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Official Report (Hansard)

Session: 2007/2008

Date: 04 June 2008

COMMITTEE FOR 
FINANCE AND PERSONNEL

OFFICIAL REPORT
(Hansard)

Review of Northern Ireland’s Tax Policy and Competitiveness

4 June 2008

Members present for all or part of the proceedings:
Mr Mitchel McLaughlin (Chairperson)
Mr Mervyn Storey (Deputy Chairperson)
Mr Roy Beggs
Dr Stephen Farry
Mr Simon Hamilton
Mr Fra McCann
Ms Jennifer McCann
Ms Dawn Purvis
Mr Peter Weir

Witnesses:
Sir David Varney )
Ms Abbie Lloyd ) Review Team
Mr Martin Beck )

The Chairperson (Mr McLaughlin):
We are joined by Sir David Varney, and by Abbie Lloyd, who is head of the Varney review team. Martin Beck, who is economic adviser to Her Majesty’s Treasury, also joins us. They will discuss evidence on the outcomes of reviews of Northern Ireland’s tax policy and competitiveness. Given that the session is being recorded for the Hansard report, I remind guests, witnesses and members that they should turn off their mobile phones because they interfere with the recording equipment.

I invite Sir David and his colleagues to make some preliminary comments.

Sir David Varney (Review Team):
Thank you for inviting us to discuss both my reviews; I hope that there will not be a third. Part of my role in the reviews has been to distil evidence from assertion and to give the UK Government and the Northern Ireland Executive evidence to help them make reasonable and informed decisions on how to develop the economy. That is a particularly important consideration in the debate on corporation tax, in which assertion and anecdote have often been confused with fact and hard evidence.

During the past year, most of my findings have been extremely positive. Northern Ireland is making progress in several areas, which is demonstrated by the increase in the gross domestic product (GDP) and employment figures. Assembly Members, Ministers, Government officials, academics and business representatives are committed fully to economic growth. The range and ambition of the policies to support growth — such as the recent Budget and skills and innovation strategies — impressed us, and I congratulate all parties on the progress that has been made so far.

I travelled around Northern Ireland and met some people, many of whom attempted to convince me that the economy needed a stimulus or kick-start because existing policies would not deliver the desired progress. Most people thought that cutting corporation tax would do the trick. Looking across the border, it is easy to see why many people associate low corporation tax with economic miracles.

My first review discovered that, given the cost to Northern Ireland and the UK, a differential cut in corporation tax would be financially questionable and would be unlikely to deliver the economic growth transformation that many of its supporters claimed. The Irish transformation relied on a host of factors that went beyond tax; some occurred in fortunate circumstances, and some were the result of sensible, well-implemented policies. The review found that other factors, including skills and industrial development policy, had not been implemented in Northern Ireland. Many commentators suggested that Northern Ireland and the Republic are identical in every respect except corporation tax. My review discovered that that is clearly not the case.

That was the starting point for my second review. We examined the key policy areas that would help to determine investment and growth, recognise progress, and identify areas that required further progress. Broadly, I found that much of the policy development in skills, innovation, investment and strategy has been commendable. However, the Executive are moving to a new stage of the development of those policies, and implementation will be vital. That is why I recommended the creation of the competitive advisory board and suggested that the Executive focus on delivering a few keys areas, rather than continually revising their strategy. My suggestions related to public-sector reform, basic and intermediate skills, dealing with inactivity, and expanding the all-Ireland economy through enterprise and innovation policy.

I believe that the ongoing debate on corporation tax is at risk of becoming, at best, a distraction and, at worst, a diversion of time and energy from critical competitiveness issues such as skills, inactivity, and innovation. Those issues are not simply window dressing; they are within the Executive’s grasp, and they must be gripped if Northern Ireland is to transform into a successful twenty-first century economy.

Mr Weir:
Thank you for your presentation. Addressing the productivity gap, if all the second report’s recommendations were implemented, would you expect the gap in gross value added per capita between Northern Ireland and GB to reduce significantly?

Sir David Varney:
I would hope so. The second report is different from the first, which attempted to explore an area that suffers as a result of limited academic guidance. The report’s content reflects that fact. I was, in a sense, asked to create a platform on which a state could consider tax policy, and it was possible to gather evidence for that.

In the second report, I tried to work with the Executive to see what stage we had reached and to take cognisance of a new situation. The demands on public money are currently greater than the amount of public money that is available, and, therefore, all our actions have an opportunity cost. I tried to identify areas that could improve the economy’s performance and build on the success that has been achieved to date. Obviously, therefore, the recommendations aim to close that gap. I did not try to produce a trajectory of what I believed would be the productivity outcome.

Mr Weir:
I suppose that that is the reason that there are no direct recommendations that would measure the expected impact. Is the report therefore qualitative, rather than quantitative, in that regard?

Sir David Varney:
The reason that I put so much weight on the competitive analysis board is that if the economy is to be the Executive’s central issue, which I believe it is, a forum with outside input that could assess productivity is needed. If I remember correctly, the Irish report on competitiveness draws on productivity data as part of the range of data that are used to make decisions.

I, as a businessman, was struck on my trip to Dublin by the sort of businesslike conversations that I had about the relative performance of the Irish economy in a global context. Some of that information exists in Northern Ireland. However, it has not brought together with the same focus, it does not have the same importance, and it is not the trigger for as much action as there has been in the Republic.

