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Celtic corporation taxes are the way forward for UK regions

Joe Wright, 27 August 2014

Northern Ireland may be set to receive ground breaking powers. According to Irish and Northern Irish newspapers, David Cameron will devolve the power to set corporation tax to the Northern Ireland Assembly this October. This is to close the gap between the South’s extremely low 12.5 per cent and the North’s (the UK’s) 20 per cent. It may fall short of the tax’s potential to make more UK regions more competitive, and shorter still of the department, Cabinet minster and committee for regionalism I would like to see. But it’s a start.

Northern Ireland has been among the slowest of UK regions to recover from the recession. According to Eurostat, it has a GDP per capita PPS of £16,250, compared to a UK average of £21,000 and London’s £36,000 (inner London £64,000, outer £18,000). A low corporation tax, along with a well educated population has served Eire well over the past two decades, giving rise to the Celtic Tiger in the late nineties and, despite a housing-led financial crisis and EU bailout, returning Ireland to growth and prosperity in a short period of time. The same, it is hoped, can be done in Northern Ireland.

Northern Ireland is only the very tip of the iceberg. West Wales and the Valleys, in the same Eurostat analysis, came bottom of the UK regions with a GDP per capita of £13,000, below that of Slovakia, Slovenia and Lithuania. A recent Inequality Brief report shows nine UK regions (including Northern Ireland) are among the ten poorest in Northern Europe. Yet none of these will receive the same powers to attract businesses.

There remains considerable opposition to devolving corporation. In a recent report for the Scottish devolution commission, for example, the Scottish Conservatives asserted this was the ‘least suitable of all taxes for devolution’. General concerns include a worry the tax will become politicised, create a race to the bottom, or be detrimental to already prosperous regions. But none of these are insurmountable.

For one, devolving the setting of the tax is not particularly necessary. The same affect can be achieved by setting regional corporation taxes centrally. Regionalism does not depend on devolving power (though it is best suited to it in most areas) but tailoring policy.

There are also wider concerns about the governmental cost of any tax cuts. In the case of Northern Ireland, EU rules will require that Stormont compensate the Treasury for any tax reduction by handing back a portion of its annual budget. But ultimately, the government will bring far more in from an economically stronger UK than corporation taxes.

Nor is a varied corporation tax intended to be to the detriment of regions which are doing well. London, the most obvious example, has a lot more to offer businesses and a 20 per cent corporation tax would remain enticing. Allowing other regions to drop by one or two per cent will create an incentive to shop around the UK. It would also ease the more costly pressures on the South’s infrastructure; if people can put up with a premium to be based in London, businesses can too.

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