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Official Report (Hansard)

Session: 2007/2008

Date: 05 March 2008

COMMITTEE FOR 
FINANCE AND PERSONNEL

OFFICIAL REPORT
(Hansard)

Next Steps on Varney Report

5 March 2008

Members present for all or part of the proceedings: 
Mr Mitchel McLaughlin (Chairperson) 
Mr Mervyn Storey (Deputy Chairperson) 
Mr Roy Beggs 
Mr Simon Hamilton 
Ms Jennifer McCann 
Mr Declan O’Loan 
Ms Dawn Purvis 
Mr Peter Weir

Witnesses:

Mr Eamon Donaghy ) 
Mr Brian Keegan ) Institute of Chartered Accountants in Ireland 
Mr Vincent Sheridan )

The Chairperson (Mr McLaughlin):

The witnesses for this session are Vincent Sheridan, president of the Institute of Chartered Accountants in Ireland (ICAI), Eamonn Donaghy, chairman of the ICAI Northern Ireland tax committee, and Brian Keegan, ICAI director of tax. You are all welcome. I ask you to make an introductory presentation to the Committee.

Mr Vincent Sheridan ( Institute of Chartered Accountants in Ireland):

Thank you, Chairman. I am delighted to do so. I thank the Committee for its invitation to come and give evidence about the Varney review of tax policy in Northern Ireland.

Committee members may be aware that we had the pleasure last week of addressing the Northern Ireland Affairs Committee at Westminster on the Varney Review. We welcome the opportunity to give an update of what happened at that session.

The Institute of Chartered Accountants in Ireland represents more than 17,000 accountants operating in Northern Ireland and the Republic of Ireland. Some 20% of our members operate in Northern Ireland. As an all-island body of over 100 years standing, the only banner that we carry is that of promoting economic development, sustainable employment and prosperity on the island of Ireland. As an institute, we believe that we have made a significant contribution to the so-called Celtic tiger of economic growth in the Republic of Ireland over the past 15 years. We want to promote the conditions for a similar boom in the Northern economy. Economic development in Northern Ireland will ultimately benefit all our members, North and South.

Speaking to the Northern Ireland Affairs Committee about the Varney Review was a difficult proposition. Sir David Varney’s analysis, particularly of how the lower rate of corporation tax impacted in the Republic of Ireland, was centre stage. His analysis was that the corporation tax rate was not the key driver of economic development to foreign direct investment (FDI) in the South. The problem, as far as the debate is concerned, is that next to no one shares that view. Our support for the introduction of a reduced corporation tax rate in Northern Ireland stems from our first-hand experience of its effect on the Southern Irish economy.

Sir David Varney was right to say in his review that there was more to economic development in the Republic of Ireland than the tax rate. In so far as it goes, that is true. Other factors that played a role include the availability of a well-educated and skilled workforce; a stable and supportive pro-business culture; enormous goodwill, particularly from the USA; a sophisticated legal and regulatory environment; membership of the European Union; an English speaking environment, and reasonable communications and transport infrastructure. However, all those factors also exist in Northern Ireland.

The difference lies in the rate of corporation tax. Low corporate tax rates provided the vital stimulus for attracting FDI to Ireland ahead of other destinations that had many similar attributes. Make no mistake about it; FDI is the key to economic development in Northern Ireland. It is also the means by which reliance on public-sector employment and subsidies from other parts of the UK can be replaced by sustainable and better-paid employment in the private sector, which it is possible to achieve.

For example, the obstacle most frequently cited in advance of Sir David’s report was the constraint imposed by the European Union on state aid. We, in the institute, were delighted that Sir David’s report agrees with our submission that that barrier does not exist. From that perspective, the Varney Report contained a major positive element.

There would be a potential loss of revenue from the proposed rate of reduced corporation tax. In his report, Sir David put the figure at approximately £280 million. We do not agree with that estimate — and we do not believe it to be the point. The experience in the Republic of Ireland was that corporation tax receipts rose when the rate was cut. It is dramatically evident that, at no time since the introduction of a low rate of corporation tax in the Republic of Ireland has the graph of revenue from corporation tax declined: there has been an upward trend throughout. In addition, income tax and other taxes, such as value added tax, will rise, and expenditure on state benefits will fall on the back of the general economic stimulus.