Mr Weir:
Your review has been based on the five drivers framework that has been used in other UK regions. There is an argument that during the past decade or so, that has not resulted in any shift in position between the different regions at least. The poor regions are probably still poor, much as they were a decade ago. What evidence can you suggest to indicate that the adoption of a similar approach for Northern Ireland would produce a radically different outcome in its position in the UK regions?

Sir David Varney:
Most external observers would say that the UK as a whole has improved its economic performance considerably. When I was at university, the then Cabinet Secretary told me that the Civil Service’s main task is the orderly management of the country’s decline. The country is not in decline now. The relative positions of regions will take some time to change. One expects that process to be gradual. Overall, the economy is competitive. Outside the United States, the UK as a whole is home to the biggest stock of mobile capital.

Dr Farry:
Picking up on the issue of UK regional policy, you have set out a vision — verbally and in your first report — that London and the south-east of England will essentially drive the overall UK economy and that the other regions will, therefore, benefit from that wealth generation. In Northern Ireland’s case, that will occur through the Barnett formula. Is that analysis essentially correct? Do you envisage that there will be any dangers, such as economic or environmental problems, for the dependent regions? I am conscious that, at present, only three out of 12 regions are net contributors to the UK Treasury.

Sir David Varney:
I do not think that UK policy sets out to be driven by success in the south-east and by the reallocation of wealth to other regions; it sets out to create a competitive economic environment for the UK as a whole. Investors then make choices about where they want to locate. There is an interesting debate in economics about whether success is driven by country or by city. Various economists have exchanged points of view on Northern Ireland’s experience, which is that Belfast is much more successful that the rest of the region. By the same analysis, one could ask whether the Northern Ireland Executive’s policy is to maximise Belfast’s success and to redistribute that wealth. I am sure that their answer would be the same as that of the UK Government, which is that we should to let the market determine where it invests.

One suggestion that I have made in both reports is for much closer working between the UK Trade and Investment (UKTI) and the investment arms of the regions. There are cases in which foreign investors could come to London and the south-east by virtue of the fact that that is the easy option. The case must be made for other options that have other advantages. We must make that case and try to work together. The policy guidelines are the right ones; that is how to maximise the UK’s competitiveness.

I see the Government in their role as an employer, with the Civil Service taking steps under both the Lyons Review and the Gershon Review to devolve jobs out of London. When I was chairperson of HM Revenue and Customs, jobs were moved out of London and the south-east because the labour market was becoming overheated. It makes sense to do that. It also makes sense not to have all one’s assets in the same place.

Dr Farry:
Moving on to corporation tax, you stress in your reports that the UK as a whole offers a competitive tax regime of which Northern Ireland is part. There is also a great deal of talk in your reports about co-operation between Northern Ireland and the Republic of Ireland and some comparisons between our business model and the way that the Republic of Ireland has acted as regards the success of the Celtic tiger economy. However, one thing that was missing from the analysis was any real acknowledgement of competition on an all-island basis for foreign direct investment, which is something that we feel acutely here, particularly through the type of investment that has been attracted to the South of Ireland through the Industrial Development Agency (IDA) and the nature of investment that comes to Northern Ireland through Invest Northern Ireland (INI). In the past, we have had quite low gross added value (GVA) business coming here, such as call centres, whereas the South of Ireland has done much better with very high added value service and manufacturing. Do you not appreciate that there may be a stronger case for considering corporation tax, given the reality of all-island competition for FDI?

Sir David Varney:
I tried to lay out in the report, as best I could, all the evidence. As a businessman, if I were asked to make a decision about a specialised corporation tax rate for Northern Ireland, I would try to make the right assessment of what I thought were the costs. My conclusions were that that was not a good solution for Northern Ireland, and that it was an even worse solution for the UK as a whole.

When we talked to people who are involved in trade promotion in the Republic, we found that they were moving to much higher value added foreign direct investment. That is what they want to attract. Although we say that they have higher value added, they see that as part of a global trend in the transfer of foreign direct investment.

Northern Ireland is second to London in attracting foreign direct investment. I thought that the recent deal that was done on financial services was encouraging. Northern Ireland is positioned to take advantage of being part of two economic markets, and realising those advantages requires skill.

However, what would worry people who may invest here is your commitment to economic growth. I say that as someone who has spent all his working life in the oil and gas industry. I am used to going to countries and being received by Administrations that tell me how welcome I am. After that, I have to try to understand how supportive those Administrations are of businesses, because investments will be made over a long period before they come to fruition. Therefore, a certain attitude is involved.

However, the availability of skills is also important. My second report concentrates primarily on skills, innovation and the relationship between higher and further education and the workforce. The skills agenda in the Republic has been driven quite hard.

People talk about the Celtic tiger economy. However, a group of economists say that if one draws those lines over 100 years, the performance has been pretty steady. It is not exciting, and one should look at a piece. There are some parts of the story that, if one were to take a long enough historical perspective, one would take a much more cautious view.

Ms Purvis:
One of the recommendations in your second report refers to the much higher rate of economic inactivity in Northern Ireland, much of which is due to the number of people claiming incapacity benefit. The message is that the Department for Employment and Learning’s Pathways to Work programme must be strengthened. Does the programme itself need to be changed, or do you feel that the Department must be more rigorous in its implementation of that strategy?

