Tuesday, 7 September 2010

Towards regional rates of Corporation Tax

Jonathan Edwards, the Plaid Cymru MP, has called on the Westminster Government to match in Wales the 'special measures' which have been promised to Northern Ireland, such as lower corporation tax and enterprises zones to help stimulate growth and jobs there. Looking at the various statistics it is clear that Wales and Northern Ireland have very similar levels of unemployment, regional GVA and high public sector employment - though it could be argued that because the neighbouring Republic of Ireland's rate of corporation tax is just 12.5%, Northern Ireland is on an especially sticky wicket when it comes to trying to attract inward investment.

Anyway, what I find dissatisfying in this whole affair is the piecemeal nature of the promise of action in Northern Ireland but not elsewhere - despite similar levels of need. It seems to me that the N.I. special measures are dependent on special pleading - Northern Ireland's politicians have obviously managed to make their case to the Coalition far more effectively than our own Welsh politicians who appear to be more interested in in-fighting (think of the situation in own beloved Anglesey, but writ large).

Anyway, it therefore occurs to me that the fairest and most equitable solution would be to introduce variable levels of corporation tax (and possibly business rate relief, etc.) in the UK based on relative regional GVA indices. I understand that Gerry Holtham has proposed something similar, but here's my own modest proposal.

Gross Value Added (GVA) measures the contribution to the economy of each individual producer, industry or region in the UK and is an important measure in the estimation of the nation's total Gross Domestic Product (GDP). However, GVA has also become the preferred measure of the Government in assessing the overall economic well-being of an area. As such it is the ideal yardstick to use in comparing the relative need of different UK regions for variable rates of corporation tax. I would propose the following system:

  • The system would be based on headline GVA per head indices for NUTS2 regions (a subdivision of the UK used by the Office for National Statistics whereby the the UK is divided into 37 subregions) 
  • In regions where the GVA per head index is at 90 or above: no change to corporation tax.
  • In regions where the GVA per head index is between 80-89: a reduction in the corporation tax by one percentage point.
  • In regions where the GVA per head index is between 70-79: a reduction in the corporation tax by two percentage points.
  • And so on...

Such a system would produce the following results (note this is just a selection of NUTS2 regions, not the entire list). For the sake of clarity, using NUTS2 regional subdivisions, Wales would be divided into two regions:

  • West Wales and The Valleys (Anglesey, Gwynedd, Conwy and Denbighshire, South West Wales, Central Valleys, Gwent Valleys, Bridgend and Neath Port Talbot, Swansea)
  • East Wales (Monmouthshire and Newport, Cardiff and Vale of Glamorgan, Flintshire and Wrexham, Powys)
This might not be entirely satisfactory but I would consider a scheme based on the hundreds of NUTS3 regions would be too unwieldy to manage and operate effectively.

In terms of the cost of introducing such a system, it would be tempting to offset the costs of reducing corporation tax in some regions by raising it in other more 'profitable' regions. I would resist this temptation in order to ensure that the country as a whole is competitive internationally. I do not have the entire resources of the Treasury at my disposal so cannot attempt to cost this proposal accurately, but one would hope that lower regional rates of corporation tax would incentivise many companies to relocate from the South East to other areas providing much needed unemployment and other benefits. Hopefully a large portion of the cost therefore of reducing the corporation tax could be recouped through lower social security and other current government expenditures in those regions.

The advantages of such a system would be to ensure that all regions are treated equitably (and without the distorting effect of special pleading) and according to their need. Should the GVA of the various regions rise, then the rates of corporation tax will also rise accordingly and vice versa. I would be very interested in your views on such a system.

A full list of the GVA per head indices for all NUTS2 regions are below for your perusal:

GVA Per Head Indices UK


The Red Flag said...

Northern Ireland is a 'special case' Druid. They have by far and away the highest proportion of publiuc sector employeees:-
England 20.1%
Scotland 25.2%
Wales 26.6%
Northern Ireland 29.7%
(UK ave 21.1%

In addition it should be noted that public sector wages in NI (and Sxcotland) are approx 33% higher on average than private sector for comparable employment. (as opposed to 12% England and Wales)

This is deliberate policy and is a 'spin-off' of the terrorism that plagued them. Terrorist groups in urban areas recruit from dissaffected (mainly) males who are unemployed or on low wages. (In rural areas it tends to be linked to smuggling gangs).

As a result, to reduce the pool of potential terrorist recruits the economy of NI has been artificially boosted by a high proportion of public sector jobs and those jobs in turn paying higher wages.

Quite how they can square the circle without exacerbating the social problems that feed terrorism I have no idea and to be brutally frank I don't think anyone else does either. Unless NI leaves the UK and joins with ROI (which is bloody unlikely), I don't see how there can be an answer to the uniqueness of the NI problem.

James D said...

That regional definition looks extremely clumsily gerrymandered. It looks as if someone were trying to find the narrowest possible strip they could connect Cardiff and Deeside with so that they could make the rest of Wales look even worse off than it is. I'd love to see someone try to get from, say, Aberdyfi (in "West Wales and the Valleys") to, say, Aberystwyth (also in "West Wales and the Valleys") without going through "East Wales": they'd need a boat!