Overall, while the Varney Review cogently identified the challenges, it offered little in the way of solutions. The economic case for a lower corporation tax rate in Northern Ireland is overwhelming. We recognise that there are political issues in Great Britain. However, a more proactive approach is required to build up the potential of the Northern Ireland economy. That approach is exemplified in the investment conference, which is to be hosted by the First Minister and deputy First Minister in May. The holding of that event confirms our view of the importance of having a vibrant economy in Northern Ireland, and of FDI in attaining it. The goodwill towards Northern Ireland will be evident at that event; but let us not confuse goodwill with ultimate business decisions. Something has to distinguish Northern Ireland from all other regions as the destination for FDI, particularly with a very competitive economy adjacent.

We hope that that distinguishing feature will be a reduction in the rate of corporation tax. That is the medium-term issue that really matters. If a reduced rate of corporation tax is unfortunately a medium-term issue, some interim measure is required in the short term. That could take the form of enhanced R&D credits, and we have expanded on that possibility in our submission to the second Varney Review, which concerns Northern Ireland’s competitiveness.

An indication from Sir David or the Chancellor that that kind of new fiscal incentive is on the table will undoubtedly assist the work of the conference, and our institute will certainly support such measures. However, we believe it to be the second-best option.

The policy arguments against a low rate of corporation tax have disappeared: they do not hold up in economic terms. Alternative tax incentives have their uses and would be welcome, but they are no substitute for a generally-available reduced rate of corporation tax; which is the fiscal tide that raises all boats.

This is clearly a political matter, and we call on the Assembly to use its influence to secure for Northern Ireland a chance to reduce its dependency on direct subsidies and public-sector employment and develop a vibrant private sector, kick-started by FDI, to secure sustainable long-term higher-paid employment.

The Chairperson:

Thank you very much, Vincent. Do Members have any questions?

Mr O’Loan:

I am on the same wavelength as the institute, and I commend the work that it is doing. Given the firmness of the slap down that Varney Review I provided, it is, politically and in every other way, difficult to respond — one can only assume the nature of the political backing that the report received from Westminster.

It is crucial to issue a rebuttal, develop a strategy and continue the argument. It is essential that a body such as the institute, which has such a high level of expertise and knowledge of the entire sector, is making that argument, and I strongly commend its efforts on that.

I am not convinced that Varney rejected a lower rate of corporation tax for the reasons presented in his report. What is at the heart of his and the Government’s reluctance to alter the rate of corporation tax?

Mr Sheridan:

We were disappointed that the Varney Report responded negatively to a reduction in the rate of corporation tax, but we were not terribly surprised. We judged the report as weak both in its analysis of the situation and in its support for its conclusion. We were delighted that it removed one factor that we feared would be an obstacle, which was the negative attitude in Europe — the report states that that is not a problem.

We simply do not accept the other reasons that Varney put forward for his negative response, particularly his argument that the low rate of corporation tax in the Republic had little to do with its attracting FDI. We have seen at first hand over a prolonged period that the two are connected. It would be a terrible mistake to think that any other series of measures could have a similar impact. I am not saying that they would not be welcome, but they would constitute plan B. Plan A must be a lower, and competitive, rate of corporation tax. Anyone who does not accept the arguments in the report, as we do not, would be stupid not to see the benefits that would flow from reducing the rate of corporation tax.

Although we are not approaching the matter from a political perspective, there are political issues around having different tax rates, and there would be some opposition to that. We encountered such opposition during the meeting of the Northern Ireland Affairs Committee, but we did not consider it to be valid. A representative from a depressed area of north-east England said that the introduction of a lower rate of corporation tax in Northern Ireland would mean that some companies in his constituency would move over here, and he gave the example of a major call centre, which I think was an Orange call centre.

However, we simply do not believe that that would happen. If a reduction in the rate of corporation tax were enough to encourage a company to move to Northern Ireland, then it would have moved to the Republic long ago. Indeed, it would have been far more likely for the company to have moved to India, which is the common threat.

Although some fears are genuine, they do not hold up to scrutiny. If a low rate of corporation tax were introduced into Northern Ireland, pressures would come from elsewhere, but such political considerations are outside our ken. We have seen the tremendous political obstacles that have been overcome in Northern Ireland. It is vital to get economic development moving in Northern Ireland, and relative to some of the political achievements, attaining a reduction in the rate of corporation tax is a small obstacle.