Sir David Varney:
I am not sure that I know enough about that to decide which is the right option. The implementation of that programme has only just begun. My experience of working on welfare-to-work programmes in the UK — I led the New Deal Employer Coalition in London — has been that a combination of agencies and voluntary groups must be involved in those areas in which people’s behaviour is deeply ingrained. Tough love and the eternal hope and belief that people can return to work are needed. I do not yet know what the right balance is, but consideration of that very important issue will form part of our response to the question of how competitiveness can be improved.

Ms Purvis:
You also talked about the need to gather more evidence about the benefits trap. How can the impact of the benefits trap be reduced in Northern Ireland, given that decisions on social-security benefits and policy are dictated by Westminster?

Sir David Varney:
I was calling for more research on how the trap operates. There is no cookie-cutter answer to that question. The UK policy framework must be worked within, but that is capable of being tested against what is happening in reality. In the past few years, I have noticed that decisions on welfare-to-work activities are being influenced by evidence that people have presented to show what has worked for them in their particular localities. A judgement must then be made as to whether that approach is likely to be effective across a broader geographical area rather than just a narrow one.

Ms Purvis:
Therefore, is it a matter of examining individual cases as opposed to how the policy affects society as a whole?

Sir David Varney:
I have been involved with welfare policy since 1997, and I know that it started off being shaped in the theoretical sense. We have solved some of the easier problems, and we are now left with groups that are harder to reach and deal with and thus harder to get into employment. We know that getting people into work will go some way towards building the competitiveness of the economy.

Ms Purvis:
Would social-security reforms increase Northern Ireland’s low level of gross value added per capita relative to the figures for GB, or would it lead to a transfer of benefit claimants into low-paid work?

Sir David Varney:
That presents a challenge. Experience has shown that when economically inactive people are brought into the workforce, they often go much further than expected. When we began our work, there would have been some justice in your point that people were simply being moved from social support to low-paid jobs. However, I have seen many examples of economically inactive people doing very well after having been brought into the workforce and given support in skills development. Therefore, I am an optimist in that regard.

Ms Purvis:
If welfare reforms existed that led to a rapid transfer of benefit recipients into low-paid jobs in Northern Ireland, would the UK Exchequer make savings in the form of annually managed expenditure (AME)?

Sir David Varney:
When I embarked on the review, I did not say that it would be a cost-saving exercise. Any economy that subsidises people to be inactive faces a penalty — not just an economic, but a social, penalty. Therefore, it is right that we should encourage people back into work. Dame Carol Black is a distinguished consultant who works in the Civil Service in England, and she has carried out quite a lot of work on the matter in the UK. She considered the issue of people who have left the workforce because they have been designated as incapable or sick. She talked to the medical profession and learnt that there is huge scope for allowing people to continue to work simply by changing the nature of the jobs that they do. That approach is good for them and their self-esteem, and it is also good for the economy.

Ms Purvis:
Welfare reforms may bring more people into the workforce, particularly those who are long-term unemployed or claiming incapacity benefit. However, my concern is that such reforms will result in the subvention for Northern Ireland being reduced.

Northern Ireland receives about £4 billion in social security benefits. Given that, should the UK Government incentivise the reduction in benefit claims to the Executive?

Sir David Varney:
It is a case to consider. There is a public policy intervention to try to reduce the number of people who are paid and out of work. The danger with trying to protect that subvention is that if the position in Northern Ireland deteriorates against the rest of the UK, that policy will get more and more attention. There is real value in helping people who are not in work into work. I am sorry, but that is what I believe: a society that can use all its talents is more likely to be profitable and successful. What impressed me in HM Revenue and Customs was the number of people with handicaps who were employed in the public service; that gave them respect and enabled them to manage their own lives. That was very positive.

Ms Purvis:
I do not think that anyone here would disagree with that; however, I have several concerns. Moving the poor and those on benefits into low-paid jobs could make them worse off; moving them too quickly into low-paid jobs could decrease our subvention, and that would not help our economy. Could the UK Government incentivise us to help those people into work by allowing them to retain some of their benefits or allowing us to retain some of the subvention to help with upskilling or any other measures that may be needed?

Sir David Varney:
I am not the UK Government, but that is something to think about. However, it would have to be informed by a great deal of evidence. Benefit levels are set to encourage people into work. Sometimes the arrangements do not do that; in that case, we need to think about the design of the policy. It is not my intention to make people even worse off; that is not viable. We need to get them on a path that encourages the growth and acquisition of skills and more responsibility. Designing such a path for particularly hard to reach groups would have to consider the characteristics of such groups. Northern Ireland happens to have, proportionally, a large number of people in that category, so it is something for which there ought to be a good evidence base. I said that it is something that needs to be tackled; however, I did not take it any further.

Mr Storey:
In your second report you emphasised the need to attract graduates and students from outside Northern Ireland. Do you agree that the best way of producing more graduates and of encouraging others to come to Northern Ireland is to have a healthy demand from employers at competitive graduate salaries? The review did not dwell on that issue.

