Official Report: Minutes of Evidence

The Chairperson (Mr McGlone): Leslie, it is good to see you. Thanks very much for coming over to us. I invite you to make an opening statement based on your paper.

Dr Leslie Budd: I apologise for the tardiness of the paper. A number of things came up, and it took me longer than I thought. That is a problem for all economists, I suspect.

In my paper, I tried to take a broader-based approach to corporation tax. I mentioned to the Clerk that David Heald, a public finance specialist from the University of Aberdeen, is giving evidence to the Finance Committee tomorrow. He was one of the main speakers at a workshop that I organised two weeks ago in Edinburgh. I have passed over copies of his presentation, as well as some of his submissions to the Smith commission that deal with financial complexities. I am not a public finance specialist, although I know something about it.

I thought that the Research and Information Service's review paper was very good and provided a fair summary. I take issue not with the paper but with some of the stuff from the IMF, which, frankly, is wrong and quite dated. A lot of the other stuff was a very fair summary of the issues, which are much broader and more complex.

The Chairperson (Mr McGlone): I do not anticipate that you would do so today, but if there is stuff from the IMF that is wrong or dated, it would be helpful if you drew it to our attention.

Dr Budd: I will put it in an email.

This takes place in an uncertain environment for the global economy, particularly the eurozone. As well as the forthcoming election, there will be complex changes to the constitutional arrangements in the UK that may lead to greater tax competition between the regions and the devolved nations. Simultaneously, given the latest tax-avoidance case involving HSBC, there is a move toward more tax harmonisation and regulation. So, we may see some of the abuses being reduced over time. There is public support for that, and, I think, political support across the European Union. Perhaps it is ironic that Juncker, who has to oversee this as President of the European Commission, enabled some of those deals when he was the prime minister and finance minister in Luxembourg. That is a paradox, but it is one that may work in favour of a much more effective treatment of corporation tax.

Part of the problem with the public debate seems to be that, so far, it has been about the trade-off in reductions to corporation tax and to the block grant. It is actually much more complex than that, and various stages are associated with it. Devolved corporation tax is a means, it is not an end. As the Minister pointed out earlier, there is a complex relationship in foreign direct investment (FDI) decisions. That includes decisions on location, including location in centres; growth output; and employment effects. That is sectoral, but it is accompanied by investment flows and spillovers. Agglomeration effects are clearly important, but, as mentioned earlier, so at second or third stage is the development of air routes and greater connectivity with global markets. The conditions associated with the reduction in corporation tax and its timing are clearly crucial, as are the kind of current allowances and the new kind of allowances.

It is usually historians who look at counterfactuals, but we need to look counterfactually at the evidence from the present base. A lot of the estimates are of what will happen, but I think that a change in the policy environment will stimulate a range of activities and responses that may be beneficial or negative. People often ask about economic forecasting as though you can somehow say what will happen in 2030. The issue for economic forecasting is what measures you should take now to try to get the desired outcome. I will take an example from the oil industry. Massive cutbacks in investment and infrastructure by global companies such as BP have implications 10 years down the line for security and supply. So, sometimes the rush to judgement should be avoided.

I will pick up an issue from my paper, as well as the point about uncertainty. The Azores judgement is waved around like a red flag as if to say, "You cannot do this, and you cannot do that". First, political and economic events, and possibly the end of the institutionalisation of austerity in the eurozone, may change the environment. Secondly, a corporation tax rate that is roughly the same as that in the Republic would effectively change the exchange rate for doing business across the border. Things like innovation hubs and a number of actions that you have already taken have recognised that. The targeting of key sectors is important, particularly the MATRIX sectors, with certain conditions attached. There are also sectoral differences between the impact of tax cuts and other locational incentives on manufacturing, services and financial services, which I will pick up.

More importantly, one has to look at FDI in the round and particularly at the global linkages that the Northern Ireland economy already has and to locate policy decisions and measures in the development of global value chains. There is a complementarity between, say, ICT and design global value chains and advanced manufacturing, particularly aerospace and certainly agrifood.