If one believes that economic development is essential, then FDI is critical to kick-starting it. A low rate of corporation tax, particularly given that Northern Ireland shares a land border with the Republic, is the key to attracting FDI.

Mr Eamonn Donaghy (Institute of Chartered Accounts in Ireland):

The Varney Report has been commended as a comprehensive economic analysis of both Northern Ireland and the impact that a reduction in the rate of corporation tax would have here. I am not going to dispute that; however, as with all economic models, the information that is put in can have a significant impact on the information that is produced. It is very difficult to grasp that the so-called costs of introducing a reduced rate of corporation tax would consistently result in an annual net cost to the Exchequer of just under £300 million. We have issues with the formulation of that model, as does the Economic Research Institute of Northern Ireland (ERINI), which arrived at different conclusions.

When we first became involved in the issue, the Treasury line was that, from a European perspective, there could be no reduction in corporation tax. We were told that EU regulations would not allow it. We disputed that, and in fact when pushed, the Treasury and Sir David confirmed that it actually could be done.

We are now being given an economic reason why it cannot be done — it will cost the Treasury too much. However, we dispute that also. The difficulty is that all the academic theory in the world pales to nothing when compared to the real model. The real model concerns what happens in the real world, and if we move 40 miles down the road we can see what has happened in the real world as a result of a reduction in the rate of corporation tax. It was not the only reason for the economic changes that have occurred, but it was a significant influencing factor. The argument that corporation tax should not be reduced because it will cost the Treasury £300 million a year should be questioned.

We accept that there are political issues involved. Mr O’Loan has indicated that there is concern in the Treasury and in Government that introducing different rates of corporation tax in Northern Ireland could have political ramifications because the north of England, Scotland and Wales will want to do the same. I have used the phrase before — and I make no apology for it — that Northern Ireland is different from the rest of the UK in economic terms. It is north of the Watford gap; on the wrong side of the Irish Sea, and shares a land border with a jurisdiction in which the rate of corporation tax is less than 50% than it is here.

From that perspective we do have an economic differential when it comes to the other countries and regions in the UK. That issue must be considered, because we cannot simply be put into the same pot as those other countries and regions, as though the situation were the same for everybody. I think that the Varney Review has hidden behind the economics, whereas the issue is really a political one. The issue should be debated by politicians, but in a considered, economic manner as opposed to solely in the terms stated in the Varney Report.

The Chairperson:

I think that there was consensus among the parties in the Assembly. We are dealing with a devolved matter, and it comes down to whether or not the political will exists to do what could be done. It remains the consensus perspective that the political will does not exist. We can, I suppose, continue to examine ways in which we could try to inject a degree of urgency into that consideration, and I am sure members will have some comments on that. When the institute offered its evidence to the Northern Ireland Affairs Committee last week, it also proposed the possibility of holding an inquiry; is there any update on that?

Mr Sheridan:

No. We were very well received by the Northern Ireland Affairs Committee; we were there for well over an hour, and we had a very good discussion. My view, as informed by that meeting, is that the economic arguments were totally accepted. There was no substantial negative point made on the economic front; it came down to the political factors that might have an influence. As I said, we were not impressed by the Varney Report’s economic analysis, but our view is that the more the economic aspects are discussed, the more that the economic differences between Northern Ireland and other parts of the UK would become so evident as to wipe away the political negatives that might be involved. However, we say that without being experts on the political front.

The Chairperson:

I think earlier I may have said “devolved” when I meant “reserved”.

Mr Hamilton:

I apologise to you, Chairperson, for being a little late, although I have read the brief beforehand. I share Mr O’Loan’s support for what the institute is saying.

It is good to have such high-level expertise supporting the Committee’s argument, and I agree with Mr Sheridan’s point that the economic reasoning for lowering corporation tax is now accepted and that the matter now probably depends purely on political persuasion. Without a reduction in the rate of corporation tax or the introduction of the alternatives mentioned by the institute — and without painting too bleak a picture — what is the future of Northern Ireland’s economy without the stimulus that would be provided by tax incentives? I appreciate that, to some degree, I am asking you to look into a crystal ball.