Sir David Varney:
I thought that there was more scope for people to come here. Northern Ireland is good at sending people across to the other parts of the UK, but, sadly, large numbers of them do not come back, which concerns me. Some people will stay, and some will go back to where they came from, but it will be good experience. I want to see an economy that has jobs and wages in the private sector that are attractive to graduates. That is an important part of developing the competitiveness of the Northern Ireland economy.

Mr Storey:
In the second report there were not many specific recommendations on targeting quality employment growth in specific areas, such as the information and financial services sector.

Sir David Varney:
It is not sensible for a reviewer to pick successes. The review was to create a framework in which some of those discussions could take place, and in the report I called for people to consider Northern Ireland’s strategic advantages. That is part of a positioning exercise between the trade promotion groups in the United Kingdom; it is about working with the Industrial Development Agency on which areas we should promote and what sort of businesses we find attractive.

The Chancellor commissioned Lord McKinsey to do a review of the competitiveness of the UK. I was surprised to see in the conclusions of that review that Bristol University was highlighted as the centre of the animation industry, because its mathematics department’s graduates started animation companies that are now world leaders. That is not something that you pick at the centre.

A competition analysis board would provide the raw evidence on which decisions could be made about the selective use and presentation of Northern Ireland’s attributes for particular sectors.

Mr Storey:
Your second report states that the funding structures for universities and further education colleges do not always support the strategic direction of economic development policy. How can those funding structures be improved?

Sir David Varney:
I am a great admirer of what happens in the Republic of Ireland. Its trade promotion arms communicate; it builds a consensus around its report of competitiveness; and it seems to be able to get a well-developed response from universities and further education colleges. One can take the view that such arrangements work well in a small place; however, some people on the mainland — perhaps even here — are concerned that business has such a degree of influence on academia, but that is what happens. I argued for more connection here between the trade promotion business arm and higher and further education, because it will serve the country well.

The Chairperson:
A strategic review into whether business has undue influence on academia might be required in future, but considering the targets that we have set ourselves such a connection seems like a worthwhile first step.

Sir David Varney:

Universities can contribute in spin-offs. I was influenced by the Massachusetts Institute of Technology (MIT) in the United States. The Bank of Boston conducted a study of the impact of MIT on the US economy since the Second World War, and it concluded that an economy the size of Thailand has been created by spin-offs from MIT. That is due to how MIT interfaces with its environment. One will see the same sort of thing in Stanford University in Palo Alto, where the university is the hub of academic excellence and of entrepreneurial growth and business spin-offs.

Mr F McCann:
I welcome you to this morning’s Committee session, Sir David. You recommend that the Executive continue their value-for-money programme, the review of public administration and the review of the number of Departments. Are there any aspects of implementation that could be improved in those areas?

Sir David Varney:
Yes. I proposed a series of challenges for the public sector. Public-sector salaries need to be addressed, and employment and welfare benefits would profit from coming together. I am a supporter of several of the programmes that have been driven through, and the Committee for Finance and Personnel has reviewed quite a few of them.

Northern Ireland is a participant in the service-transformation work that we are doing across the UK, and we hear about the work that happens here. Like the rest of the UK, it is likely that your public sector will have to undergo a transformation for efficiency and effectiveness reasons. One area is benefits where often many different agencies of government interact with the same family and sometimes create as many problems as they solve. That is why we must do better.

If, like me, you believe that there are not enough resources to satisfy demand, everything has an opportunity cost, which would cause me to do two things: first, I would examine the design and scale of the public sector. Things are done here in the public sector that are done in the private sector in other parts of the UK. Would reducing the public sector’s scope help to grow the private sector? Secondly, there is approximately £38 billion of public-sector assets here — every pound that is freed-up from those assets can be used in other ways to improve your competitiveness. You may decide not to do that, but the opportunity is there.

Mr F McCann:
Do you not think that wages for civil servants here highlight our low-wage economy?

Sir David Varney:
Wage levels vary across the Civil Service. It is not as simple as saying that wage levels in the public sector look high because wages in the other parts of the economy are low. The report states that:

“Analysis of certain jobs which are roughly comparable between the public and private sectors show that at lower skills levels (below middle and senior management) the differential in favour of the public sector is only about 3 per cent, but rises to as high as 22 per cent at senior civil service levels.”

It is partly the nature of the work in the private sector as well as that sector’s structure and size that determines wages. The salary-forming policies of the Civil Service have been nationwide, which, to a certain extent, imposes higher costs.

Mr F McCann:
The Institute of Chartered Accountants in Ireland states that an increase in the tax credit available, coupled with a relaxation of the rules governing what constitutes research and development expenditure, would go a long way to increasing high-wage jobs and innovation in Northern Ireland. What conclusions did the review come to on that suggestion?

Sir David Varney:
I concluded that there was not a strong case for either research and development tax credits or allowances for training. Encouraging firms to invest in research and development and in training is important in developing the Northern Ireland economy, but such proposals would face legal and practical difficulties. In my first review I investigated research and development tax credits solely for Northern Ireland and concluded that it would lead to tax avoidance and the displacement of activity from other parts of the UK. One suggestion was to introduce research and development tax credits for incoming investors only, but that would create a competitive tension between domestic and foreign companies because of different tax arrangements. That did not seem sensible and would invite firms from mainland UK to come here into sectors and compete purely for tax advantages.

Training tax credits are not the most effective way of incentivising employers to increase investment in training. The Train to Gain system that has been introduced in England should be watched carefully because it looks like a simpler way of getting investment in training. There is much effort in the UK, with Business in the Community helping Government, to make signposting for business training much easier.

