Economy

Budget 2012 analysis

treasury6The 2012 UK Budget brought few surprises but forthcoming decisions on corporation tax and regional pay will have major consequences for Northern Ireland’s economy.  Peter Cheney reports.

In what is likely to be the last Budget before the Treasury decides on devolving corporation tax, Chancellor George Osborne cut the tax bill for the lowest and highest earners in society, but the benefits will be offset by higher fuel duty and potential pay cuts for public sector employees.

The Stormont-Westminster working group on corporation tax is due to finish work this summer with the Chancellor expected to make a final decision before next March’s Budget.  Business leaders are continuing to press for a transfer and cut to 12.5 per cent, a landmark change in Northern Ireland’s public finances.

With Treasury spending cuts continuing to 2017 and probably beyond, private sector growth is urgently needed to revive Northern Ireland’s economy and create jobs to make up for public sector staff cuts. The Republic, in contrast, is experiencing an export-led recovery and sustained inward investment, partly due to its low corporate taxes.

The Budget’s main measures include:

•    raising the personal tax allowance from £8,105 this April to £9,205 in April 2013 (which should cut tax for around 605,000 Northern Ireland employees and take another 25,000 out of tax system);

•    the freezing of age-related allowances for existing pensioners and introduction of single personal allowances for new pensioners from April 2013 (the so-called granny tax);

•    reducing the 50 per cent rate for top earners (i.e. above £150,000) to 45 per cent;

•    implementing the 3p rise in fuel duty this August;

•    cancelling child benefit for families with one earner on £60,000 or over; and

•    a 2 per cent cut in UK corporation tax to 24 per cent (with the aim of 22 per cent by 2015).

The £13 million broadband fund for Belfast and devolution of air passenger duty were re-announcements; the latter transfer is expected next April.  Enterprise zones (see issue 49, p.30-31) are already in place in England, Scotland and Wales and Owen Paterson has pointed out that the Executive can also establish one in Northern Ireland.  Mark Durkan has demanded action on a cross-border enterprise zone in Derry, claiming that civil servants in Belfast were holding back progress, DETI declined to comment.

MLAs broadly welcomed the corporation tax cut and a creative industries tax credit but criticised regional pay proposals, the fuel duty rise and the cut in high-earners’ tax.

Sinn Féin Economy Spokesman Conor Murphy dismissed the “minimal increase” in personal allowances, freeing up an extra £4 per week: “What little benefit this measure will deliver will be more than wiped out by increases in fuel duty which will inevitably be passed on to consumers through higher goods prices.”

UUP Economy Spokeswoman Sandra Overend welcomed what she saw as a restated commitment to a Northern Ireland enterprise zone (a UCUNF commitment) and the proposed enterprise loans for young people.

Alliance MP Naomi Long reminded Osborne that he was Chancellor for the UK “and not just the Conservative part of England.”  Long welcomed the devolution of air passenger duty, for which she has strongly campaigned, but was disappointed with the slow progress on devolving corporation tax.

Green MLA Steven Agnew claimed that the Budget contained no investment or support for renewable energy and saw the Budget as the “final nail in the coffin” for the Government’s claim to be the “greenest government ever”.

Freezes

In the DUP’s response, Sammy Wilson called for the Government to go further on investing in infrastructure, which “would have fitted with the Chancellor’s rhetoric, but he has held back.”  Regional pay, he stated, “will impact negatively across the UK outside of London and the South East” and freezing public sector pay was a “pernicious proposal” which would have a “very detrimental impact” in Northern Ireland.  The Executive has itself frozen the pay of civil servants earning more than £21,000.

“All regions of the UK must play their part,” he said of cutting the deficit, “but it is wrong to ask some areas to pay more than others, particularly when the Government has made the choice to reward the very richest in our society.”

In a more heated statement released through the DFP press office, Wilson warned: “There is no evidence that national agreed public sector wages create problems for the private sector in recruiting workers.”  The policy, he claimed, was “really another excuse to grab cash from devolved administrations and from poorer regions of the UK in an attempt to balance the Treasury books.”

Owen Paterson, though, gave a robust defence and dismissed the local critics as populists.  “They never, ever come back and say how those [tax] reductions will be paid for,” he told the News Letter.

“Businesses will welcome the Chancellor’s decision to improve the competitiveness of the UK’s tax system for companies and entrepreneurs, within a fiscally neutral Budget,” said CBI Director Nigel Smyth, although he called for more action on corporation tax and reducing employment regulations (a devolved matter).

NIPSA General Secretary Brian Campfield dissented: “This Budget takes place in the context of mass unemployment, pay ‘freezes’ which in real terms are cuts and pension attacks which mean workers have to pay more, for longer, and receive less on retirement.”  It was, he claimed, “written by millionaires, for millionaires.”

Scotland moves ahead on tax powers

One of the most significant announcements for Northern Ireland was the agreement to devolve a range of new tax powers to Scotland, while tax devolution stalls on this side of the North Channel.

The final version of the Scotland Bill includes the devolution of the income tax rate, stamp duty and landfill tax to Holyrood, as well as the power to create new Scottish taxes.  Westminster also plans to launch a consultation on allowing Scotland to issue its own bonds.  Scottish corporation tax is still being reviewed but is not an immediate priority for the UK Government. 

This represents a significant change to how the UK is governed and financed.  The changes are endorsed by the SNP (as a stepping stone) and mainstream Scottish unionism i.e. Labour, Conservatives and Liberal Democrats, to stave off independence.  Tax devolution, though, is not necessarily a nationalist concession as other unions such as Australia or Canada allow their states and provinces to vary taxes.

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