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Economy

Varney report rules out corporation tax cuts

Monday, 17 December 2007

Alistair Darling has welcomed a report by Sir David Varney on the role of corporation tax rates in boosting the economy of Northern Ireland.

The assessment of the review is that in considering the costs and benefits for Northern Ireland in isolation, a clear and unambiguous case for a 12.5 per cent rate of corporation tax cannot be made.

Sir David says that it is clear from his initial assessment that there would be an up-front cost of near £300 million per annum in lost corporation tax receipts, with no cost recovery in terms of tax receipts in a reasonable period of time.

Long-term cost in reduced resources

The report says that the overall case against a reduction in the corporation tax rate in Northern Ireland from a UK-wide perspective is more marked.

"The likely displacement of both capital and profits from the rest of the UK, and the fact that this would be subject to a lower rate of corporation tax, mean that a reduced rate of corporation tax for Northern Ireland would certainly come at a long-term cost in reduced resources to be shared by the UK regions or in the financing of public services. The policy would result in a net cost
of about £2.2 billion over ten years, with no prospect of full cost recovery over the long run," Sir David Varney concludes.

The Chancellor said that the government accepts the reports finding that there is no convincing case for a change.

In March 2007 the Government asked Sir David Varney to undertake a review looking at how tax policy can support growth in Northern Ireland, and to report back to the Chancellor. Sir David published his report on Monday.

He concludes that implementing a different corporation tax rate for Northern Ireland, as compared to the rest of the UK, does not offer the best way forward for building a strong investment strategy for Northern Ireland.

Financial investment incentives

The report notes that the Northern Ireland economy has historically been reliant on public sector investment for its growth, but that political progress over the last ten years to transform Northern Ireland to a peaceful, stable society has already helped attract inward private sector investment.

The restoration of devolution on 8 May is a major turning point and incentive for such further inward investment.

Sir David, therefore, recommends a strategy to develop private sector investment in Northern Ireland based on maximising the benefits of the competitive advantages that already exist in Northern Ireland, including current financial investment incentives, and realising the potential further to improve this competitive advantage.

The report recommends further improvements in basic and technical skills, reducing the size of the public sector and improving efficiency, better university and business collaborations.

It also recommends promoting trade and investment across government, working with Invest Northern Ireland, the Irish Investment and Development Agency and UK Trade and Investment.

Sir David Varney says that he has reviewed all the evidence carefully and visited both Northern Ireland and the Republic of Ireland.

He adds that he is convinced that, in the light of the successful peace process, Northern Ireland can potentially emulate the economic success of the Republic, although he believes there is not a clear and unambiguous case for changing corporation tax in Northern Ireland beyond the UK-wide measures announced in the 2007 Budget.

Second review

The Government announced a second review by Sir David Varney building on the first review and focusing on identifying further measures to promote private sector investment.

Building on his earlier analysis and agreement from all parties about the unique circumstances of Northern Ireland in relation to the opportunities provided by the peace process, the need to strengthen the private sector, to create increased employment opportunities and to reform the public sector this second review will explore in more detail how to expand the private sector and to enhance Northern Ireland's competitiveness.

The review will look at incentives for supporting the sustainable growth of businesses, investment and employment in Northern Ireland and the implications for reducing the historic dependency on the public sector.

This will include examination of incentives for growth in Northern Ireland that fall within the responsibility of the Northern Ireland Executive and the UK government.

Sir David will aim to report in good time for the US Investment Conference. He will be supported by a small secretariat and will receive direct and regular input from Northern Ireland Executive officials.

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