Given the amount of training that is on offer, it is daunting for a small company to find its way through such provision. Therefore work is under way to consider whether there is a case for producing a training map to help smaller businesses to access and find their way through the myriad of provision.

The Chairperson:
Did you consider the all-island context of competing economic conditions that particularly affect the North but which do not reflect experiences in Britain?

Sir David Varney:
I considered both. There are areas in which there is much to be gained from co-operation between the two parts of the island, such as tourism and trade promotion in which there is common ground. Northern Ireland is a major supplier to the Republic, and that is another growth area.

Some opportunities are interesting. When I was in Dublin I discovered that the Government are beginning to identify a need for a management training programme for small and medium-sized businesses; however, that is probably beyond the scope of resources on the island, and, therefore, the Government will probably look to the US to provide courses. That was the sort of area in which there could be co-operation.

My first report includes as much academic information as we could find about intra-state tax competition. We looked at the small amount of literature that we could find about tax competition between states, and, interestingly, we took apart and analysed — both academically and business-wise — ERINI’s earlier model. We arrived at different judgements, but we have been absolutely transparent about where we sourced our evidence and what weight we gave to it. Over the coming years, academics will review, criticise and improve on those judgements, and the report will become an interesting tool. Nevertheless, there still not much known about that subject. When reaching such judgements, one must lay out all the evidence that one has used and the weight given to various bits of it. Throughout the process, we attempted to be a bit schizophrenic by considering Northern Ireland as part of the UK and as part of the island of Ireland.

The Chairperson:
We know all about that.

[Laughter.]

Mr F McCann:
The report mentioned the transfer of Housing Executive powers to a registered social landlord, and that caught my attention. How would that operate and what impact would it have on the delivery of a social-housing programme?

Sir David Varney:
Over the past decade and a half in mainland UK, there have been some developments in the emergence of more social housing, which has freed-up resources that were allocated to public housing and created vehicles in which tenants play a bigger role in managing their facilities.

I live in a part of London with a great deal of social housing, and one of the main differences that struck me over the past 10 years is that the housing department used to be far from the tenants. However, some of those housing departments are now registered social landlords, and the housing manager is an employee of the tenants. Such housing developments have completely changed their outlook and are now much more vibrant. If such vehicles are created, private-sector investment can be levered in and public resources freed up, and that is what happened.

That brings me back to my central concern that the major task facing Northern Ireland’s Administration is to increase the Province’s competitiveness, and for that it requires more resources. No matter how much resources one is given, one will always want to do more. I am looking for more resources to build more infrastructure or to encourage innovation. It is up to you to decide whether that would be a better use of public money rather than leaving it in public housing.

Mr Beggs:
I thank Sir David and his team for their continuing interest in Northern Ireland. Their report is food for thought that will prompt debate, and decisions will be taken on the basis of it. Sir David, you suggest that further asset disposals should be made to deliver more efficient services and release funds for investment. Have you evidence to support the view that further disposals will bring about efficiencies?

Sir David Varney:
I take your point, and I refer you to the answer that I have just given. Northern Ireland has assets tied up that could be used to improve competitiveness. The Executive must make a political choice about where it wants to leave the money.

My job was to write a report that would improve competitiveness. I approached it like a businessman and recalled how I acted when I was chief executive of British Gas. The company had falling sales and problems with profitability and executive remuneration. We did not have a problem with assets: we had plenty of them. We instituted a programme, which has continued to this day, of constantly reviewing assets to see where they can be deployed more efficiently and effectively. In the process, we have transformed the performance of the company, split it up and changed it.

It is not good enough to say that a particular asset cannot be touched. There has to be a debate: if an asset is not touched, what is the consequence for the competitiveness agenda, which is the most important objective? It is important to ask that question. Everything must be tested. That does not mean that everything has to be sold, but there must be a sensible debate about the opportunity-cost. I would be surprised if a competitive Northern Ireland emerged with the same asset base with which it started; that would be almost inconceivable.

Mr Beggs:
You seem to recommend further disposals beyond those identified by the capital realisation task force. What criteria do you use to identify additional assets, and what process will ensure that value for money will be achieved in disposing of them?

Sir David Varney:
I was impressed by some of the people that we met. Were I in this situation, I would look for people who have the ability and expertise to get the best commercial value. It is easy for me to say, but I would make a political decision — contingent upon having the best possible people. In business, once you decide to sell something you need a team of people who are good at selling. The third-best-paid person in British Gas, when I was chief executive, was the chap responsible for disposing of a billion pounds’ worth of property assets. He spent his whole working life in property. There are people who specialise in obtaining value for assets.

There is a difficulty in timing because of the state of the economy. However, Northern Ireland needs resources, and they will have to come from somewhere. I would be surprised if the resource allocation that you start with remains unchanged over a three- or four-year period. As one finds out what works, one is more likely to put money in it and less likely to invest in things that one finds more difficult.

Mr Beggs:
Do you accept that this may not be the best stage in the economic cycle to sell a large number of assets?

Sir David Varney:
It is never the best time. I spoke to someone the other day who did not sell properties because he thought that the property market would go up by another 10%.