A more meaningful two-region solution would be:
1) the South: Glamorgan, Gwent, Llanelli, and Brycheiniog (less Buallt); and:
2) the North and West: Everywhere else.

I do feel that a five-region solution would be better though, splitting the south into Cardiff- and Swansea-focussed areas, and the rest of Wales into the North-East (including Maldwyn), the North-West, and the West (including Maesyfed and Buallt).

The Druid of Anglesey said...

Red Flag - you make a very good case for Northern Ireland. NI as you say is indeed a special case - still I believe that possibly the most effective way of decentralising the British economy, which is so clustered around the South East, would be to introduce variable regional rates of corporation tax.

Incidentally, I would also reject Plaid Cymru's tired analysis of why the S.E. attracts so much economic growth (i.e. because successive governments pander to the city of london, etc). Without incentive to set up businesses elsewhere, companies will always cluster around the economic centre where there is a larger pool of skilled workers, better domestic and international transport links, and complementary companies providing needed services.

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The Red Flag said...

Druid, Northern Ireland should possibly be dropped out of the equation altogether as it has unique problems that distort any data.

Your comment I would also reject Plaid Cymru's tired analysis of why the S.E. attracts so much economic growth I find interesting. Personally I would speculate that the reason for the amount of growth in SE England is caused by several things working in parallel such as for example direct access to trading ports and routes across the Channel/North Sea and as a result the markets beyond as one of the major ones. Then there smaller things such as London-centric tourism, the impact on local economies of the spending of City wages, the

James D said...

Well, the most important factor propping up South-East England is that successive governments have controlled money supply in such a way as to provide a beneficial exchange rate for that economy, whilst providing a detrimental exchange rate for most other areas of Britain. In Wales, we've been struggling with an over-valued currency for getting on for 85 years. The economic case is strongly for something beyond what Plaid feel comfortable proposing: a Welsh currency.

The other issue is that we don't have any large enough cities. Urban economies matter. The only Welsh city that is anywhere near achieving global competitiveness is Cardiff, and it is simply too small as a core city: the metropolitan area isn't a bad size, but the city's only half as big as Oslo, Copenhagen, or Helsinki, a third as big as Dublin or Brussels, or a quarter as big as Prague. The only similarly-sized city that succeeds is Zürich, and that has the special conditions of the low cost of doing business (i.e. low taxes), very good infrastructure, and being outside the EU and the Eurozone.

The Red Flag said...

This is true James D, along with the pure density of population in the South East which is in effect a far higher density of consumers.

But like I said it's several things in parallel. Chicken and egg sort of thing. Access to european markets via the ports means productuion and storage facilities are more efficient the closer they are to the ports. that attracts workers who in turn need houses and furnishings which then employs providers of these which leads to a shortage of workers which leads to higher wages which attracts more workers which increases the density of the population (and consumer base) etc etc etc etc

The Great Councillini said...

An interesting debate. I recall from my degree days that in the slaving days, cities and ports on the West of Britain were ideally placed for the Atlantic Trade. When all that ended, the eastern ports took over in their capacity as continent and market-facing locations. It means that Wales is very much at the end of the UK for facing European trade, which is even more true of north Wales.

But, that story's nothing new. There's no point harping on about it. There are plenty of attributes we could capitalise on, but everyone wants to see the same tired old development as other parts of the UK. Being where we are, that's not very likely, so a change of approach is needed.

The Druid of Anglesey said...

Red Flag & James D - I am grateful to you both for your informed comments.

"The economic case is strongly for something beyond what Plaid feel comfortable proposing: a Welsh currency."

James D - I note that in a recent exchange of comments with you on former Plaid chairman John Dixon's site, he states "I prefer the option of joining the Euro". In which case surely Wales would have to suffer from monetary policy set to suit Germany. I have little doubt that this will be more harmful to Wales than a monetary policy set to suit S.E. England.


James D said...

Well, I'd argue that it's less an absolute problem as to whether setting economic policy for London or for Frankfurt is worse for Wales (it could probably be argued either way). But there is a difference in flexibility between the Sterling zone having overvaluation essentially voluntarily (albeit with a lot of lobbying going on by financial interests in London) and the Eurozone's overvaluation by treaty. We shouldn't forget the pain that was caused by ERM (the underpinnings of the Euro) in Britain in the early 1990s and the pain it continues to cause in Greece now.

In a way it's a terrible shame. There is a lot that's attractive about the concept of European unity. I can see why Plaid would want to work with such an ideal in mind. But I cannot support mechanisms for impoverishing Wales by entrenched law, be they ERM, or VAT, or just simple over-regulation.

My ideal situation is therefore the same one as Switzerland: inside Schengen, but outside the EU and the Eurozone. This is not a matter of principle for me, but I do not foresee the EU instituting the sort of reforms that would make me change my mind.

I do not expect Plaid to change either. That is why I am not joining them (or any other party for that matter). I do, however, feel a bittersweet satisfaction that it was the eurosceptic parties — that is, the Conservatives and Farage's anti-Assembly nutjobs — who did well in Wales at the last European election. It was probably for all the wrong reasons, but it's nice to see the political class's europhilia take a beating.

(Although superficially rather hypocritically, I did vote for Plaid Cymru at that election, largely because I did not approve of the first candidate on the Conservative list. Had we had open lists, I would probably have ranked their third and second candidates first and second respectively.)