Wrangles over spending cuts expose flaws in political relationships

Northern Ireland’s only regular  press commentator on economics  John Simpson is the latest to pour cold water on harmonising corporation tax with the Republic. ( though as usual John does it very gently).  Any extra foreign direct investment (FDI) gained would fail to make up the consequent shortfall in block grant revenues  of about £200m a year and we haven’t got  the range of skills base to attract enough FDI anyway.

One suggestion he makes is to opt for a lower but not matching level of say 19% to divert some investment away from GB. But like most contributions to the debate over tax varying powers, even this ignores what I constantly hear from the company I keep on this side of the water, that the mass ranks of parties and interest groups in Great Britain are adamantly opposed to such special treatment for NI without a radical review of the financial support NI receives from UK taxpayers. An across the board differential corporation tax rate for NI is a step too far for British taste and would be thought of as  tantamount to a  major move towards a one island tax base – in other word Irish unity, minus British financial support.

Supporters of tax harmonisation seem to forget that their refrain  about NI as  ” the only part of the UK with a land frontier with another State” cuts both ways. As well as attracting some sympathy,  if pressed to far it provokes the reply ” why don’t you join them then?” Going for special investment tax breaks – the alternative option also favoured by the tax experts who appeared before the NI Select Committee last week –  is a safer bet.

It’s not that all the flaws in strategy are on one side.  In his must-read blog Devolution Matters,  Alan Trench offers a searing critique of how the UK coalition government have failed to adapt their procedures for deciding  financial cuts to take account of devolution. The overwhelming concentration on English priorities puts Scotland, Wales and Northern Ireland at an institutional disadvantage.

Two points need to be made about this. One is the unsuitability of this sort of Spending Review process for allocating funding to devolved governments generally – having them as recipients of funds that depend on inter-departmental negotiations driven by spending and political priorities that relate first and foremost to England. The speed of that process, and the tendency of immediate concerns to take precedence over remoter ones, is structurally inappropriate. It also leads to serious specific mistakes. In 2007, the biggest mistake was about consequentials arising (or not) from the 2012 Olympics

Making (the) system work would require two changes. One would be to slow it down, so that there are meaningful opportunities for devolved governments to engage in the process. The second is to create the framework for that engagement, to address areas of policy spill-over. The clearest example of this at present is higher education

The second is that the Coalition appear uninterested in the wider purpose of devolution of keeping the UK together, by enabling devolved parts of the UK not just to have the gewgaw of their own governments and legislatures, but also to reshape public policy to reflect their preferences. ‘Respect’ has been treated as being something about process (though it has often miscarried even on that level), not substance.

The UK Government has utterly failed to learn from the past.

 

 

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  • aquifer

    “Any extra foreign direct investment (FDI) gained would fail to make up the consequent shortfall in block grant revenues of about £200m a year ”

    John in his on the one hand and on the other manner did not say that, he said there were doubts about it, and went on to suggest other measures such as tax credits for R&D, education training and investment friendly infrastructure planning could all help to stimulate Foreign Direct Investment. And then he suggested that the EU and treasury would not let us do it anyhow.

    Unionist commentators should declare an interest in this, as GB may not care as much about what we do as they would like to think. I doubt if our semi detached politburo could gather the cahones to cut £200M though, even if it would pay back quickly in terms of economic growth.

    John spotted a downside with the low tax idea, in that the banks could get half the benefit. This may not be a problem when many of them may already be bust, needing some ready cash to rebuild their balance sheets and start lending again.

    We may get one chance at this. It will be cheaper to do in a recession, and the essential point is that it is a great way to attract high growth firms.

    We should probably knock one or two percent off corporation tax just to check that our system of government is capable of anything more than administering DLA badly and buying votes off old ladies.