Mr Sheridan:

So much of the gross national product in Northern Ireland is generated by the public sector, and there is a huge dependence on block grants to run the economy. Economic development is essential. It is a big task — certainly it is a long-term task — to look to indigenous economic growth and development.

The South has developed a blueprint, which is still available. There is no reason why that blueprint cannot be extended to the North. Our analysis suggests that all of the factors — as outlined in my opening statement — that were important in attracting FDI to the Republic are present in the North. However, we firmly believe that those factors alone would not have attracted FDI to the South without the stimulus of low corporation tax.

World competition for FDI is enormous. The US is still the big elephant globally with regard to FDI, but it is not alone. As a result of economic development in the South, the Republic is now the fourth largest investor in the UK economy and invests more in the US than Germany does. Therefore, there is huge potential for the Republic to invest in Northern Ireland.

However, it is difficult to envisage investors moving from a 12·5% corporation tax regime to one that has double that percentage. No FDI decision is made without the projection of large profits, and that is a vital consideration. Such projections may not always materialise, but they are always there. When boards are considering projects, no other relief is as attractive as low corporation tax, which ensures high profit and small Government deductions. That is hugely positive, and companies will stay on your side of the table when you can provide a low rate of corporation tax.

Mr Donaghy:

Conventional wisdom is sometimes cited as an easy excuse to avoid change. Last year, members of this Committee and, indeed, Assembly Members overcame conventional wisdom and established a Government that is working. We support the Assembly and its work.

Convincing the Government and the Treasury to lower corporation tax is a difficult task. However, the Committee for Finance and Personnel and the Assembly should not stop trying, and I urge all Members who have an influence, to continue to exert that influence. A lower rate of corporation tax is right for Northern Ireland. I accept that it will be difficult, but if we all believed in conventional wisdom we would probably not in a position to be meeting today.

In response to Simon Hamilton’s question about the position of Northern Ireland’s economy, the key statistic that always grabs my attention is that 61% of Northern Ireland’s GDP is generated by the public sector. Also, a huge percentage of the workforce is inactive, with many people claiming disability benefits. Those people are not encouraged to enter employment and stop claiming benefits. I am not saying that those claiming disability benefits do not have a disability; but if there were appropriate economic incentives, then some of those people would find work.

We are the northern part of a small island. We need to have a beacon for the world to see, because we have a great deal of positives here. We have a strong workforce, a good education system, great infrastructure — many of the things that are required for FDI. And there has been some FDI coming into Northern Ireland, but unfortunately it has mainly been through back-office functions and call centres. That is fantastic, and it has created jobs; but it is a very transient investment, because the people doing those jobs could be here today and gone tomorrow.

What is needed is an incentive for people to set up businesses in Northern Ireland, make profits in Northern Ireland, keep them in Northern Ireland and invest them in Northern Ireland. The result of that will be long-term, sustainable economic growth, and the creation of jobs. A spin-off from that will be the expansion of the existing economic base in Northern Ireland.

Northern Ireland will continue to do reasonably well. I think that we are at about 70% of the UK average of economic prosperity, whatever way that is measured. The Government plans to improve that figure to around 70·5% over the next 10 years. Therefore, Northern Ireland’s economy will not be brought into favourable comparison with the economy of the South. We could end up, fairly quickly, being an economic backwater, unless we focus on the issue.

We believe that many people do not want that to happen. However, it might be an inevitable consequence as the public purse gets squeezed, and as Northern Ireland falls off the world political agenda due to our success in putting the Assembly in place.

Ms J McCann:

Several times, in your paper, you talk of an all-island economy, and about the lower rate of corporation tax attracting FDI. One sees the benefits of attracting FDI in an all-island capacity; as opposed to North and South being in competition with each other. For instance, tourism is marketed on an all-island basis, and once tourists arrive, they are able to visit wherever they choose. Is there any benefit in attracting FDI in the same way?

Mr Sheridan:

There are many opportunities in respect of marketing. The Republic is seen as a good place for FDI. Corporations have been established in the Republic, and there have been huge additional investments from some of the large multinational corporations. It is seen as a prime location — a huge proportion of American investment going into Europe is captured by the Republic. It is not a huge leap to make that brand into an all-island brand, but that will not happen if there are different corporation tax rates in the different jurisdictions.