You can see that, in the report, I have taken something from the United Nations 2007 conference on trade and development summary meeting. It gives selected measures to promote investment and technological upgrading. I highlighted three areas that seem to be relevant to the changes in corporation tax for Northern Ireland, and I then highlighted tax where there might be future development. I thought that was useful information. The other parts of the briefing are about the challenges and opportunities.

The Chairperson (Mr McGlone): Thanks very much indeed, Leslie, for that and for your paper, which was very interesting. The bit that really intrigued me was figure 2 on economic growth rates and effective corporate tax rates in the United States. It would appear from the graph that corporation tax is not really having much of an impact, because the lines for GDP growth and the like are ping-ponging up and down and all across the way. It probably emphasises that this is just one element in a bigger game plan. I do not know whether other effects in the economy — fuel costs or whatever — might be impacting on that. Can you give us any further insight on that? As you rightly say in your paper, some have presented corporation tax as a silver bullet, which, as the rest of us know, it certainly is not. It is part of a bigger picture. Can you give us any insight into why the graph shows disparity in the consistency of the corporation tax? Has that happened just because corporation tax is the indicator?

Dr Budd: I will make two points on that. I brought that graph in because I was trying to find a figure for Northern Ireland. I have some other data from Northern Ireland, but I wanted to be as brief as possible. Again, I can send you supplementary evidence that I have about the relative performance in GDP and growth. I handed a paper over to Committee staff that the Economic and Social Research Institute in Dublin did in October. I know people there who did that for the Department of Finance.

There is some interesting supplementary information in that.

The Chairperson (Mr McGlone): OK. That would be helpful.

Dr Budd: The graph, which would be better if it was in colour, shows that the effective rate comes down to 30%. They find in the States that the actual average effective rate can be lower in particular sectors and particular states, depending on locational initiatives. Corporation tax receipts are very volatile, as we know, and there is a kind of lag of changes — sometimes there is a lead and sometimes there is a lag. That is in the United States as a whole, but you can see that the trend rate of growth — it is a very big economy — is relatively volatile. That is the case except for the early 60s, when there was a drop and it went up again. The causality may be a lag or it may a lead. It depends, as you say, on other factors.

Changes in corporation tax legislation in the US — this is why we have had things like the "double Irish", the deals in Luxembourg, and companies like Amazon and Google in more recent years — have meant that US corporates have to pay their corporation tax in the US. So, they have tried to offset that. There is a complexity to that, and the changes in legislation are not picked up there. I wanted to illustrate that the claims that the Republic of Ireland made — again, there was relatively volatile growth even over the period of the so-called Celtic tiger — are not just a function of corporation tax; they are a function of other activities, such as the size of GDP and access to particular markets, especially the European Union. I am still digging away at trying to get a graph like that for the Republic.

Mr Flanagan: Thanks, Patsy.

How are you keeping?

Dr Budd: Very well, thank you.

Mr Flanagan: Good. I had a discussion with the Minister about where organisations locate. Can more be done to weight selective financial assistance (SFA) to encourage more investment outside greater Belfast and into rural and subregional economies?

Dr Budd: As a former chair of the Regional Studies Association, my answer would be yes —

Mr Flanagan: That will do you there; there is no need for a "but". It is all right.

Dr Budd: It would be a yes. My concern is that Northern Ireland would end up like England. I am a dyed-in-the-wool Londoner, and I am one of the few Londoners who strongly argued that the privileging of London is bad economics and bad politics. An example of that comes from the Institute for Public Policy Research (IPPR), which says that infrastructure spending in London is 22 times more per head than the rest of the United Kingdom.

Mr McKinney: Crossrail, for example.

Dr Budd: Do not get me started. If we thought about HS2 etc, we would find that there are better things to do. The underlying question is about agencies themselves. It is the intent of the agencies as a whole. If you are working in Invest NI, you want to get as many firms as possible investing in Northern Ireland. It also seems that, in rebalancing an economy, you have to look at the spatial rebalance, which again is something that has been taken from England — I stress England — but has not really been addressed. People talk about northern powerhouses, but it is about the big agglomerations. There are tensions in the debates about the large rural areas in England that are left out. What about the small towns that have become more attractive to UK Independence Party voters because they feel alienated from the mainstream seaside resorts?

