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Dublin: 13 °C Thursday 18 December, 2014

Column: The success or failure of the UK’s economic strategy matters greatly to Ireland

The UK budget being announced today has implications for Ireland too, writes James Kilcourse, who says as well as being a crucial trading partner, the UK is Ireland’s biggest rival for attracting foreign direct investment.

James Kilcourse

BUDGET DAY IN the United Kingdom falls in spring, but there are few signs of green shoots in the British economy. George Osborne, Chancellor of the Exchequer, will deliver his fourth annual budget speech today. The package of measures which he presents will be subject to a four-day debate in the House of Commons before coming into effect in April 2013, the start of the UK’s fiscal year.

One thing that can be predicted with certainty is that Osborne will be hoping for a less unpopular budget than 2012, which was memorably labelled ‘an omnishambles budget’ by the opposition.

Attempting to reduce the deficit

When the Coalition Government was elected in 2010, Osborne set out an ambitious programme to eliminate the UK’s structural deficit by 2015 and thereby stem the increase in public debt as a proportion of GDP. He has reduced the deficit, although much more slowly than originally planned, by cutting back on public spending, eliminating tens of thousands of public sector jobs, reducing welfare benefits, and increasing taxes.

However, this has not resulted in the planned reduction in public debt, which is in fact on the rise after two years without economic growth. Less tax revenue than expected, combined with rising social welfare payments, forced Osborne in December 2012 to extend the 2015 target and to prolong austerity measures until 2018.

This week’s budget speech follows a long winter of bad news, which has reignited the austerity versus growth debate in the UK. In February, Moody’s became the first ratings agency to strip the UK of its prized triple-A investment grade. This was a political blow for Osborne, who had consistently stressed the importance of retaining the AAA rating. The UK economy experienced negative growth in the final quarter of 2012.

If the economy contracts again in the first quarter of 2013, which is certainly possible, this would officially mark a return to recession for the third time in four years. The prospect of a triple-dip recession, which would be unprecedented for the UK, puts an enormous amount of pressure on the Chancellor of the Exchequer to get the economy moving.

Balancing act by Osborne

The pressure on Osborne is coming from all sides. Some Conservative backbenchers advocate a “slash and burn” approach of radically cutting public spending  while reducing tax rates to boost consumer confidence. Business Secretary, Vince Cable, of the Liberal Democrat party, has on the contrary called for increased public spending in order to inject capital into sectors of the economy that need a boost, like construction.

The opposition Labour Party Finance Spokesman, Ed Balls, proposed an emergency tax cut in order to increase consumer spending power and kick-start economic growth. Osborne is unlikely to back either a spending splurge or an emergency tax cut because both measures would be expensive and would require the government to borrow money, thereby hampering its primary objective of reducing the UK’s deficit.

In the run up to the budget, Osborne has insisted that he will stick with his “Plan A” and he has been strongly backed by Prime Minister Cameron.

Increasing competitiveness

So there will probably be few surprises in this week’s budget speech. Many of the tax measures set to take effect in 2013 have, in fact, already been announced in the Chancellor of the Exchequer’s 2012 Autumn Statement. The headline rate of corporate tax will fall from 24 per cent to 23 per cent on 1 April 2013. Next year, it will be reduced to 21 per cent.

Increasing the competitiveness of the UK tax system has been a major commitment of the Coalition Government. It is, therefore, not impossible that Osborne will announce yet another future reduction in the corporate tax rate (to perhaps 20 per cent) in this budget, or later in the year.

Other tax incentives targeted at research and development and the creative sector are already due to come into effect this year. For example, the Patent Box tax regime, which applies a corporate tax of 10 per cent to profits arising from new patents, will come into effect on 1 April 2013. This measure is designed to attract innovative businesses that provide high-value jobs in researching, developing and manufacturing new technologies.

What does this all mean for Ireland?

The impact of Osborne’s policies on Ireland is two-fold. Firstly, the Coalition Government’s commitment to making the UK the most competitive tax regime in the G20 is a worrying development for Ireland. Making Britain “Open for Business” and attracting overseas investment is Osborne’s approach to stimulating the economy.

However, as well as being a crucial trading partner, the UK is Ireland’s biggest rival for attracting foreign direct investment. A lower corporate tax rate in the UK combined with very generous incentives for research and development could fundamentally shift the competitiveness equation between Ireland and the UK.

Secondly, a stagnant British economy is bad for Irish exporters. Ireland’s own economic recovery depends on demand from its trading partners. This problem looks set to be further confounded by a weakening of sterling, which has fallen in value because of the UK’s poor economic performance and the loss of its AAA rating.

Repercussions in Ireland

A weaker sterling makes it more difficult for Irish businesses to sell their goods in the UK. It could also deter British tourists from visiting Ireland, where they would get less value for their pound than at home. Britain is Ireland’s largest market for overseas visitors, so this would be a very negative development for the Irish tourism sector.

The Irish economy is highly dependent on inward investment and overseas exports. A much more competitive British corporate tax regime combined with weaker UK demand for Irish exports present a two-fold challenge for Ireland.

Mr Osborne’s Budget Speech this week may not produce any big surprises or any deviation from his “Plan A”, but the success or failure of his economic strategy matters a great deal on this side of the Irish Sea.

James Kilcourse is a researcher at the Institute of International and European Affairs. To read more articles by James for TheJournal.ie click here.

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