Corporation tax – devolution too far?

The FT has once again ignited the debate over whether Northern Ireland, and also Scotland, should be given the powers needed to lower corporation tax.

An editorial (£) for the Financial Times has once again ignited the debate over whether Northern Ireland, and following on from that, Scotland, should be given the powers needed to lower corporation tax.

In March, the Treasury published a consultation on enabling Stormont to vary its corporation tax to ensure it is better equipped and able to compete with the South – where rates remain low at 12.5% – in an effort to attract new business. It follows recent news that 17% of shops in Northern Ireland now stand empty, a much larger proportion than the UK as a whole.

Outlining the UK’s government’s support for the measure which unusually for Northern Ireland enjoys broad cross party support, the Secretary of State, Owen Paterson, told the Belfast Telegraph in May that devolving corporation tax powers would be “the economic equivalent of the peace process”.

He continued:

“I have been speaking to Northern Ireland businesses at least once a week for years and every one of them says that the tax rate, in terms of creating competition with the Republic of Ireland, and planning, are the two biggest problems they face.

“Planning is devolved, so now we need to devolve the process of setting the tax rate.”

It is a case that also enjoys the support of the cross-party Northern Ireland select committee, whose chairman, Laurence Robertson, argued in May:

“The 12.5% rate of corporation tax in Ireland has attracted significant inward investment and a number of large companies, as well as the ability to compete better with emerging economies.

“The evidence we received from businesses, trade unions, economists and politicians formed a convincing argument for a lower rate for Northern Ireland, which could help to unlock the potential of its private sector by boosting growth, innovation and exports.

““Northern Ireland’s ability to compete with other countries, and to retain expertise in its workforce, is vital for the success of its economic future and we urge the Government to examine carefully our recommendations.”

Yet despite the overwhelming support for the move from politicians, businesses and unions of all persuasions, the Financial Times has concluded that devolving powers over corporation tax would amount to devolution too far.

In its editorial the paper says (£):

“On an international level, tax competition is desirable. It discourages states from adopting punitively high rates damaging to economic growth. In theory there is nothing wrong with competition at a sub-national level. But for this to work, regional authorities must face the fiscal consequences of their decisions. Since UK corporate tax receipts go straight to the exchequer, this is not the case.

“True, there is a mechanism available in the case of Northern Ireland and Scotland, involving offsetting adjustments to the block grant they get from Westminster were corporation tax to be cut. But this is a crude tool and one that would not apply to England.

“That leads on to an even bigger complication. Devolving tax-setting powers would require constitutional changes, as such powers should be matched by democratic accountability. This exists in the cases of Scotland, Wales and Northern Ireland – but not England. There may be a case for establishing an English parliament, but doing so to vary corporation tax is not the obvious one.

“These complications are a heavy price to pay for a reform that will produce at best marginal economic benefits. George Osborne, the UK chancellor, has pledged to await the outcome of the consultation on Northern Ireland’s corporate tax rate before deciding on Scotland’s. He should tell both to go back to the drawing board.”

The article will further stoke the tensions felt within Scotland and some parts of Wales who now look on in envy at Northern Ireland’s likely ability to lower tax rates in this way. In Scotland, the UK government argues that lowering corporation tax to a level similar to that in the Republic of Ireland would lead to a £2.6 billion black hold in Holyrood’s budget.

Yet for the Scottish Executive, finance secretary John Swinney remains adamant that such figures are alarmist, concluding:

“Despite the phased reduction in the headline corporation tax rate in the UK by 2014-15, the latest forecasts by the Office for Budget Responsibility predict that total onshore receipts in 2013-14 will be higher than the pre-recession levels.”

In Wales also – which some have claimed could already be back in recession – whilst not actively seeking such powers, the government in Cardiff have made quite clear their belief that should Belfast be given powers to vary corporation tax, they would expect the same treatment for Wales.

And speaking to the Western Mail today, Plaid Cymru’s economic advisor, Dr Eurfyl ap Gwilym, concludes:

“I have always favoured the Welsh Government having the power to vary corporation tax. It is most valuable to profitable companies. The more profit you earn the more tax you will pay. We want to encourage more successful companies in Wales…

“Clearly, if other parts of the UK do have that power Wales could be sorely disadvantaged. Scotland is getting pretty vociferous over this and the danger is Wales will be taking a back seat.”

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