There are demonstration effects. If you look at inward investment in Wales, particularly at Sony, you see that, once you have established particular companies and particular activities, there is a demonstration effect of what other companies want to come to. I think that the issue that you have in Northern Ireland, as a relatively small place, is connectivity. You could increase infrastructure, but that might increase commuting into greater Belfast. So, it is about connectivity elsewhere in the region and possibly also across the border if you have cross-border innovation units.

One last argument is that, every 10 years, it seems that the IMF and the OECD agree that equality, not just efficiency, makes an important contribution to the growth in the total size of the economy. The real danger is that, if you have spatial inequalities, your potential to grow the whole economy is reduced. So, I phrase the answer in those kinds of terms.

Mr Flanagan: Is that a yes then?

Dr Budd: I said yes to begin with. I think that it is a yes. I think that you can always do more. I knew that you would ask me this, Phil. There is an all-UK issue. Every time that Boris Johnson flies somewhere, he does not fly on behalf of the whole of the UK; he flies on behalf of what we now call Borisstan, which London is known as. He flies first class as well. He goes to the Middle East. He does not actually say to companies, "OK, you can locate in London, but there are all these potentials of the devolved nations and other regions in the UK". I think that the whole Union has to look at that and at the way in which incentives are measured. As you know, I was critical in the report on Invest NI, and I was so on the basis that I wanted to see evidence of value added. Often, you can get value added in the smallest and most distant of places. Again, one of my bugbears in the UK as a whole is that there is not enough mapping of subregional data attributes, capacity and capabilities around which you can build things. On innovation, let me say that, in the Clerk's home town, you have an airport. That would make a very good innovation centre, given the linkages. It repairs helicopters. Most people do not know about that.

There is another issue, which was in the BBC report yesterday about ICT. On your point about broadband, I can say that you do not have to be in the capital cities. James Cornford did some very good work about 10 years ago when he was at Newcastle University. At a conference, he asked where most gaming software activities take place, and everyone said London. He said no, and he said that it happens in places like Darlington and Worcestershire, which are wired and have a lot of graduates from the universities and because the cost of premises is important. So, things like that kind of software development and ICT can take place in these areas where you have connected infrastructure. That does not necessarily mean physical infrastructure, which may encourage commuting away from those places.

Mr Flanagan: Are you concerned that we are moving to a situation here that is similar to that in Britain, in that the vast majority of economic development here is taking place in Belfast as, in Britain, it is taking place in the south-east of England?

Dr Budd: Yes, I am, in the sense that, in any economic upturn, because of the demonstration effect and the benefits of agglomeration, people tend to go to capital cities. You need a set of incentives but also information about these other places and the benefits that there are. For a long time, Manchester was seen as "Madchester" because of its association with certain kinds of music and a drug culture, but that has changed itself, giving it the change in its industrial structure. However, if you look at the set of towns north of Manchester, you see that they are not connected to each other. There will be an upgrade, and, again, that will focus in on Manchester. Yet, just further up the road, you have the Warton plant. The Airbus site there is where they make the wings for all Airbus aircraft, yet the connections for those smaller towns are not towards that, if you like, global, hi-tech centre but towards relatively low-service occupations commuting into Manchester. I am not defending people, but again, if you are a Minister, you are Minister for the whole of Northern Ireland, so you want to see general growth. Clearly, domestically, if you are going to attract FDI and have a more dynamic economy, it is about the spatial distribution. That is an important part of rebalancing.

Mr Flanagan: Do you have any suggestions for how we could improve the spatial distribution of the FDI jobs coming in here?

Dr Budd: Not off the top of my head, but, again, there needs to be a better mapping of capacities, capabilities and linkages, and the encouragement of certain sectors, such as gaming software, that do not need to be in large conglomerations if you have appropriate shared premises. For those kinds of activities, wired premises are really important.

