Slashing Northern Ireland's block grant to allow a cut in corporation tax is “emphatically not a gamble”, the Secretary of State insisted last night.

For every 2.5% knocked off the tax rate, the Assembly will lose £60-£90m in Westminster funding under plans to rebalance the economy unveiled last week.

Owen Paterson insists the loss of public funding is a “very modest risk” as it amounts to just 0.5% of the £12bn Stormont allocation, and urged politicians to “be brave and be bold”.

The Northern Ireland Secretary branded it “outdated Soviet-style thinking” that cutting the grant would mean having to cut services such as cancer treatment centres. Instead, the boom in tax returns from an increase in the number of businesses would mean “you can have two cancer centres”, he told the Northern Ireland Affairs committee.

But the Treasury still needs to be convinced by the plans, he admitted, telling MPs “it is not in the bag”.

“This is a Treasury paper. It's bound to be written in sober and cautious language. There's no certainty that we can pull this off,” he warned. “We need a deluge of response from businesses.”

Prompted by the DUP's Ian Paisley about the cost of politics at Stormont, the Secretary of State said tackling waste would help level out losses in grants.

He pointed to the cost of absenteeism in the public sector, where adopting private sector payment levels would save £45m.

All of Northern Ireland's political leaders are behind the tax proposals, he insisted.

But English MPs argued their constituents would be asking them why Northern Ireland was getting a reduced rate, particularly in parts of the north and south west where unemployment levels are high.

Mr Paterson argued it was “in the interests” of the whole of the UK to boost the province's private sector as state funding is 25% higher per person than it is in England.

He told the committee there was support from Dublin for the reduction, saying there had “never been a hint of churlishness”.

The fact that they had fought “like tigers” to hang on to the their own low rate during the European bailout negotiations showed just how important the tax rate was.

The DUP's Ian Paisley said he believed it would be “foolish to look a gift horse in the mouth”.

But Alliance's East Belfast MP Naomi Long warned it would not replicate the boom that the Republic of Ireland enjoyed during the 1990s.

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Last week Owen Paterson launched a Treasury consultation on proposals which could result in Northern Ireland's corporation tax rate being set in line with the Republic's 12.5%. Under EU law the power has to be devolved to the Assembly to allow the rate to be varied within the UK, where it is 28%. However, the UK rate is set to fall by 5% over the next four years.