Jeremy Peat, the Royal Bank of Scotland's chief economist, was complementary about the Island's decision to reduce corporation tax to zero per cent.

He said the Isle of Man was much better placed than other offshore locations to cope with lower corporation tax revenue. He did, however, issue a warning that, despite economic theories to the contrary, extra business activity would not fully replace the estimated £23 million per annum losses in tax revenue.

'Obviously the Isle of Man is anticipating that as it takes tax down, it will bring some increase from other tax sources. I don't think it will fully compensate for tax revenue losses as I am not one of those who believe that if you lower tax you will double revenue. I do know that the Treasury Minister will keep a close handle on public expenditure, and that there will be a natural increase in some revenue streams,' he said.

The Manx government has committed to implementing the zero tax regime by 2006 in line with European Union tax package initiatives. The Treasury aims to strengthen the Island's international standing by complying with European standards.

The current economic strategy document states: 'The tax strategy is designed to secure the future economic well-being of the Island's community by sharpening the competitive edge of companies, helping to restructure the economy and meeting changing international standards.'

Mr Peat also had advice for the Isle of Man on how to combat the current trend in the UK for offshoring. Many businesses are relocating their manufacturing or service-based activities to cheaper countries such as India and China. He advocated that companies being undercut by offshoring competitors should differentiate themselves through value and specialism rather than cost.

He said: 'The lesson for the Island and the UK is to try to compete on value rather than the cost chain. It adds to the challenges but, whether it be service or manufacturing, it has to work with these low-cost regions and to keep the value- added element.'

Speaking on the global economy, Mr Peat said the US and UK governments were set to continue their policy of prudent interest rate increases into 2005, to help balance growth and price stability.
Mr Peat said the Royal Bank of Scotland expected to see a very cautious approach by the Bank of England with only a couple more base rate increases due. He also expects to see an increase in rates across the Atlantic over the next two years.

'In the short term, as far as the UK is concerned, we don't see oil prices entering into the equation. We see just two more quarter point interest rate rises in November and February taking the base rate to 5.25 per cent.

'In the US, the Federal Reserve has raised rates twice and its rates are still at a major low level of 1.5 per cent, so our expectation is that it will continue to take them up gradually. The latest consumer price data is encouraging. There are no major concerns at the moment despite what is happening to oil. We expect the rate to be raised to 2.5 per cent by the end of the year and 4.5 per cent by the end of next year. That is assuming the US economy continues to grow,' he said.

Mr Peat said concerns over the oil price needed to be seen in context and he forecast that it would be down to $30/35 by the end of the year. He said the pricing depends on the level of stability in the world's oil-producing regions.

'As far as oil prices are concerned there are three factors interacting. Demand has gone up faster than expected due to China's emerging economy, supply concerns have emerged due to the instability within Russia and Venezuela, and also hedge fund speculation has contributed to elevated prices.

'Provided we get the Russian and Venezuelan concerns ironed out of the market, we foresee $30/35 per barrel by the end of the year and down under $30 by next year. The risk remains on the upside but there is no reason not to think this, based on financial projections.'