Gordon Brown has today announced a review of the tax differential between Northern Ireland and the Republic, as part of the financial package in support of a re-established Northern Ireland Executive.
Business leaders in the North have campaigned for several years for a cut in corporation tax to match the 12.5 per cent rate in the South. One leading figure in the campaign, Bombardier Shorts chairman Sir George Quigley, dismissed the impact of the 2 per cent corporation tax cut announced by Brown in yesterday’s budget:
"The problem is that he is benchmarking the UK against major world economies, as he is entitled to do, but our challenge is to make Northern Ireland competitive against our immediate neighbour, the Republic.
"The reduction of the gap from 17.5% to 15.5% between north and south is neither here nor there in terms of attracting foreign direct investment to Northern Ireland." (Belfast Telegraph)
The tax review will be carried out by Sir David Varney, a former Chairman of Her Majesty’s Revenue and Customs and of mm02, and most recently the Chancellor’s Senior Advisor on Transformational Government.
It’s hard to believe that Varney will recommend significant tax cuts for Northern Ireland, given the problems this would create for the Treasury and especially for his current boss. Anything that could add to the financial tensions between the different parts of the United Kingdom is extremely politically dangerous for Brown.
This potential threat was illustrated by Alex Salmond’s response to the budget:
“Brown has moved onto SNP ground in the reduction of corporation tax. However, this gives no competitive advantage to Scotland.
Ireland is to get an industrial renovation fund to revitalise the
economy. Scotland was only mentioned in terms of supermarket jobs. That
is why SNP proposals to Let Scotland Flourish are so badly needed to
boost Scottish growth rate. (SNP press release)
It will be interesting to see how the SNP responds to the announcement of the Varney review. Even if it is an attempt to kick the issue into the long grass, it is potential ammunition for an argument in favour of Scottish fiscal autonomy.
The underlying reality was well-expressed in last year’s study by the Economic Research Institute of Northern Ireland:
in the UK context the relatively prosperous South East with major
concentrations of companies seeks to capture tax from those moving into
the region to gain access to its markets. The loss of revenue from a
cut in Corporation tax would be significant. On the other hand more
peripheral regions with a smaller tax base can use a strategy of lower
Corporation tax to promote themselves as attractive profit centres for
FDI without suffering large losses of tax from existing enterprises.
This form of analysis suggests that a unified Corporation tax rate may
not be optimal for different regions within the UK. (Assessing the Case for a Differential Rate of Corporation Tax in Northern Ireland)
Northern Ireland cannot afford to give up on the lower tax strategy, because of its proximity to the Republic. Likewise, Scotland cannot afford to be left out of any concessions on this score from the Treasury. Under the EU’s Azores ruling, Stormont and Holyrood can only get differential taxation if they assume fiscal powers themselves and bear the cost of reduced revenues. The latter fact might well make fiscal autonomy more acceptable in England.
These centrifugal forces cannot be very palatable for Brown, as they point to arrangements that would further narrow the range of UK-level responsibilities and strengthen the case for an English Parliament.
Nevertheless, the demand for fiscal autonomy will no go away. Until it happens, Scotland, Northern Ireland and Wales will remain dependent on transfers from England which are unsustainable in the long run.