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Is the corporation tax break gamble one worth taking?

WHEN I WAS on the board of Scottish Enterprise (SE) we received regular updates on the amount of Foreign Direct Investment (FDI) which had been attracted to Scotland. 

 

FDI has been very important to the Scottish Economy – as our coal, steel and shipbuilding industries were wiped out in the 1970s and 1980s, whole new businesses were transplanted in by international corporations such as Digital Equipment, Motorola, Hewlett-Packard, NEC and so on, creating valuable new jobs.

 

But what was obvious to the SE Board was that, in the battle for new FDI investments, we were fighting with one hand tied behind our back. Our main competitor was also another small EU country with a good supply of skilled young people, the Republic of Ireland (RoI). And Ireland had a trump card, a corporation tax rate of 12.5%, by far the lowest rate in the EU. This allowed Ireland to win the European headquarters of multinationals such as Apple, Dell, Cisco and Intel, among others.

 

And although Scotland has a much stronger base of life sciences research in its universities than Ireland, their tax breaks managed to attract 9 out of the top 10 pharmaceutical companies to set up base there. 70% of pharmaceutical blockbusters are produced in Ireland in what is now a very significant industry employing over 47,000 people.

 

Of course, it is not just the Scots who have noticed the advantage that the RoI has grabbed here. The devolved government in Northern Ireland has, arguably, a much stronger case for a level playing field to be set up between them and the south. So they set up an ‘Economic Advisory Group’ (EAG) to study this problem, and commissioned Oxford Economics to undertake some scenarios assessing the impact of a reduced rate of corporation tax.  Their report was published recently and forecasts that if corporation tax in Northern Ireland was also reduced to 12.5%, 58,000 new jobs would be created by 2030, and economic growth would be on average 1% better every year.

 

Of course there is a downside, and that is that a lower tax rate will lead to, at least initially, a lower tax take. The EAG study projects that the attraction of new corporations and increased economic activity would create a net gain in tax revenues after 2021 but until then there would be a shortfall of about £1bn in money raised.

 

All of this activity has, of course, been keenly observed by the SNP Government here in Scotland because if Northern Ireland were to be granted the power to lower corporation tax, you can be pretty sure that John Swinney would be knocking on George Osborne's door demanding similar powers.

 

Mind you, the resulting short-term Scottish tax shortfall would also have to be managed, and that wouldn't be easy. As the Scottish economy is over three times the size of the Northern Ireland one, it would be reasonable to assume that the revenue lost before there is a net gain would amount to over £3bn.

 

Then there is the eurozone factor. France and Germany have got fed up supporting economically weaker countries in the EU and clearly want a stronger fiscal union; they are pushing hard for harmonisation of tax rates, including corporation tax, within the EU. They have never been happy with Ireland’s low rate of corporation tax, which they see as predatory. 

 

It would be ironic if Ireland was forced to put up it's corporation tax just as Northern Ireland was allowed to lower theirs. 

 

Now, that would be interesting.

 

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