It’s easy for those of us in Britain to overlook the debates in Northern Ireland about devolving corporation tax. This was a commitment set out by the Coalition in its Programme for Government, and a paper about it has been prepared by the Treasury, is under discussion between the devolved government and the Secretary of State, and is due for publication as part of the UK Budget in March (see also account of what’s apparently in the paper here). As is obvious from the debates about it in Scotland, it’s highly problematic in many respects, and was considered for HM Treasury in a review by Sir David Varney in 2007 (available here). Although Varney rejected the arguments for devolution of corporation tax, they continue to attract support from a wide range of parties and other actors in Northern Ireland, including Owen Paterson, the Secretary of State (indeed, he appears to be one of its strongest advocates).
The Commons Northern Ireland Affairs Committee has been carrying out an inquiry into the issue as well, and in the course of that has heard oral evidence from Professor Rosa Greaves of the Law School at Glasgow University about the implications of the EU jurisprudence about devolved corporation tax as a form of ‘state aid’. Rosa’s evidence (available here) explained the problems that case-law presents, but didn’t address the question of the implications of that for the working of the block grant that will continue to fund the bulk of public services there, which clearly intrigued the Committee’s members. (I discussed that session HERE.) I’ve tried to address that in my evidence to the Committee, which is available HERE.
In my memorandum, I try to work out the sorts of machinery that would be necessary to give effect to devolved corporation tax, and discuss the consequences of making a cut in the Northern Ireland block grant to allow for devolving corporation tax. The key thing to satisfy EU law is that all decisions regarding devolved corporation tax must be devolved, and there can be no prospect of a bail-out from the UK Government if those decisions result in a shortfall of tax revenue. As the likely scale of cut is in the order of 5 to 8 per cent of devolved non-social-security spending, it’s quite a risk to take – and if this doesn’t deliver the revenue that’s expected, Northern Ireland will have to be on its own, and public services there will have to be cut as a result. This would have serious implications for devolution finance more generally, beyond Northern Ireland if a system of grant based on relative need, or using forms of fiscal equalisation, were to be introduced.
The financial debate in Scotland has revolved around the question of whether the point of fiscal devolution was to fund public services, and create a measure of ‘fiscal accountability’ to achieve that, or to devolve control of fiscal levers to drive economic growth as well. The ‘funding’ side has clearly driven that debate, and underpins the approach of the Scotland bill. In Northern Ireland, it’s the ‘economic drivers’ approach – understandable given the state of the Northern Ireland economy and its very small private sector, but showing how the UK Government has allowed the debates to go in different directions without even considering the UK-wide implications of this.