Mr Flanagan: Can I ask you about the future of the union? There is talk about the British Government or future British Governments trying to take Britain out of Europe and take us with them. Has any work been done that you have seen to estimate the potential economic impact of that on the economy here? If we were taken out of the European Union, what impact would that have on trade?

Dr Budd: I have seen a lot of the various measures for business in Europe, but not directly on Northern Ireland. The Chambers of Commerce today called for a referendum to be brought forward. There is a tension in the city, with hedge funds wanting to come out of the European Union but investment banks wanting to be in. I could gather some evidence for you on that. I am happy to do that; it is of interest. I put my hands up: I am pro-EU. I think that it would be severely damaging. Frankly, it is an old story.

The Chairperson (Mr McGlone): I think that it would. I am out and about, like most other members in the room, meeting businesses. A lot of them trade with the rest of the island and within the island. If further obstacles were introduced, such as red tape, customs and all that, like we used to have it, it would make things more difficult for them at a time when they really do not need difficulties being introduced. That is before we even go down the route of being focused on a reduced corporation tax economy.

Mr Flanagan: Will you get us a piece of work on that, Leslie?

Dr Budd: Yes.

Mr Flanagan: Great job. Thanks.

Dr Budd: When would you like it done for?

Mr Flanagan: Tomorrow at 9.00 am.

Dr Budd: Tomorrow morning?

Mr Flanagan: Yes.

The Chairperson (Mr McGlone): We will agree that as a Committee.

Dr Budd: I just need deadlines.

The Chairperson (Mr McGlone): OK. We will maybe discuss that at the end.

Mr Frew: Thank you very much, Leslie. I hope that you are not too sick about the football results at the weekend.

Dr Budd: I thought that you might say that. St Mirren won.

Mr Frew: OK. That is who you support now, then.

The Chairperson (Mr McGlone): Do they pay corporation tax?

Mr Frew: I will get on message again, Chair. I am a spark by trade. You had a conversation about regionalisation, and you said that things were London-centric. As a spark, we had a thing called London weighting, which basically meant that, if you worked in London, you got extra money. Of course, that was a great thing, if you wanted to travel, and you headed for London rather than Manchester, where you did not have that same incentive. If you were going to have to take the pain of being away from home, you wanted to be in London if the work was there. A lot of sparks at that time in the 1990s worked in Dublin because that is where the work was. Whilst they got extra money, they did not get as much as they would have done working in London. How much of that is a barrier? We hear of global companies moving away from Northern Ireland to go to low-cost and low-wage economies. How much of a factor does London weighting have throughout the global companies?

Dr Budd: Clearly, there is a wage premium in the private sector. London weighting for the public sector — I do not get it, although I live in London — is about £2,500 or £3,000. There is a premium for certain kinds of activities. They are usually associated with high value added, but it is interesting in investment banking, where the wages paid, or at least the bonuses, often do not relate to value added whatsoever. There is a paradox there, and so, in my view, the labour market does not work. There is another thing that you now find when you go to London because of economic congestion, including housing. I recently went to Heathrow at about 6.00 am and got on the Tube; it was absolutely packed. Five or 10 years ago, it would not have been. It was people commuting in to their relatively — [Inaudible.]

— jobs, and they are commuting further and further out. People talk about cuts in real wages, and transport costs are clearly a cut in real wages. Certain areas that previously had mixed communities in terms of economic profile tend to be much poorer. That is things like footfall in those towns. There is a paradox there. I think that London is economically congested.

You made a point about low-cost locations. That is starting to change. You are starting to see a lot of reshoring of activities back from a lot of the emerging economies. I will give you two examples. One is Alcoa, the big aluminium company, which has moved a lot of its operations back from emerging — that is not mining itself but intermediate goods — by automation and capital investment to feed high-end markets. The point about global value chains is that they work both ways. For example, if Bombardier had a joint venture in China, you could get some reshoring of those activities back. Airbus has done it. The point about global value chains is really important. There is evidence from the 1980s. The Ministry of International Trade and Industry in Japan did a major study on the locational decisions of Japanese firms and found that labour costs were sixth. It was about access to market, quality of labour, innovation etc. I would argue that the agglomeration effects can sometimes lead to a reduction in labour productivity and what is called total factor productivity, which is the residue after capital and labour, which is process innovation. There are a lot of mindsets about large corporations and wealthy corporations in which process innovation, which is really important, is overlooked. There is a business cycle. A lot of really big firms have crashed and burned over time that we thought never would have. I have rambled a bit on that, but I have tried to come back.