The question is: what is the opportunity cost? There is an opportunity cost to standing still; if we do not have the resources, we cannot do what we want to. It is about the scale of ambition. Northern Ireland has a series of big infrastructure investment projects, costing £18 billion over the next 10 years, which is very important, because the Province’s infrastructure needs to be improved.

Mr Beggs:
You suggest selling assets such as additional facilities, public car-parks, the Port of Belfast, and public-sector housing. In the Port of Belfast a new Stena Line terminal will be opened today, which represents a considerable investment; and huge investment is being made in the Titanic Quarter.

What difference would it make if the Port of Belfast were entirely in private hands?

Sir David Varney:
If it were in private hands, I would hope that it would be incentivised to continue to improve its performance. Privatisation would enable the money that was raised to be used for more infrastructure, innovation, intervention on skills or anything that is under local control. The money would be spent on those areas rather than on anything else. That is the position that politicians are in. Holding the port as a cherished asset may provide a psychological income that is greater than the income that would be available from investing in competitiveness. A choice must be made.

As a reviewer, I am struck by the size and shape of the public sector here; things are done in the public sector here that are not done in the public sector in other parts of the UK; in other parts of the UK such debates do not take place. People do not say that they wish that parking houses were in public ownership and that everything has gone to rack and ruin since privatisation. Many ports have been privatised. Privatisation is an important issue, on which you must make a decision. My job was to put the issue on the table.

Mr Beggs:
The Minister for Regional Development recently proposed that the port have increased commercial powers so that it can stimulate additional economic activity. Is that sufficient or should he go still further?

Sir David Varney:
I am not up to date on what the Minister recommended. I ask the question again: does it create the resources for you to do more about competitiveness?

Mr Beggs:
Getting statistically more public-sector activities reclassified as private-sector activities — for example the sale of car-parks — does not significantly increase economic activity. How will the disposal of assets to the private sector significantly grow that sector?

Sir David Varney:
That is very a pessimistic view. I worked in two ex-nationalised industries that had been privatised, British Telecom (BT) and British Gas, and they are completely different to what they were in the public sector. The biggest challenge for managements was to turn those companies into commercial enterprises. At one stage, BT, as part of the public sector, had a mobile phone business. There is no resemblance today between 02, a mobile phone company that survives against international competition, and the public-sector organisation that preceded it. When I think of BT, I think of my black Bakelite phone that was delivered only after a long wait. Today, I see people fighting to provide services.

I read remarks from the Assembly that the policy to which you referred was window dressing from the Treasury. I disagree. The policy tries to create a bigger class of people who are economically active in the private sector. Around the world, the experience of Governments that have privatised activities is that those policies have made a major contribution to their economic success.

Mr Beggs:
Largely the same personnel runs Northern Ireland Water as ran the Water Service. The wages of those staff have improved, and the chief executive received a huge pay-off. That does not strike me as benefiting the public; therefore how do we ensure that privatisation does not simply lead to former civil servants being better paid?

Sir David Varney:
That certainly has not been my experience of regulation in the UK. I had my rates cut, and the public sector went through mammoth downsizing; although mistakes must be learned from. The water industry faces particular challenges. We all recognise that the nature of the industry, the long lead times and water politics make water privatisation difficult. However, one bad apple does not spoil the barrel. The real strategic issue concerns the deployment of resources, and that will not go away. You will continually find that you must make hard choices.

Ms J McCann:
I will be brief, because many of my questions have, to some degree, been covered already. You stated that corporation tax does not feature that highly and that other issues, such as skills and innovation, are of equal importance when companies that are considering FDI are deciding where to locate. Mitchel touched briefly on the uniqueness of the North of Ireland; it cannot be compared to places in England, Scotland and Wales, because it is on a different island.

The rate of corporation tax is 12% on one part of the island and 28% on the other. That large disparity means that an investor may decide to locate a factory in Dundalk, for example, rather than just up the road in Newry, where the much higher rate applies. From that starting point, even being able to compete must be regarded as a challenge to the North. I would like to hear your comments on that.

I was interested in the all-island element to the economy that you mentioned and to which you refer in your report, particularly where working together to build a skills base, developing innovation, and so forth are concerned. How could Invest NI work with the IDA in the South? I will throw a spanner in the works by suggesting that instead of regarding investment as competition, we could perhaps try to attract investment on an all-island basis, as opposed to being concerned only with whether a company locates in the North or the South. By doing that, we could build the all-island economy, rather than viewing the two economies as separate.

Unless the British Treasury acknowledges the uniqueness of the North and implements tax incentives here, inward investment will not happen. If it is cheaper for companies to locate two or three miles up the road, I imagine that they would want to do so — that is obvious. Rather than being competitive, how can Invest NI and the IDA move forward and work together to attract investment on an all-island basis to strengthen the economy?

Sir David Varney:
Your first point concerned corporation tax. In the Ernst and Young survey that was published in 2008, corporation tax was ranked as the seventh most important factor that companies consider. Much of the current analysis is based on assertions that corporation tax is some kind of magic bullet. I wrote an entire report in which I tried to explain that there is no business case that I can see, to the best of my knowledge, for a reduction in the rate of corporation tax.

