Monday, 20 June 2011

Competitive spirals

The Welsh Government seems to be a little bit confused as to what it thinks when it comes to devolving Corporation Tax.  According to the Business Section in Friday’s Western Mail, it was being ruled out pretty firmly, but Adrian Masters reveals a rather different stance on the issue in Government statements.
I’m still convinced that it could and should be devolved, but I have considerable sympathy with Carwyn Jones’ concern about a “competitive spiral to the bottom”.  It is a real potential danger.
The extent to which we need to worry about it depends though on what we really mean when we talk about ‘creating’ jobs.  It’s a word much-loved by politicians, particularly if they can claim that their actions have done the ‘creating’, but far too often what they actually mean is ‘moving’ jobs.
If the jobs are genuinely extra ones, then a lower rate of CT in one part of the unitary state can indeed be a significant factor in helping industries to decide where to ‘create’ those jobs.  And that makes it a valid approach from a unionist, not just a nationalist, perspective. 
Holtham’s recommendation for a rate of CT which varied according to the gap between ‘regional’ GVA and the ‘national’ average is a mechanism which anyone could support, regardless of their views on the constituonal position of Wales.  (And indeed, it’s something which Wales might even want to consider internally, in order to boost the prospects of places like Ynys Môn, rather than concentrate all new jobs in South-East Wales.)
If the jobs are not extra, and are merely being moved from an area of high CT to an area of low CT, then whilst it might have some positive effect by spreading economic prosperity and jobs more evenly (not to be sneezed at as an objective in itself), the net fiscal effect would be an overall loss to the Treasury with no overall total increase in economic prosperity to show for it. 
But, rather then seeking to oppose the idea as a result of such concerns, surely it would be better if our First Minister applied a little thought to the question of how we combine the power over CT with other actions so as to ensure that we target the genuine creation of new jobs?

3 comments:

Welsh Ramblings said...

The fact that two credible media sources can have such a different interpretation of an official government statement says alot about the level of policy confusion in the Government over this. This confusion stems from a point you have made on your blog many times, that Labour doesn't have a settled view or understanding of where devolution is going or what kind of British state Labour wants to see.

Aside from the valid dangers you raise about lowering any kind of taxes, one principle that is nationalistic is that regardless of outcome, Wales should eventually control all of its own taxation, so the interim powers over corporation tax are a must- even if a Welsh administration chose not to vary it.

Radical Wales said...

What is the prospect of a cut in corporation tax about other than gambling public money on something which is only ever going to result in winnings for the private sector?

Grasping at devolving corporation tax as a possible gain for Wales does little to strengthen the credibility of devolution delivering on social justice or economic equality.

John Dixon said...

"What is the prospect of a cut in corporation tax about other than gambling public money on something which is only ever going to result in winnings for the private sector?"

I think that's a bit of an oversimplification, but it does touch on the point that I've made before about the possible dangers of devolving the power only to change one or two taxes rather than taxation as a whole.

If a cut in CT leads to companies relocating wherever CT is lowest and using the reduced level of CT to extract more private value from those companies in the form of excessive salaries at the top, or large dividends to the owners of capital, then I'd accept your comment as a valid one.

If on the other hand it makes it possible for a larger number of smaller and more local businesses to develop (including more social and co-operative enterprises, which also seek to make profit albeit not for private purposes), by improving the prospect of profitability/ reducing the risk of failure, then it isn't only the owners of capital who benefit.

I'd also add that reduced taxation on retained profits can help to increase investment.

But - and it'a s big but - a regime of low business taxes needs to be coupled with a regime of fair and progressive personal taxes, so that when money is taken out of the businesses (in dividends and salaries for the directors/ owners), it is properly taxed so that the benefit of low CT doesn't simply flow into private hands. So, I'd argue for higher top-end personal taxation alongside lower business taxation within the Welsh economy.

The other factor to consider is how to deal with 'transfers of profit' from one taxation regime to another; without clear rules and control over that, then, again, a low CT regime can encourage the movement of money rather than the creation of jobs; and it's a problem which Ireland suffered from with some companies simply moving their brass plates to Dublin.

"Grasping at devolving corporation tax as a possible gain for Wales does little to strengthen the credibility of devolution delivering on social justice or economic equality."

In itself, no. But as part of a package of measures, set in the right framework, I think it can make a contribution.