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Finance Minister will have to come up with something new to help Northern Ireland

By John Simpson

Published 05/07/2016

Chancellor George Osborne
Chancellor George Osborne

Chancellor George Osborne has unexpectedly shifted his stance on fiscal responsibility. In the space of a few days, gone is his long-held goal of delivering a fiscal surplus by 2020. And now he is speculating on a possible change in corporation tax to a rate of 15% or lower.

For the Stormont budget, a major reduction in corporation tax rates UK-wide would have a number of consequences.

The bid to use a 12.5% tax rate to make Northern Ireland more attractive to foreign investment coming to the UK would be nearly neutralised, although in total the UK might attract more foreign investment that would otherwise go elsewhere in the EU.

The funding available for Stormont-managed public services, already reducing year by year, may tighten further as the Treasury adjusts to reduced revenue or higher public sector borrowing.

An even more significant consequence of the Chancellor's suggestion is that it sends a warning signal to our (former) EU partners that the UK is not ready to negotiate an outcome from Brexit that seeks to retain a nearly level competitive playing field based on 'good neighbours' avoiding potentially harmful fiscal competition.

The suggested cut in corporation tax rates would be likely to be criticised heavily by the OECD policy principles to avoid Base Erosion and Profit Shifting incentives. In the past, the UK has been a critic of company tax policies and practices in Luxembourg and Ireland. The pendulum of criticism could swing the other way.

If the Chancellor, anticipating the UK will take back control of UK fiscal policy, is preparing for an autumn budget with greater fiscal freedom, the Northern Ireland Minister of Finance could add his intellectual weight to other changes.

In the new found fiscal freedom, would Stormont ask the Treasury for new devolved authority to set, not just the rates of corporation tax, but also a system of locally-based tax allowances based on capital investment, research and development, skills training and marketing?

The Chancellor has opened a very large fiscal Pandora's Box.

Belfast Telegraph

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