As far as tourism is concerned, there are many opportunities for joint marketing, and some of those are in place already. The concept of an all-island economy can be promoted in all kinds of ways. Our point of view is that, from the macro perspective, FDI is very important for stimulating economic development — and having the same rate of corporation tax in both jurisdictions is essential if that is to happen. The brand of the island of Ireland being a good place for multi-national corporations to invest in would then be created.

There is a huge benefit built up that the Northern economy can buy into immediately.

Mr Donaghy:

Given the fact that North and South have a lot of economic similarities, the following question has to be asked: why has the Northern economy not prospered in the same way as the Southern economy? In the past, there were lots of very good reasons, which resulted from the conflict in the North. That has now moved away, yet we are still not seeing the level of FDI in the North as we are in the South.

The Varney Report focused on lots of differences — “sure, everything’s very different between the North and the South”, as the saying might go. I do not buy into that interpretation. We do have a lot of similar characteristics. Economically, we can provide very similar things. There is an argument that we do not have enough of a trained workforce or facilities. I suspect that the focus in saying; “well, let us get the supply organised and the demand will follow”, is naive in the extreme. We have to create a demand and then try to fulfil the supply. That demand will come from FDI. The attraction of the island of Ireland as an economic base will create all sorts of interweaving.

For example, companies already in the South might want to locate in the North but are prohibited from doing so because of the corporation tax rate. Multinationals might see that a work shortage in the South might be provided for in the North or that there could be cheaper rental. As a package, we might be able to generate greater economic benefits to the island as opposed to two separate economies, one of which is currently not on the same playing field.

Mr Brian Keegan ( Institute of Chartered Accountants in Ireland):

It often surprises me how low the starting off point is in the minds of those who take FDI decisions when they are going about their decision-making process. There are a number of clear steps than can be identified when one analyses how those decisions are taken. One of the first things one needs to do is get on the shortlist. In the context of an all-Ireland economy, it is very good to be in a position to be able to say that there is good news North and South. The tremendous progress that has been made as a result of the political settlement in the North has contributed greatly to the South as well in its attractiveness as a destination for FDI.

Conversely, the strong track record that the South now has in the corporate mindset as a good destination for FDI for hi-tech industries such as pharmaceuticals can work both ways. The overriding concern of all those with whom I have spoken, North and South, is that if there is an FDI decision being made, they would rather see it going to Bangor than to Bangalore. In that context, the all-island brand has great potential for both North and South.

Mr Beggs:

Thank you for your written submission and for your presentation. You have explained the issue concisely and have concentrated my mind on the significance of corporation tax in the FDI decision-making process — something that is principally profit-motivated and in which the decision can go either way. Earlier, you disagreed with the Treasury figure for the corporation tax take. What figure would you put on it and how would that be more accurate than Varney, who had access to HM Revenue and Customs?

Mr Sheridan:

Before I pass that question over, may I reiterate that, whatever the figure, we do not think that the point is important. Our experience is that there is no lose of revenue because, like any business, even the corner shop, there are two ways to make money: one is through volume and the other is through margin. Therefore, the experience in the South is that if the margin is reduced and the volume increased then overall receipts go up.

Mr Donaghy:

An economic model can be given to create an economic sum. Unlike the Treasury, we do not have access to the finest Oxbridge economists. It would therefore be invidious of me to say that everything that they have done is incorrect.

Some of the assumptions made in the model are slightly more negative than I would like them to be. In that context, £280 million per year sounds like an enormous sum; I believe that the figure will be less than that, but let us assume that that is what it will be in the first couple of years. Sir David Varney says in his review that the regions taking the risk deserve the reward. Therefore, it is those regions whose Governments put themselves out there, trying to generate economic activity, that will be given the reward. We are not asking the Government for another handout — they have given £6·5 billion already — rather, we are looking for a hand-up. We want an investment, over the next two or three years, that will give Northern Ireland the opportunity to begin sustaining itself. The £280 million that we are asking for amounts to less than 4% of the overall Budget; it is not megabucks relative to what we already receive. We suggest that from that initial investment will flow additional taxes — employment taxes, VAT, corporation tax — and a reduction in the state benefit level, as more people will be attracted away from inactivity and the state benefit culture.