I was amused to hear that one commentator thought that I started out with that idea — I started out with a blank sheet of paper. I had only one conversation with the Chancellor, which was when he rang to tell me that he thought that such a study would be useful. I do not carry out reviews whose outcomes are predetermined because they are a waste of everyone’s time, including mine. I made my own assessment of the issue, and there are measures that can, and should, be taken. They are in the gift of the Executive and need to be progressed from paper strategies to implementation. The first of two challenges concerns co-operation with the Republic. My sense is that the Republic is slick and good at making decisions quite quickly. I also think that time will be a pressure. We spoke with some of the founding figures of the IDA, and they said that they approached the issue exactly as though it were a business. They expected to be able to tell investors what they could do for them.

The first example of positively attracting foreign investment that IDA officials cited to us did not relate to tax, but to the retraining of software and electrical engineers. The IDA committed to provide training for those skilled people without getting a commitment from the universities that they were prepared to do so. They simply went back to the Republic and said that they had committed to retraining those people, and if that happened, the investment would come in.

Some links between Invest Northern Ireland and the IDA could be useful. Tourism is likely to develop on an all-Ireland basis. The work on financial services that has started between the new Taoiseach and the new First Minister is a good example of confidence building. I spoke earlier about the expense of bringing in an American business school to provide a package of training for supervisory management. That package will be developed in the Republic, but it may also be useful for a small number of people here. That is the sort of process that I would go through. I would find topics on which we could co-operate and build strengths. If tourism grows, the demand for training people in that industry will also grow.

I went to the University of Surrey, which had a gifted school of hotel and catering management. Those courses were developed by someone who was involved in that industry who felt that there was no professional training for people wishing to enter that sector. It was one of the leading schools in the country for providing training for people entering the hospitality industry. That industry has transformed its standards. That is one of the areas where I would seek co-operation. Such a process would involve Northern Ireland being clear to itself about where its strategic strengths lie in the business areas of foreign direct investment.

The last time that I was in Dublin, I heard press reports about a factory in the Republic, which is one of the world’s largest producers of breast implants, that decided to transfer its operations to Costa Rica. There was talk about whether that was a change in the competitive environment, and, if so, questions would be asked about where the Republic would put its weight in the next bout of investment.

I was not at the investment conference, but I imagine that participants in the conference would be wondering about the reaction to areas that were found to be attractive in Northern Ireland and areas where the presentation could be strengthened.

Ms J McCann:
I made some comments about building a strong, vibrant economy. Do you feel that the North of Ireland is different? Are we unique here because we are part of an island? Do comparative studies with England, Scotland and Wales not really apply here due to the uniqueness of our geographical position? Do you feel that not working on an all-island basis is an impediment to building and growing a strong economy?

Sir David Varney:
Potentially, you have the best of both worlds. You are part of the world’s most successful attractor of mobile capital outside the US, and you have opportunities for co-operation with a dynamic partner. Therefore, you need to build on those opportunities. I do not think that there is a case for a different corporation tax rate. On business grounds, it would not be good for Northern Ireland and it would not be good for the UK.

Ms J McCann:
Would it be good for the North of Ireland if we had our own tax-varying powers?

Sir David Varney:
The financial implications of that are discussed in the report. There would be major implications were the UK to move to a Balkanised tax system. I have outlined many of those implications in my report, including the need to create tax authorities to work everything out. However, that is a different issue. I was asked to consider the case for tax-varying powers, and I did not find it prudent. However, I think that there are opportunities. Indeed, you can turn it the other way round.

When I was at Shell, I found that it was always difficult to persuade people to come to Northern Ireland because they had impressions of what it was like. Once they came here it was almost impossible to get them out. They would go through a brief period when they could see that Northern Ireland was a half-full glass and full of opportunity, but if they stayed here for a long time, the glass was half empty. Many positive things are happening and should be built on. The point is to maximise Northern Ireland’s position of both being part of the UK and of its having a good relationship with a vibrant neighbour.

The Chairperson:
It is generally accepted that the single issue that kick-started the so-called Celtic tiger economy was the corporation tax differential. There is an argument, which has some resonance with me, that that moment has passed and that the corporation tax differential may not be as significant now or may not have the same effect. Nonetheless, there is contemporary evidence that some serious corporate players are relocating from Britain to the South of Ireland and are citing corporation tax as the reason. We are also informed that the Chancellor is conducting a review of corporation tax in the UK. Therefore, should those issues not be taken into account?

Sir David Varney:
I am perfectly clear that it is a key responsibility of the Treasury to consider the competitiveness of the UK tax regime. That is a difficult task, but the Chancellor has indicated that it is important — he has set up a group to which he has been talking about whether our corporation tax is at the right level. As I said, until this point, we have been getting a disproportionate share of the world’s mobile capital. It is coming to us, we are winning it, so in the hands of almost anyone else outside of this narrow debate —

The Chairperson:
When you say “we”, do you mean the south-east of England?

Sir David Varney:
It is coming to the UK, although I agree that a lot is coming to the south. I have made comments in my report about working more closely with UKTI, because in the same way that you want to work with the IDA, you should use both those relationships to maximise your position. However, you must identify what sort of industries you believe are strong here. The issue of the overall level of tax in a state is completely different to the issue of whether a state should have differential tax rates inside its jurisdiction.

