Economist Esmond Birnie: NI must consider cutting corporation tax to compete with Republic of Ireland

A respected Northern Ireland Economist has called on Stormont to reflect on how it is going to remain competitive with the Republic of Ireland in light of the decision by the Chancellor to raise corportation tax across the UK.

Wednesday, 3rd March 2021, 10:33 pm
Updated Thursday, 4th March 2021, 2:59 pm

Corporation tax in the south is ostensibly 12.5% or lower, while in the UK it is 19% and since an announcement in the 2021 budget today - to rise to 25%.

The concern is that such a high rate could see more overseas investment go south of the border due to lower taxation.

Dr Esmond Birnie, senior economist at Ulster University Business School, noted the optimistic forecast published by the Office for Budget Responsibility alongside today’s budget.

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Economist Esmond Birnie. Picture by Brian Little

It predicted GDP recovering to 2019 levels by mid-2022, although NI “may take a bit longer” he added.

Government borrowing in the past year of £355bn was “a record in peacetime”, he said, and as a result Chancellor Rishi Sunak had announced the increase in the UK corporation tax rate.

“This raises an interesting question for the NI Executive,” Dr Birnie said. “Should they adopt the UK increase or stick at 19% and try to win some competitive advantage especially given that we are competing against the Republic’s nominal average rates of 12.5?”

He noted that NI has the power to set its own corporation tax rate, although it has never exercised the ability to do so.

It was widely regarded by observers today that the chancellor’s budget will mean a largely investment-led economic recovery for Northern Ireland which “meets the moment” with no widespread austerity -  at least just yet.

While Rishi Sunak announced a £410m ‘budget boost’ for NI, Stormont Finance Minister Conor Murphy responded that, while welcome, almost all the money is one-off funding for the Covid response, with only a £4.2m increase for what he called everyday public spending.

Mr Sunak’s headlines for NI were that individuals and businesses in NI would benefit from the extension of Covid-19 support schemes - as well as the £410m in “additional funding”.

Other key announcements in his “meets the moment” budget were the increase of UK corporation tax from 19% to 25% and the extension of the 5% VAT rate for tourism and hospitality, and stamp duty exemptions.

For the first time the NI Housing Executive will also be exempted from corporation tax.

Speaking in the House Commons yesterday, Mr Sunak also announced a one-off £500 payment to eligible working tax credit claimants and Covid-19 related income tax exemptions for employees.

“Since the start of the pandemic, the UK Government has supported jobs and businesses across Northern Ireland – and this Budget continues our Plan for Jobs through the next stage of our recovery,” he said.

The government highlighted that fuel and alcohol duties will also be frozen.

NI Finance Minister Mr Murphy welcomed the extension of Covid support schemes and additional funding for the Covid response.

However, he said that money for everyday public spending has actually only increased by £4.2m and there is no additional capital funding.

“The biggest concern of many employers is wage costs, so the extension of the furlough scheme until the end of September is good news for workers, families and businesses,” he said.

However, he said that asking employers who may not be fully operational to find the cash to make increasing contributions to furlough payments this year could lead to redundancies.

“It’s also welcome that the Chancellor will support newly self-employed people,” he said.

Commenting on the additional £411.9m, the minister said: “Almost all of this money is one-off funding for the Covid response which is welcome as we look to the recovery phase, however, it still leaves us with a flat-cash budget for mainstream public services.”

Richard Ramsey, Chief Economist, NI, Ulster Bank said the chancellor’s £37.5bn of UK spending was “a huge amount”.

“What’s concerning though is that spending in future years is going to be cut at progressively larger amounts, and next April will therefore herald the start of four consecutive years of public spending cuts,” he said. There will then be “a phasing out of tax cuts and a phasing in of tax rises”.

 Angela McGowan, CBI Northern Ireland director, said the budget succeeded strongly in protecting the economy now and kickstarting recovery. However, she warned that the increase in corporation tax could cause “significant challenges” for NI.

“The Government and the Executive must now have a laser-like focus on Northern Ireland’s competitive position in the round, including fundamental reform of business rates, investment in skills and a relook at how Northern Ireland competes with the Republic’s corporation tax rate of 12.5%.”

Ann McGregor, chief executive of the NI Chamber of Commerce and Industry, said: “Businesses will broadly welcome many aspects of today’s budget, in particular the extension of the furlough scheme, which provides relief for firms facing enormous cash-flow pressures as a result of the pandemic.”

The continuation of Restart Grants and the Recovery Loan Scheme will also play an important role in enabling firms to reopen safely and sustainably, she added.

Leaders in the retail and small business sector gave qualified welcomes for the budget.

 Retail NI chief executive Glyn Roberts welcomed the extension of the furlough scheme until the end of September.

“But with employers expected to contribute 10% which will rise to 20% in the summer, it does reinforce the need for the Executive to clarify the timescale of its ‘strategy’ of lifting restrictions and allowing businesses to reopen” he said.

He noted the chancellor had outlined proposals for a £6k Restart Grant per premises for English independent retailers and also a year of rates relief - and called on Stormont to do the same for NI.

The increase in corporation tax “poses huge questions” but it is welcome that small businesses will be protected with a 19% small profits rate, he added.

The head of the Federation of Small Business in NI, Roger Pollen, welcomed the continued support schemes for jobs and the self-employed. However, he too said the increasing employer costs from July onwards will make the scheme “prohibitive for many”.

He welcomed the support for the self-employed, the announcement of a fifth self-employment grant and the extension of the 5% VAT rate for hospitality and tourism.

The planned increase in corporation tax increase causes concerns, he said, but were offset by the small profits rate.

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