Mr Frew: I understand. Your report states that, in 2011, the Economic Advisory Group published a report saying that a cut to a 12·5% rate would produce an anticipated 58,000 jobs by 2030; an increase in employment by 58,000. What does that 58,000 look like? I know that it is an estimated figure, but is that 58,000 in global companies that are massive employers of 1,000 people each or is that much more sprinkled and disparate employment?

Dr Budd: I think that a lot of it will be in non-tradable services. It will stimulate that. The problem with FDI, particularly in the targeted sectors like MATRIX, is why I recommended in the paper to look at employment effects and income investment effects. The targeted approach of MATRIX is good, because that will be about investment and income flows associated with that. It will include stimulation and innovation, which will create a larger economy from which a number of activities grow. Domestic supply chains and logistics are really important. People caricature Milton Keynes, but Milton Keynes is a global centre for logistics, and it is global software companies that are serving those logistics. It is not just big sheds and lorry drivers.

The other interesting thing could be gold being found in Northern Ireland. You never know. At the moment, commodity markets have dived quite considerably since their boom. Certain things like that will attract. There are two companies already listed on AIM. It seems that part of that is not just forecasting forward from corporation tax. I mentioned a national investment bank or a regional version of one. You do not have a stock exchange here, but you could, through Northern Ireland, invest and through some intermediary, perhaps private-public bodies, take some stake in those activities, which may be beneficial. Obviously, there is risk and there are public sector rules about the block grant, but you have to be forward looking and look at those linkages.

I like diagrams, having started my career in structural engineering, and I will try to make something of those linkages. As long as you have a living wage — not a minimum wage, a living wage — and you stimulate those services, you stimulate skills and possibly vocational education. So, in the round, you could see growth in employment. That might not be very high-value employment in the first stage; it would depend on your strategy.

Mr Frew: Obviously, it is not a silver bullet, but it is a massive tool in a toolkit. How much will that tool be blunted if we cannot, as a region, manage energy?

Dr Budd: That is crucial. I had not realised before I took this role that you had the most expensive energy tariffs in the whole of the UK. But, you also have the capacity for renewables, given the climate etc.

A lot of the complex regulation around utilities and natural utilities has increased transaction costs, costs for businesses and costs for consumers. The argument that may be made — it is made by Ryanair, and in its case rightly so — is that you have to hedge because energy prices are in dollars, which means that you will not get an immediate cut. You do not want volatility.

It seems to me that there is a basis for devolving not just corporation tax but some kind of powers over energy. That is crucial for Ireland, and perhaps all-Ireland linkages are important because of the need for scale and the need for the appropriate mix of energies. Managing energy is absolutely crucial.

I have said this before, but Eskom, which is the South African electricity provider, decided to deregulate, but it did not build any capacity. So, it did not privatise. It seems to me that if you are going to have markets, have markets. Obviously, in utilities, you have to have regulated markets. Mining companies, particularly chrome mining companies, are being paid not to produce more than they are getting. That was at the peak last year. There is a paradox there. The biggest problem that South Africa has is its energy. Notwithstanding the distortions of the commodity industry, because they rely on that, that is the biggest problem they have. There is a huge conference going on at the moment called Mining Indaba, which is the biggest mining conference in the world, and that is one of the big issues.

Mr Kinahan: You may have heard my sort of questions. I have always been concerned that, in both tourism and investment, we are always looking at the big things. Therefore, a lot of effort goes into bringing the big companies here, which is great because that creates the jobs. But, are we building ourselves a problem for the future in that our smaller and medium companies that are trying to expand will find that they are never able to do so because they are either losing their skills to the bigger companies or things are not trickling down to them and so they cannot get the trade? Or is that the right way to go, because it links us to the world and to the global markets, which the smaller companies cannot do?