This is not a long-term cost to the Government. I accept that an element of Government investment may be required. However, we say to the Treasury what we have said to the Northern Ireland Affairs Committee: this is not a case of Northern Ireland with its hand out — or its begging bowl out — again asking for additional money. We want Northern Ireland to have a vibrant and fulsome economy, which generates returns for the Treasury rather than taking funds from it.

Mr Keegan:

I will make a single rough, supplementary observation. A generally received piece of wisdom regarding tax and economics — and the OECD agrees — is that there is a direct correlation between the corporation tax taken in an economy and GDP. If GDP increases by 2%, it can be expected that the corporation tax take will also increase by 2%. The hard evidence from our experience in the Republic of Ireland is that that relationship persists irrespective of the rate at which the corporation tax is charged. That is a compelling argument that perhaps Sir David Varney did not afford sufficient weight in his review.

Mr Beggs:

It would be useful if you would put forward the specific aspects of Varney’s assumptions that you query. You question the Varney Review for limiting much of the discussion to the manufacturing sector rather than the service sector. For example, why should the banks in Northern Ireland be included? They are not going to provide more banking services locally, so why should we allow them to have substantial additional profits? Surely we should follow the Azores ruling, under which any reduction in corporation tax will essentially be paid for by the Northern Ireland block.

Mr Donaghy:

I will make a couple of points in relation to that. First, the statistic that only 3% of companies in Northern Ireland are charged the higher rate of corporation tax — currently 30% — is trotted out from the Treasury or, possibly, from the Northern Ireland Office. We must make it clear that that will always be the case unless fundamental changes are made to the current system. The current state of the Northern Ireland economy should not prevent it from reaching the levels of improvement that it aspires to.

The concern that Mr Beggs raised about the banks is interesting. The focus should be on bringing in FDI. We are not asking the Government to put more money into the pockets of entrepreneurs in Northern Ireland; that is not our objective. Our aim is to encourage large multi-national corporations to consider Northern Ireland as a site for location.

It is not relevant to reduce the corporation tax paid by local businesspeople because — as we have said already — it is the large corporations, rather than local businesspeople, that pay the highest rate of tax. The member has correctly identified the banks as one of the main contributors of corporation tax, and therefore they would possibly be one of the main beneficiaries if it were reduced.

I have not discussed this matter with my colleagues but my personal view is that the banks do not necessarily have to be included in the package. However, under European legislation, we may have no choice in the matter. The cost of reduced corporation tax — that investment — may be an unfortunate, but unavoidable, by-product of this scheme. I am sure that people around this table will baulk at the idea of banks making even more profit.

However, if we exclude the banks, we could fall foul of European legislation. Therefore, we must consider their inclusion.

Mr Keegan:

Services also include software services, film production, research, and so on. That kind of work is equally significant in the context of the overall services package.

We clearly advocate a 12·5% rate for real activity; buying, selling, manufacturing, developing and trading. In the Republic, a 25% rate of corporation tax still applies to passive income such as rental income, investment income, and so on. Indeed, if one were to calculate the effective rate of corporation tax in the South — and because I live a sad life, I have to make corporation-tax calculations from time to time — it would work out at somewhere around 16% or 17%. It is not quite 12·5% because of those influences. The financial sector is very important, but it is only one component.

Mr Sheridan:

The arguments being made against a lowered rate of corporation tax here are valid, but I can remember those same arguments being made in the Republic. The 12·5% corporation tax rate in the Republic came about as a result of the introduction of a very targeted rate of tax for new companies starting up in the financial services centre, and, before that, for export companies. Thus, the rate was very much targeted towards investment coming into the country. Then the EU said that we could not have that targeted low tax rate, and the response was to give everyone a low tax rate. Of course, there were some who said that that was not such a good idea because people would make a lot of money. However, nobody on any side of the political divide in the South makes that argument now. It really is a question of keeping the focus on the economy, the jobs and the earning potential of the population. The old adage is that a rising tide will lift all boats. Some of those boats are probably high enough in the water at the moment, but that should not divert attention from getting all the other boats in the harbour up to the same level.

Ms Purvis:

Thank you for your presentation.

It has been said that FDI is the key to growing the economy and that reducing corporation tax is the key to attracting FDI. Recent research commissioned by DETI identified issues that impact on companies’ decision on whether to locate in Northern Ireland and on Northern Ireland’s ability to attract FDI. It mentions the unfavourable tax regime, but it also lists a number of other issues, including a small critical mass in comparison to other regions; distance from customers; inappropriate skills; infrastructure; lack of foreign-language capability; and the mismatch between the nature of R&D work undertaken by universities and that required by business.

