Holyrood is not entrusted with corporation tax yet Northern Ireland is – so much for a level playing field, writes George Kerevan
As former Prime Minister Harold Wilson remarked, a week is a long time in politics. Last Thursday the Smith Commission rejected the notion of giving Scotland the right to set all, or even part of, corporation tax. We need a level playing field in the UK, don’t you know. Come this week and Northern Ireland gets control over that very same tax.
We weren’t given a reason for denying Holyrood what Stormont gets but one assumes that one or all of the Unionist parties vetoed the idea.
Possibly Labour was the roadblock. After all, Labour did not want to devolve power over income tax to Holyrood, and relented only as a result of the meltdown in its popularity north of the Border.
Besides, Labour has form when it comes to rejecting the devolution of corporation tax. Seven years ago, Gordon Brown vetoed the idea of letting Northern Ireland set its own rate.
His feeble excuse was that such a move would breach European rules. He was referring to the so-called Azores Judgment, the rejection of a proposal by the Portuguese Government to set a different rate of business tax in those islands from the mainland.
Brown claimed the Azores Judgment meant that business taxes had to be uniform across the UK. At the time I disputed this. I suggested he was fibbing because he did not want to let a strategic tax escape the clutches of the London Treasury. Wendy Alexander, in her brief sojourn as Scottish Labour leader, was less duplicitous but still maintained that devolving corporation tax “raises issues of compliance with EU rules” (in her speech proposing what became the Calman Commission on devolution).
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In fact, the Azores ruling means only that business taxes must be set autonomously within a specific area – national or regional. What you can’t do, under EU rules, is have the central government decide by itself on the different rates for different parts of the country. So there is no EU barrier to George Osborne’s much-leaked decision that he is devolving corporation tax powers to Northern Ireland.
So much for the Azores ruling. And so much for the now dated Calman Commission set up by Wendy Alexander. Reporting in 2010, this too rejected devolving corporation tax to Scotland on the bizarre grounds that firms would “react to tax considerations rather than commercial factors” – as if they didn’t anyway. Ask the oil companies.
To be fair to Calman, it was honest enough to admit in the small print: “We are not convinced that allowing the Scottish Parliament to determine a Scottish rate of corporation tax would produce harmful tax competition”. This canard is the stock in trade of Labour politicians – especially, Gordon Brown – when rejecting the devolution of business taxation. But letting devolved jurisdictions set business taxes is the norm in the industrial world. It has not stopped America or Germany being successful. Local economies within the UK vary tremendously, and so require tax regimes tailored to their needs. Using such powers to poach another area’s existing firms would not work, as the majority of business operations are specific to local markets.
So why is Osborne devolving corporation tax to Northern Ireland and not Scotland, or even Greater Manchester? Answer: opportunism. Osborne will argue that Northern Ireland is a special case. It is. Giving Stormont control over corporation tax is the price David Cameron is prepared to pay in order to secure a deal with the Democratic Unionist Party (DUP) to support the Conservatives in a hung parliament, after next year’s general election.
In May, Cameron hosted a lavish reception in the Downing Street garden for the DUP, currently the fourth largest party in Westminster. A “senior DUP source” was quoted in the Guardian: “It would be fair to say that a lot of wooing is going on. You don’t invite eight parliamentarians to such a reception and have the children playing round unless you are seriously interested.”
Of course, there is a logical economic case for giving Northern Ireland corporation tax. The current UK rate of corporation tax paid by businesses in Northern Ireland is 21 per cent, compared to 12.5 per cent in the Republic of Ireland. The Northern Ireland Executive, supported by most of the business community, wants to match the rate paid in the Republic. In Wales, the Holtham Commission recommended that the Welsh Assembly open discussions with the UK government on the feasibility of a separate rate. Only in Scotland does the business community – or its avowed representatives – seem to believe that London knows best.
In the long week since the Smith Commission reported, I have pored over the details of the proposals with mounting alarm. Scotland gets highly restricted control over income tax, a fiscal lever so toxic that the mainstream Westminster parties avoid using it if they can. Unlike Northern Ireland, we have little ability to incentivise business investment. Meanwhile – as the autumn statement will reveal – a fut ure Tory government will embark on a major round of spending cuts, possibly kept in office by deals done with the DUP, or Ukip in return for an EU referendum.
What the Northern Ireland deal proves, coming so swiftly and cynically on the back of the Smith proposals, is that the devolution process in the UK is not a logical or honourable process of democratisation. Rather it is a series of ad hoc compromises, yielded under pressure by a UK political establishment that wants to retain power at all costs.
The pro-Yes parties should think hard before signing on the dotted line to Smith.
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