Dr Budd: Clearly, you have a number of events, such as Titanic and, next year, Derry/Londonderry being a creative city for the European Capital of Culture. If you have linked tourism to sport and culture, you have a wider base. However, I take your point. It is always important to look at the second and third order of preferences, not just the highlight. Again, clearly for politicians, it is important to get those events. I did not realise that Northern Ireland did not have a strong tradition in cycling, which the Republic, Scotland and the area around Manchester do. However, one stimulus from the Giro d'Italia is the number of small cycling shops that have opened up. They are important in terms of skills, for things like repair, and the increase in cycling generally. For that retail end, the important point is about local government finance, which Northern Ireland has successfully changed, and that is recognised by the Department of Finance. There are also things like business rents, rental values and leases. I was talking today about where I live in London. It is ridiculous; unless you have the freehold of shops, you do not stay in business for very long. Also, local authorities are only interested in big multiples, not their local shops. I think that that base is really important.

The other thing, apart from getting the reputational capital, if you like, for Northern Ireland as a tourism deliverer — clearly there are things like golf as well — is actually undiscovered beauties in many places. If you wander round London and do not necessarily go to the big galleries or whatever, there are lots of interesting little things. And that is in the capital city; they have been there for a long time and have a long history. With the Titanic, there is a lot of oral history around that, which is centred at the moment in Belfast, but is elsewhere. So, I think that that is important in thinking about what you can do at that lower level and making the linkages. When the Minister talked about the Department for Employment and Learning merging, I think that those things are important. You will still get rivalries, but you then have to look at the spatial question. There are parts of Northern Ireland where this kind of tourism, at a smaller scale, is important.

Mr Kinahan: If we take the same thing to bringing in big companies with Invest NI and corporation tax, is it the same problem? There, the medium and smaller companies are finding it hard to compete, and, therefore, they will struggle; and yet they are the heart of the economy. When things go bad, that is what we are really digging into. Do we need to be much more careful so that we are bringing up our small and medium-sized companies at the same time?

Dr Budd: Yes, absolutely. It is the same in England, where a lot is talked about small and medium-sized enterprises, particularly in London, but there is not the support for them that there should be. After all, as you have seen in the notes, given the employment structure, cutting corporation tax — unless you get a lot of big companies in — is not initially going to generate a lot of income, but, again, there is conditionality about FDI. If those companies locate, particularly tourism companies, there are their linkages to specialised tourism companies. It is interesting how we have gone from the mass tourism of the old days, where people went to Majorca for two weeks, to specialist activity holidays. I am a windsurfer, and I go on a lot of windsurfing activity holidays. That is the change. A flight to Barcelona has started up. If you did a survey of flights, you might ask why people go to Barcelona. You do not go for the sun and sangria. You go to Barcelona for a range of things. Specialist companies offer those activities.

While flying over here with Aer Lingus, I saw in its magazine that it was pointing out all these cities and activities. It is all very much boutique hotels and specialist activities. That is something to be encouraged. A campaign around that would be useful. "Glasgow's miles better" had an impact — maybe not so much in Easterhouse — and people's perceptions changed because of that. I think that people's perceptions are changing Northern Ireland again. I am not a great believer in anecdotes, but the taxi driver last night was Romanian, and he had been here for seven years. I asked him how it had been. He said that he has a family here, he really likes it, and it has changed. I noticed, the last time I came here, that a lot of American golfers are now coming to Belfast rather than Dublin. There is a promise there, but there is a missed opportunity if one just thinks of it as the big events.

The Chairperson (Mr McGlone): OK. Thanks for that. Unless other members have anything further to add, I will say thanks very much for your time, Leslie. The issues that were raised by Phil created consensus in the room that we could have something. I have just chatted briefly with the Committee Clerk, and 23 March would be a suitable date for that.

Dr Budd: OK.

The Chairperson (Mr McGlone): Thank you very much indeed.