We are all agreed that there should be a cut in corporation tax, but are we putting all our eggs into the corporation-tax basket?

Mr Sheridan:

We are putting all our eggs in the FDI basket. We see corporation tax as the single most important element in attracting FDI because so many of the other necessary attributes are already present in the economy. However, that does not mean that one should just sit back and wait for people to form an orderly queue to join the economy. Of course, one must work on all of the other aspects, too. There is huge activity in the universities in the Republic at the moment. They are seeking to become more involved in R&D, partly because they want to generate more income for universities, but also because R&D is one of the stimulants that the broader economy needs to attract investment into the country.

We would be the last to say that corporation tax is the only ingredient that is required; we recognise that an awful lot of the necessary ingredients already exist. Some 15 years ago, one of the great ingredients that the Republic had was a large, well-educated labour pool. That is absolutely essential. Since then, the Republic’s labour pool has now had to be imported from abroad — from eastern Europe and elsewhere — to keep economic development going.

There is a problem to be solved at every stage, and there are other inputs. However, we believe that low corporation tax is the main input that will bring together all the advantages of the other existing attributes in the Northern Ireland economy.

Mr Donaghy:

We have been misunderstood or misquoted at times when we have put our arguments forward. We do not believe that a reduction in corporation tax would be the silver bullet and that everyone would be happy. We must go back to the supply and demand sides and find out which is more important. Do we need to create demand or do we need to provide the supply so that the demand will want to come?

Ms Purvis is correct in the points that she has raised, and issues do need to be resolved. However, it would be better to resolve them with the prospect of jobs coming in, rather than hoping that they might come in after we have resolved the issues. There is the idea of attracting FDI, but one has to consider what company chief executive officers and chief finance officers will do. They have a list of the various countries in which they might invest — and there are boxes to be ticked. For example; is there is a well-educated workforce; is the infrastructure in place, or is there the language capacity? They may not be able to tick every single box when it comes to Northern Ireland, but they may be able to tick many of them when it is compared with the South of Ireland. However, when they reach the box relating to tax, the South will get a tick, and will possibly get on the shortlist. Northern Ireland may pass that hurdle in a few cases, but it does not get on the shortlist in many.

No matter what opportunities, talents or supplies are available in Northern Ireland, if we do not get on the shortlist then we will miss the boat. Northern Ireland must have the opportunity to get on to the shortlist and, after that, we have other attributes that we can focus on and develop. Corporation tax is not the silver bullet, but it could potentially be the X factor that will enable us to go from where we are to where we would like to be.

Ms Purvis:

You referred earlier to the number of people who are economically inactive, particularly those claiming disability benefits: 43% of those claiming disability benefits are suffering from mental illness and behavioural disorders. Given the speculation that Varney II will focus on reprioritising Executive Budget allocations, does Sir David Varney have a point?

Mr Donaghy:

Far be it from me to tell Sir David what he should put in his report. The Executive might be best placed to allocate their Budget, rather than Sir David, and I will leave that matter with the Committee.

We have made a submission to Varney II, and in our introduction we stated that we believe that there is unfinished business in Varney I. Tax is still on the agenda and it should remain on the agenda. Unfortunately, tax was not mentioned in the eight questions raised by Varney II. Therefore, as far as Varney II is concerned, tax is off the table and should be forgotten about. Our view is that it is not off the table. We commend the Committee and the House to keep it on the table, and not let it be taken off. I appreciate that that will be difficult. There is the potential that we are asking the Committee to paint itself into a corner, and that may be the only way out. There are other suggestions, and Mr Keegan may mention one or two, but corporation tax cannot be taken off the agenda and be forgotten about. Once it is forgotten, it will not come back. This is the time and the opportunity. Unfortunately, if we let it pass, that will be the end of the debate.

Mr Sheridan:

There is an alarming statistic that over 40% of the population are not in productive employment. The comparative figure for the Republic is 12%.

Ms Purvis:

The total is just over 27%, but 43% of those claiming incapacity benefit are suffering from mental disorders.