Ms J McCann:
You are saying that we can work with the UK and the South, but using the example of fuel prices, the tax on fuel increases that was being paid by the people here in the North of Ireland was going straight to the British Treasury, and we were not seeing any of that money. It seems that a lot of our economic problems result from the fact that we do not get the same the benefit from our taxes, or get the same level of investment here. I feel that we would probably be much stronger economically if we had a greater economic connection with the South of Ireland as opposed to with England, Scotland and Wales.

Sir David Varney:
Northern Ireland has a strong economic connection with the Republic; it is a major export market for you. Based on our assumptions, a £7 billion public subsidy was coming in to Northern Ireland to maintain the level of public services here, so obviously there are pinch points with various differences in tax rates. You see the same thing in Europe — for example, Luxembourg has the biggest service station in Europe because its tax rate on fuel attracts everyone from nearby, but that has not resulted in other countries reducing their tax rate to the same as Luxembourg’s; they just tolerate it. Public services here cost approximately £7 billion in excess of what is self-generated. Therefore, being part of the UK brings substantial benefits.

The Chairperson:
However, it can be demonstrated that historically, the convergence policy has not been successful here. Furthermore, it has not been successful in regions in England.

Sir David Varney:
It is an interesting economic concept. When I worked for Shell, we conducted work on the growth of cities. Many countries comprise dynamic cities that have done well. Michael E Porter, a professor at Harvard Business School, wrote about the vibrancy of regions, and he concluded that economic success was dependent on success in clusters. Therefore, while we talk about Italy as a country, he divided it into cities such as Milan and Florence. Those cities were centres of wealth creation that the rest of the country shared. Governments must judge balancing the preservation of the competitiveness of the entire country with the need to move investment from traditional places into new areas.

As Nigel Dodds mentioned a few days ago in the Assembly, a recent survey conducted by OCO Global rated Northern Ireland the second most attractive part of the UK behind London. That is what people from outside Northern Ireland are telling you, and if you were thirteenth on that list I might agree with you. However, you are doing pretty well, but the point is that you must now land the fish.

Mr Hamilton:
I want to ask about the chapter in your second report on public-sector reform, which is a well-recognised and well-identified problem. Although there might be some divergence on the method used for such reform, agreement on the objectives that you outlined in the report would be almost universal.

When your second report was published, the section on public-sector pay caused, perhaps, the most controversy. The report discusses the risk of crowding out the private sector because of comparatively higher public-sector pay in Northern Ireland, for which there is anecdotal evidence. From my own experience, I know that well-trained, highly skilled, adaptable people are leaving local government — or a particular local council — to move, not to the private sector, but to another area in the public sector. I am sure that that is replicated across the board. Is there any empirical, rather than anecdotal, evidence of that? What impact does it have?

Sir David Varney:
People in the private sector suggested consistently that there is evidence that their experience shows that the private sector is unable to compete successfully with the public sector. Although the Irish Congress of Trade Unions does not accept the crowding-out argument, everybody else that we spoke to does. Therefore, that is one case where the consensus in Northern Ireland and I were on the same page. [Laughter.]

Mr Hamilton:
That is an achievement in itself. Some of the suggestions include radical — and perhaps difficult — steps such as the differential, minimum wages, and breaking up the pay-bargaining mechanisms and so on. Such steps may have the desired effect, but they are not easy approaches. The Institute of Chartered Accountants in Ireland suggested that rather than freeze or reduce public-sector pay, private-sector pay could be incentivised through allowances or tapered National Insurance contributions. What is your view on that suggestion? Is it a viable option?

Sir David Varney:
No; I am not enthusiastic about that suggestion. The details of public-sector pay must be examined. My report states that the matter is related more to higher-level than to lower-level grades. Northern Ireland shares with the UK mainland concerns about public-sector pensions. However, the public-sector pay issue should be dealt with first.

Due to the structure of Northern Ireland’s private sector, interventions are problematic, given that the companies that are involved are so small. Interventions that focus on a company’s individual skills would be helpful. Procurement practices could be changed by identifying Northern Ireland’s successful software or by consulting companies and making sure they have an equal opportunity to bid for contracts. That would be better than small companies attempting to procure large contracts, which are invariably signed by organisations higher up the food chain. I am sceptical of an attempt to fix the problem in such an indirect way.

Mr Hamilton:
Do you agree that there should be further study of the impact that the Executive’s adoption of such an approach could have on living standards and competitiveness in Northern Ireland? You mentioned that there is not such a big difference at lower-level public-sector grades as there is at higher-level grades. However, the current rise in the prices of all goods has a more severe impact on individuals at lower grades.

Sir David Varney:
I am not an advocate of a uniform approach; it should be identified where exactly a problem exists. A problem in a particular section of the Civil Service should be handled with a specific response.

As I stated in the report, I worry that a great deal of assistance is offered in the private sector, with the effect that competitiveness can be blunted, rather than strengthened. Indeed, that is another potential objection to the proposal of the Institute of Chartered Accountants in Ireland. If we were not careful, the sheer complexity of such assistance could be counterproductive, especially for small businesses. The design of the provisions may have discouraged people who could have benefited. To tackle that problem, HM Revenue and Customs now work with the Civil Service in assessing the take-up of incentives.

The Chairperson:
On behalf of the Committee, Sir David, I thank you and your colleagues for the time that you have given us today and for the work that you have done. Your conclusions will be discussed, but there is no question that you have made a substantial contribution to the debate.

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