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Now everyone wants to cut orporation tax

The First Minister, Jack McConnell, is in trouble again with our old friend “Government Source”. Mr Source says that the FM “blundered” when he appeared to call for the Scottish Parliament to be given power over corporation tax, as is being proposed for the devolved Stormont government in Northern Ireland. McConnell is accused of giving comfort to the nationalist enemy by suggesting that Holyrood should have more tax powers.
Mr Source no doubt wanted McConnell’s other offences against the UK state to be taken into account, including the FM’s objection to dawn raids on asylum seekers, his unhelpful remarks about Trident and nuclear power and of course his support for that team in the World Cup which shall remain nameless but which began with two T’s.
So, let’s suppose that Mr Source – who could of course be anybody from Number Ten to a Scottish Labour backbencher with a grudge against McConnell – is not a million miles away from the Treasury and the Godfather of Scottish politics, Gordon Brown. What exactly is he saying? That Scotland should not benefit from any commercial incentives which are being considered for other regions of the UK?
That’s all McConnell asked for at First Minister’s Question Time on Thursday; he didn’t actually call for more powers. And, really, what else could he say? He has to be seen to fight Scotland’s corner after all.
Under the St Andrews Agreement on NI government, the deadline for which expires on Friday, there has been a cross-party demand for some form of compensation for the “Dundalk Effect”. This refers the way Irish border towns like Dundalk are sucking jobs and business out of Northern Ireland. The Republic now has some of the highest wage and growth rates in Europe.
A report from the independent Economic Research Institute of Northern Ireland (ERINI) last week said that halving the 30% rate of corporation tax in NI would double economic growth in the province and create 180,000 jobs. It was commissioned by the Industrial Task Force under the former Ulster Bank chairman, Sir George Quigley. The CBI in Northern Ireland support the move and even the Irish Taoiseach, Bertie Ahern, agrees with the plan to harmonise business taxes north and south.
It’s thought that Tony Blair agrees too – what better way to bring the North and South closer together. The PM is anxious for a settlement in Northern Ireland to be part of his “legacy”, and time is short. However, the Chancellor baulked at the idea of cutting corporation tax in NI because of the likelihood that Scotland would say ‘me too’.
The Scottish economy has many similarities with Northern Ireland’s: low growth, a large public sector, a shrinking and ageing population and a loss of skilled labour and capital to higher-waged economies. If it hadn’t been for the influx of 20,000 Polish workers since 2004, the Scottish economy would be flat-lining.
Of course, the proximity of the Republic is a special factor in Northern Ireland, with higher profits just a stone’s throw away. However, you could equally say that proximity to England has a negative effect here. The Scottish economy is deformed by the immense pull of the South East. That’s where all the government contracts go, where business goes, where all the good jobs are. London is a world financial centre and the billions in bonuses distributed every year go straight into the South East economy.
This is a vicious circle which has to be broken, and there could be an opportunity here to break it. The deal on the table this week does not formally involve a different rate of corporation tax in the province. The 30% rate would remain in Northern Ireland just as it does in the rest of the country. Instead the first 60% of company profits would be zero-rated to mitigate the impact of the low rate in the Republic. Crucially, it would NOT require any new powers for Holyrood if replicated in Scotland.
Tax talk may sound dry and technical, but it is of crucial political importance. Doubling economic growth in Scotland, as the ERINI indicates is possible, could transform Scotland over a couple of decades. There is no natural law that says Scotland has to be in the economic slow lane.
A rational economic policy should anyway seek to discourage the over centralisation of the British economy, which has serious environmental and social costs, such as congestion and house price inflation in London. Britain is too bottom heavy. There’s nothing inherently nationalist about using tax to rebalance economic geography.
Of course it would mean a loss of revenue, equivalent, according to the First Minister, to #1.4 billion a year if Scotland had the Northern Ireland deal. But the ERINI report claims that any losses to the Exchequer would be made up within six years as a result of the increase in business activity. Low business formation has been the bane of the Scottish economy. If the government is serious about promoting enterprise, here is the way to do it.
It’s better than state handouts, after all. The tax reduction could be part of a reformed Barnet Formula. And since it needn’t involve new tax powers to Holyrood it would shoot the SNP fox at the May election. Hitherto, the corporation tax issue has been the preserve of the SNP, but it doesn’t have to be. Promoting business in Scotland isn’t only of benefit to Scottish nationalism; but not promoting business certainly could be.

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About iain2macwhirter

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