and other countries have also used corporation tax as a headline in attempt to attract limited foreign investment. Secondly, the UK Government would have to satisfy the criteria laid down in the Azores judgment for the tax reduction to satisfy EU rules on state aids. This means the UK must devolve the decision to vary the corporation tax to the Northern Ireland Executive, and that the Northern Ireland Executive must take responsibility for the financial consequences of the reduced tax rate. As a result, the block grant would have to be reduced by the amount of corporation tax raised in Northern Ireland.
This, in turn, creates several administrative hurdles for HM Treasury and HMRC. At present, HM Treasury does not actually know how much corporation tax is raised in Northern Ireland. If the Northern Ireland Executive chose to lower the tax rate, and the tax revenue is reduced in the short term, then the EU rules do not allow the UK Government to compensate or offset the loss in revenue. The Northern Ireland Executive would have to make decisions for future public expenditure planning with an element of their budget reliant on a more unpredictable source of revenue; and pay for the administrative costs incurred by HMRC in managing the process and regulating any companies that wish to exploit the lower tax rate without creating any economic activity in Northern Ireland.
It is worth repeating that the decision to devolve corporation tax, and how it would be implemented in Northern Ireland, would require cooperation and agreement between the Northern Ireland Executive and HM Government. A low rate of corporation tax is advantageous, but on its own would not be a panacea for all Northern Ireland's economic ills. To maximise the benefit, there are other important steps that would need to be taken in conjunction, many devolved already, on other economic development policy mechanisms including planning, education, skills training, and incentives to encourage R&D and exporting. The measures need to be worked into a single, easily understood package, alongside corporation tax, that can be marketed to potential foreign investors and stimulate entrepreneurs and enterprise among indigenous businesses. We do not consider it necessary to devolve any further tax measures at the moment but, at the same time, urge the Government to avoid introducing measures that clearly make Northern Ireland a less competitive, less business friendly, location.