Mr Sheridan:

There may be all kinds of historical reasons for that. I suspect that some years ago the percentage was far higher than it is in the Republic now. Opportunity is a wonderful thing, and if opportunities are created they might make inroads into that figure.

The Chairperson:

I want to make a couple of points. To reiterate my earlier observation, there is general agreement among the parties that the issue is whether the political will exists. There are political issues involved and, given the Scottish Nationalist Party discussions, possibly even constitutional ones. Strong motivating arguments need to be found in order to affect Westminster’s settled view.

I have two questions. Has there been any economic modelling or projection of the benefits for local industry and local enterprise from increased FDI as a result of a more competitive corporation tax regime being developed?

Mr Keegan:

I will make two observations on that point in the context of the experience of the South. First; all of the development authorities generally agree that, for every one FDI job created, two or three indigenous jobs are also created, whether through servicing, providing back-up and support for the plant that has just been established, or whether it is because people have more disposable income and shops are therefore doing more business.

Secondly; I have always suggested that tax is a great truth theorem, as it can help us to gauge how businesses are doing. Businesses that are doing well generally have a contribution to make to the Exchequer, and it is absolutely right that that happens. Mr Sheridan, our president, mentioned the rise in the tax take earlier, and the direct correlation between the rise in contribution by indigenous business and the rise in contribution by FDI is very significant. In other words, the rise in contributions will come not just from the FDI — in fact, the proportion is 50:50. In the context of additional FDI, the contribution from indigenous enterprise rises just as much as that from FDI.

The Chairperson:

We might also follow up on that, because I think that is an interesting discussion.

Mr Donaghy:

ERINI has carried out economic modelling in Northern Ireland, and Committee members may have seen the report that was issued approximately 15 months ago. ERINI has considered the Varney model and is working on, or may have completed, a response.

I echo Mr Keegan’s comments about the implications of FDI. For example, Seagate’s moving away from Limavady had repercussions not just in relation to the jobs lost at Seagate but also in relation to those that were lost in the surrounding area, and the businesses in the services and retail industries that were also affected. Therefore, the reverse must also be true: bringing in FDI lifts all boats and results in local business and international business working together.

We believe that that is the way forward for the North. If we can get large corporations to consider setting up in Northern Ireland, the ripple effects will be absolutely huge and significant, and I am sure that the ERINI report will back that up. As Mr Keegan mentioned, the Republic of Ireland is a clear example in which every FDI job that was created led to two or three other jobs in the service and retail industries, and that has had a major impact in the Republic in the last 15 years.

The Chairperson:

I will move on to my second, and perhaps the final, question. Although the Southern economy will not be immune to the pressures stemming from factors such as the EU accession states, the emerging economies, the Asian economies, the so-called race to the bottom in terms of corporation tax; it will arguably be in a much stronger position to resist those pressures than ours will be. Have those pressures been taken into account? The Southern economy has the advantage of timing, as it is the best part of two decades ahead of ours in respect of the corporation tax regime. To what extent do those emerging pressures have to be factored in?

Mr Sheridan:

Those pressures exist, and the fact is that the economies in the Republic and in the North are never going to be low-cost economies. That is a limitation, but it is not a bad one, because I do not believe that we necessarily want to have a low-cost economy. In the Republic, people speak about “the knowledge economy”, or say that “we have got to get up the value chain” — those may be buzz words, however they really do mean something.

The type of foreign investment that we have been particularly successful in attracting has moved away from the manufacturing or packaging corporations that Sir David Varney talked about: investment is now in pharmaceutical, technology, life sciences, and financial services. Northern Ireland will have to get into those areas of business if it is to survive the competition from the developing economies. We need the multinationals in those business areas to come here and kick start our involvement in those business; that is the direction in which the Republic is moving.

Twenty years ago, the Industrial Development Authority (IDA) went out looking for jobs, and it would have taken anything; it did not matter what type of jobs they were. Those days are gone, because those types of jobs are difficult to hold on to. We have to move up the value chain and get into the knowledge economy. There is no shortage of investment that is looking for a home, and we can provide it.

The Chairperson:

Thank you for your valuable input. This is a live discussion for the Committee, and, no doubt, we will return to the topic. The paper from the institute has been marked confidential, but it is not a confidential paper. Members can, therefore, treat it accordingly.

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