It is a pleasure to follow the hon. Member for Belfast East (Naomi Long). I should like to begin by saying that this measure is entirely the right thing for Northern Ireland. Those of us who serve on the Select Committee have all seen how hard it is to compete when a neighbour a short distance away can offer a much lower rate of corporation tax. I wholeheartedly support the notion that we should allow Northern Ireland to choose its own corporation tax rate, especially on trading profits. In fact, I would even support the principle that lower business taxes drive growth. Over the past five years in the UK, we have reduced our corporation tax rate from 28% to—in a couple of months’ time—20%, which is important in helping to drive growth in the whole country.
That leads me to my first concern. Part of the argument for making that reduction is that we recover money that we lose in corporation tax by attracting more investment: more companies make more money and pay more corporation tax as there are more profits. Even though corporation tax is set at a lower rate we begin to recoup some of the costs. Also, with more employment, we would expect increases in income tax and PAYE. Greater economic activity will result in more VAT, and more property transactions will give rise to more stamp duty. Those are the key ways of recovering what is lost through lower corporation tax.
It is not entirely clear how much of those increased tax takes will go to Northern Ireland and how much will be kept by the UK as a whole. When the final deal is done and a calculation is made of by how much budgets are reduced, that net cost needs to be worked out to ensure that it is fair to Northern Ireland and fair to the rest of the UK. There will need to be a breakdown of the overall impact of behavioural change as a result of a lower tax rate in Northern Ireland, if that is what results. I assume we expect to see a rate of 12.5%, or perhaps a little lower to make it competitive.
We seem to be devolving taxes haphazardly, creating a mishmash. We ought to look forward a few years and ask, for all our taxes, “What should our tax system look like? What taxes will we devolve and to where? How can we best achieve a sustainable, sensible tax system as a result of that?” One way of doing that would be to set a federal income tax rate and a federal corporation tax rate that apply throughout the UK. Once those were set, each area could choose its own rate as well, so there could be a federal corporation tax rate of, say, 10% and Northern Ireland could choose 0% as its local rate, and England could choose a rate as well.
What we have in this Bill is a complex way of doing that for one area of the country. I accept the reason for doing that just for Northern Ireland initially, but if there is pressure from Scotland and Wales, this mishmash of a system will be hard to act on and it will be very unfair on England. How will we work out the rate that we want? With the devolution of corporation tax, I
suspect that the easiest competition will be between Northern Ireland and the rest of the UK, because we have the same currency, much the same legal system, the same VAT system and the same income tax system. In fact, for almost any sensible business, the east midlands is a far more attractive place to do business than Northern Ireland. I would say that, because my constituency is there, but we have the right skills, the right location and all manner of advantages.