The Commons Northern Ireland Affairs Committee has had an inquiry underway for some time into the possible devolution of corporation tax in Northern Ireland. The Committee’s inquiry has been underway since last summer, following its inclusion though in the Conservative Party’s manifesto for the 2010 election and the Coalition’s Programme for Government. There seems to be strong support for it from the Ulster Unionists, the Northern Ireland business community, the Economic Research Institute of Northern Ireland (who started pushing the idea some years ago), and Sinn Fein and the SDLP (both of whom support the idea as it would enable a greater degree of economic harmonisation between the north and the Republic). But perhaps its strongest advocate has been Owen Paterson, the UK Secretary of State. (I discussed the inquiry, and my own memorandum of evidence to it, in an earlier post HERE.) Contrary voices include a number of figures broadly on the political left, including the Green Party, Richard Murphy of the Tax Research UK blog (see posts here), and Robin Wilson (see his Belfast Telegraph article here).
The Treasury launched a formal consultation on the issue in the March budget, when it published its paper on Rebalancing the Northern Ireland Economy (available here). That is still open – it closes on 24 June.
The Committee has, perhaps surprisingly, come out broadly in support of the idea of devolving corporation tax there. It has been persuaded that this would confer a significant economic benefit, in ‘years not decades’, on the north, and describes the arguments for devolution as ‘convincing’.
The report notes plenty of risks and potential downsides to the idea of doing this. The Committee acknowledges the problems of ‘brass-plating’, possible tax evasion, and the need to ensure that there are adequate staff to administer a new system. Most of the problems it identifies relate to the need to reduce the block grant, however: the fact that no-one (particularly HM Treasury) has any clear idea of how much corporation tax revenue is generated in Northern Ireland, the problems of complying with the EU’s state aids rules, and the need for a cut in the amount of the block grant as part of that.
There are two big problems with the report. One is the extent to which it plays up the (unquantifiable) upsides of tax devolution for Northern Ireland, and plays down the very significant practical and administrative issues. For my part, I find it quite extraordinary that a proposition like corporation tax devolution can have got as far as it has without anyone having sensible figures for the amounts of tax involved. The discussion of how to calculate a cut in the amount of the block grant is notably weak; it discusses my evidence which canvassed the various approaches (as raised by the Holtham Commission). When it comes to making a recommendation on this point, though, it skates over those complex issues and elides four different approaches into one.
In truth, these difficulties are such that the case for devolution can’t be more than ‘arguable’ or ‘attractive’. No proposition can be ‘convincing’ when you have no idea how it will work, how much it will cost, or what its benefits might be. The reality is that to comply with EU law, a substantial and irrevocable cut in the block grant will have to be made, based on present tax receipts. If – as is generally assumed – Northern Ireland were then to cut the rate of corporation tax, that would affect its revenues, and require immediate reductions in spending. In the longer term, there might well be a gain, both in overall economic activity and total tax receipts (maybe even corporation tax; even in its present recession, this has been the main source of revenue for the Republic). While those gains may be expected, they can’t be predicted, and might turn out to be smaller than the assumptions of organisations like ERINI. The EU state aids rules mean there could be no recourse to the UK Exchequer if that happened. It’s rather surprising that Northern Ireland’s politicians are willing to contemplate that at all, given how averse they have been to taking on financial responsibilities since 1999.
The second problem is the wider implications of cutting corporation tax in one part of the UK. Curiously for a committee of the UK Parliament, the report only looks at this from a Northern Ireland point of view. If corporation tax were to be devolved to Northern Ireland, there can be no good argument of principle for not devolving it to Scotland as well – a point the Scottish Government has hastened to make (see its press release here). If the UK Government were to decline to do so, it would be a reflection of sheer cussedness rather than a desire to maintain the integrity of the UK economy (for example). Such a decision would have profound implications for the regionalisation of the UK economy, and for such long-established principles as relating public spending to need. These are big decisions with wide implications, which the Committee has overlooked – but which the Treasury is much less likely to. (The problems with the working of the Barnett formula reflect the fact that the UK doesn’t do this very effectively, but it is the principle on which spending decisions in theory are based, and which governments of all parties have accepted since 1945.)
This is one of the points where the Coalition UK Government’s policy of treating each of the devolved parts of the UK as if it were quite separate from the others comes to have a profoundly centrifugal effect. While the Blair and Brown governments may have done something similar, the extent to which they did so was much less, and the Labour governments were insistent on the need to maintain an integrated UK-wide economy. It appears that the Coalition are much less interested in that, raising a wider question: what do they see as the point of the Union more generally? That question has huge implications for all parts of the UK, not just Northern Ireland.